Category Archives for "Personal Finances"

Disasters and Disaster Relief 

By Randall Orser | Personal Finances , Personal Income Tax

According to Public Safety Canada, a disaster is a hazard that overwhelms a community’s ability to cope and may cause serious harm to people’s safety, health, welfare, property, or the environment. A disaster can be the result of a naturally occurring phenomenon within the geophysical or biological environment or human action, whether malicious or unintentional, including technological failures, accidents, and terrorist acts.

The Canada Revenue Agency (CRA) understands that disasters can cause great difficulties for taxpayers whose primary concerns during these times are their families, homes, businesses, and communities.

Those giving to charities in times of disasters should remember to give wisely.

Financial assistance payments from your employer or to your employee

Income tax

If an employer makes a financial assistance payment to an employee because of a disaster, is it taxable?

A financial assistance payment that an employer makes to an employee is not taxable if the person received the payment in his or her capacity as an individual and not as an employee. The CRA considers a person to have received a payment in his or her capacity as an individual when all the following conditions are met:

  • The individual was affected by a disaster (for the criteria, go to www.publicsafety.gc.ca/cdd).
  • The payment is philanthropic, to compensate the individual for personal losses or damage he or she suffered during a disaster.
  • The payment is made within a reasonable time after a disaster.
  • The payment is voluntary, reasonable, and bona fide.
  • The payment is made to an individual dealing with the company at arm’s length (for example, the individual does not control the company or is not related to a person who controls the company). See Income Tax Folio S1-F5-C1: Related persons and dealing at arm's length, for more information.
  • The payment is not made to a shareholder, a connected person (for example, a person related to a shareholder or a shareholder of a related corporation), or a person of influence (for example, an executive with power to control company decisions).
  • The payment is not based on employment factors such as performance, position, or years of service.
  • The payment is not made in exchange for past or future employment services or to compensate for loss of income.
  • The payment is not the regular salary paid to an individual who is unable to report to work because of a disaster.
  • The employer has not taken a business expense deduction for the payment.

If an employer makes a financial assistance payment to an employee who is a shareholder or an executive, is it taxable?

When a financial assistance payment is received by a shareholder, a connected person, or a person of influence, the facts must be examined to determine whether the payment was received in his or her capacity as an individual (that is, not as an employee or a shareholder). If so, it is not taxable. If the employee received the payment on the same basis as other employees, the payment is likely to be considered to have been received in his or her capacity as an individual, assuming all the other conditions listed above are met.

If an employer makes a financial assistance payment to an employee, is the payment tax-deductible?

If the financial assistance payment is made to an individual in his or her capacity as an employee, the payment is taxable and the employer can deduct it as a business expense if it is reasonable and was incurred to earn business income. The taxable portion of the payment should be reflected in the employee’s T4 information slip in Boxes 14 and 40.

If the financial assistance payment is made to an employee in his or her capacity as an individual (see above), the payment is not taxable and the employer cannot deduct it as a business expense.

The employer is not entitled to claim a charitable donation tax credit or a deduction for the payment because it is not a gift made to a registered charity or other qualified donee.

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

GST/HST will not apply to financial assistance payments that an employer makes to an employee, including an employee who is a shareholder, when the conditions, as outlined above for income tax purposes, are met and the payments are not taxable for income tax purposes. If the employer’s financial assistance payment to an employee is taxable for income tax purposes, the GST/HST does not apply to the payment since the GST/HST does not apply to salaries, wages, commissions, and other remuneration. In either case, the employer cannot claim an input tax credit for the payment.

Financial assistance payments from your government

Income tax

Is government assistance paid to an individual taxable?

Generally, a disaster relief payment that an individual receives from a government, municipality, or public authority for personal losses and expenses is not taxable and is not included in the recipient’s income for income tax purposes. This includes payments for temporary housing, clothing, and meals. As well, government compensation for loss of or damage to a personal residence does not ordinarily result in any income tax consequences.

Is government assistance paid to a business taxable?

Generally, government assistance that a business receives to help offset the cost of expenditures incurred because of a disaster can either directly reduce the amount of business expenses incurred or be included in income and the business expenses deducted when incurred in the normal manner. In either case, the business will effectively have no net income related to the assistance.

Government assistance received to help replace destroyed or damaged property will generally reduce the capital cost of that property. To the extent that the government assistance is compensation for property that has been lost or destroyed, the amount of the assistance is treated similarly to insurance proceeds so that the compensation is proceeds of disposition.

Generally, the Income Tax Act allows a business to elect to postpone recognizing a capital gain or a recaptured capital cost allowance when a former property is disposed of involuntarily and a replacement property is acquired. A replacement property must be acquired within a specified time limit (generally within 24 months of the end of the tax year in which the proceeds were receivable). A property is a replacement property for a former property only if specific conditions are met.

To ease the financial burden that might arise when a business elects to postpone recognizing a capital gain or a recaptured capital cost allowance, the CRA may accept security in lieu of payment of taxes owing until the final determination of taxes is made or the period for acquiring the replacement property has expired. For more information on posting security, see paragraph 3 of Interpretation Bulletin IT-259R4, Exchange of Property.

If the business is unable to pay or secure the tax debt arising from such a scenario, it is CRA policy to work with the business to establish a payment arrangement based on the business’s ability to pay.

The business should file its income tax return in the normal manner for the year that the proceeds are received and file its replacement property rules election within the specified time to amend the tax assessment for the year the proceeds were received and reduce the amount payable on the proceeds. In the meantime, to offer security or discuss a payment arrangement, the business can call the CRA at 1-888-863-8657.

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

In general, the provision of financial assistance by a government (or other grantor) to an individual or a business to subsidize the individual or business for losses or expenses resulting from a disaster will not be considered a supply and, therefore, the GST/HST will not apply to it, if there is no direct link between the financial assistance and a supply by the individual or business to the grantor or a third party specified by the grantor. For more information, see Technical Information Bulletin B-067, Goods and Services Tax Treatment of Grants and Subsidies.

Compensation you receive from your employer or government is, generally, not considered income in most circumstances. Any time you receive compensation for a disaster, including insurance, it’s always wise to talk to an accountant or tax preparer to ensure your non-taxable position.

Calculating the Home-based Business Tax Deduction

By Randall Orser | Business Income Taxes , Freelancing , Home Based Business , Personal Finances

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)

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

By Randall Orser | Freelancing , Home Based Business , Personal Finances , Small Business

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

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

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

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

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

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

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

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

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

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

Tip #3 Products, Services, or Both?

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

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

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

Tip #4 Online, Offline, or Both?

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

Tip #5 Are You Good at Waiting?

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

What is a Pooled Registered Pension Plan?

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

A few years back the Canadian government was realizing that people weren’t saving for retirement, and that the Canada Pension Plan (CPP) would have to go through drastic rate increases that would devastate the economy. So, the Pooled Registered Pension Plan (PRPP) was created.

A PRPP is a retirement savings option for individuals, including self-employed individuals. A PRPP enables its members to benefit from lower administration costs that result from participating in a large, pooled pension plan. It's also portable, so it moves with its members from job to job. Since the investment options within a PRPP are like those for other registered pension plans, its members can benefit from greater flexibility in managing their savings and meeting their retirement objectives.

Contributing to a PRPP

Like RRSPs, the maximum amount that a member or employer can both contribute to a PRPP in each tax year without tax implications is determined by the member's RRSP deduction limit.

Any employer PRPP contributions, combined with a member's contributions to their PRPP, RRSP, SPP, and spouse or common-law partner's RRSP and SPP, that are above the RRSP deduction limit may be considered excess contributions. It is important for members to know how much unused contribution room they have available in each tax year.

Any contributions made to a PRPP that are not deducted on the member's income tax and benefit return in each year are referred to as unused RRSP contributions. If a member withdraws the unused contributions from his or her PRPP, an offsetting deduction may be claimed. For more information, see What to do with unused registered savings plan contribution and "Withdrawing unused contributions" in Guide T4040, RRSPs and other Registered Plans for Retirement.

A member can make voluntary contributions to their PRPP between January 1 in each year and 60 days into the following year, up until the end of the year in which they turn 71. Member contributions are deductible on their income tax and benefit return, but the deduction must not exceed the difference between their RRSP deduction limit and the employer's contributions to their PRPP.

Death of a PRPP member

Like other registered retirement plans, when a PRPP member dies, all property held in the PRPP account is deemed to have been distributed immediately before the date of death. The fair market value (FMV) of the assets held in the account less any amounts paid to a qualifying survivor is included in the deceased member's income on the final income tax and benefit return.

In the case of the death of a member who had a spouse or common-law partner, if the deceased member's spouse or common-law partner was named in the agreement with the financial institution, the surviving spouse or common-law partner become a surviving member of the plan, taking over ownership and future direction of the PRPP account for the deceased. The surviving member is then entitled to receive a lump-sum payment from the PRPP or can choose to transfer the funds directly, on a tax-deferred basis, into another investment plan such as another PRPP, RRSP, SPP, RRIF or RPP.

Financially-dependent child or grandchild

In the case of a PRPP member who has a financially-dependent child or grandchild, the child or grandchild, if designated, will as a qualifying survivor, receive the funds from the deceased's member's PRPP account up to any amount designated. Since payments made from the PRPP are taxable, the child or grandchild would include the amount received as income on his or her income tax and benefit return. Same as for RRSPs, the amount received can be used to purchase a qualifying annuity.

If the financially-dependent child or grandchild has a physical or mental infirmity and is eligible for the disability tax credit (see line 316 – disability amount), the lump-sum amount from the deceased's PRPP can be directly transferred or "rolled over" on a tax-free basis, into a registered disability savings plan for an eligible individual.

Breakdown of the marriage or common-law partnership

A spouse or common-law partner or former spouse or common-law partner of a PRPP member, who is entitled to the funds from the member's PRPP account because of a breakdown of the marriage or common-law partnership, may transfer the lump-sum amount to: another registered plan such as another PRPP, RRSP, SPP, RRIF or RPP of the individual; or purchase a qualifying annuity.

Investment options

The investment options available for PRPPs are like those available for other registered plans, but there are some restrictions. The Income Tax Act does limit the type of investments that can be held in a PRPP to prevent tax avoidance planning. For example, a member cannot hold restricted investments in a PRPP such as their mortgage or debts, and shares of companies in which members have a significant interest.

The Pooled Registered Pension Plan (PRPP) is another great way for you to save for retirement, and, perhaps, save on the fees associated with other plans. What are you doing for retirement? If RRSPs, don’t make sense then look into the Pooled Registered Pension Plan (PRPP).

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What Every Small Business Owner Should Know Before—and After—Hiring a Bookkeeper

By Randall Orser | Business Income Taxes , Home Based Business , Personal Finances , Small Business

Many small businesses need to hire a skilled bookkeeper to track income and expenses, not only for tax preparation purposes, but for financial management as well. But how do you find a qualified bookkeeper, what should you look for and what should you look out for? We’re taking more about someone you hire as an employee and not necessarily as a freelancer.

A common misconception made by accounting novices is that anyone that can add and subtract can be a bookkeeper. Another is that anyone with a little computer savvy can purchase and use popular accounting software to meet his bookkeeping needs. Useful bookkeeping requires some basic knowledge of accounting, including concepts such as assets, liabilities, equity, income and expense accounts, and can understand financial statements. Furthermore, if you have employees your bookkeeper should be familiar with payroll taxes and federal and state laws pertaining to employees, even if you have an outside service preparing the payroll. Frequently, you can find individuals offering their services as “bookkeepers” when they do not have a grasp of these basic accounting principles. Unfortunately, if the employer also does not understand accounting, it can be months or more before he finds out that this bookkeeper really doesn’t know what he is doing.

The best place to start when looking for an acceptable candidate would be your accountant’s office. Many accounting office’s offer bookkeeping services, but their staff bookkeeping services are often billed at a premium. If your accountant offers this service, but you feel that the rate is too high for your small business, ask the accountant if he can refer you to a qualified independent bookkeeper. Rates for these individuals usually run a little lower.

You should interview several bookkeepers until you find one that you feel comfortable with, as this is someone you will be working with closely on sensitive information relating to the business. You should also request permission to run a background check on your prospective hire, as incidents of fraud and embezzlement do occur. The individuals who have committed these types of crimes are not always prosecuted, and after being discovered and terminated, will often take employment elsewhere with unsuspecting business owners. An experienced and reputable bookkeeper will not be offended by this request, and should be able to offer business references as well.

There are bookkeeping tests that you can administer to your prospective hire to determine if the individual has sufficient skill to perform the tasks necessary. Many are offered free on the Internet, some provided by professional bookkeeping organizations.

Once you have hired a bookkeeper, there are some ways to protect your business from fraudulent activities and in turn allow the bookkeeper to feel free from suspicion.

The following is a partial list of good practices:

1. Have all bank information such as statements, passwords, cancelled checks, etc. mailed to your home or a different business address. Open all such mailings, before any employees, to review for any suspicious activity and ASK QUESTIONS if something doesn’t look right.

2. Never give out passwords on bank, credit card, or loan accounts to the bookkeeper even though it may seem more convenient to do so.

3. Make sure that all bank and credit card accounts are reconciled properly and promptly and that you review the reconciliation reports. If you don’t know how to read a bank reconciliation report, ask your banker or your accountant to teach you what to look for.

4. Make sure that you have adequate “separation of duties” policies in place. Some examples of this would be:

a. The employee recording a bill or creating a bill payment should not also be signing the checks.

b. The employee reconciling the cash should not be the same person taking the deposit to the bank.

5. You can find out more about the “Separation of Duties” by researching online or by speaking with your accountant.

6. Be sure that you and/or your accountant review the financial statements on a regular basis for anything that looks out of the ordinary.

Finally, when you find a good bookkeeper, be sure to value and compensate him accordingly. This is an important position within the business and should not be left to unskilled, poorly trained, and underpaid people.

Are You Moving This Year?

By Randall Orser | Personal Finances , Personal Income Tax

Moving is probably one of the most strenuous things we do in our lives, and, sometimes expensive. The government has seen fit to at least let you write-off your moving expenses when it’s for school, a new job, or starting a business. Of course, with anything the government does there are conditions. And, for 2016 tax year they’ve added a new twist, you must state on your tax return that you have sold your principal residence.

Can you claim moving expenses?

You can claim eligible moving expenses if:

  • you moved and established a new home to work or run a business at a new location; or
  • you moved to be a student in full-time attendance in a post-secondary program at a university, college or other educational institution.

To qualify, your new home must be at least 40 kilometres (by the shortest usual public route) closer to your new work or school.

What can you write off as moving expenses?

If you qualify, you can claim reasonable amounts that you paid for moving yourself, your family, and your household items. Not all members of your household have to travel together or at the same time.

Transportation and storage costs (such as packing, hauling, movers, in-transit storage, and insurance) for household items, including boats and trailers.

Travel expenses, including vehicle expenses, meals, and accommodation, to move you and your household members to your new home. You can choose to claim vehicle and/or meal expenses using the detailed or simplified method.

Temporary living expenses for up to a maximum of 15 days for meals and temporary lodging near the old and the new home for you and your household members. You can choose to claim meal expenses using the detailed or simplified method. If you choose the simplified method, although you do not have to submit detailed receipts for actual expenses, we may still ask you to provide documents showing how long you stayed at the temporary lodging.

Cost of cancelling the lease for your old home, except any rental payment for the period during which you occupied the residence. However, you cannot claim rental payments for any period before the cancellation of your lease, whether or not you occupied the home during this period.

Incidental costs related to your move which include the following:

  • changing your address on legal documents;
  • replacing driving licences and non-commercial vehicle permits (not including insurance); and
  • utility hook-ups and disconnections.

Cost to maintain your old home when vacant (maximum of $5,000) after you moved, and during a period when reasonable efforts were made to sell the home. It includes the following:

  • interest;
  • property taxes;
  • insurance premiums; and
  • cost of heating and utilities expenses.

The costs must have been incurred when your old home was not ordinarily occupied by you or any other person who ordinarily resided with you at the old home just before the move. You cannot deduct these costs during a period when the old home was rented.

Cost of selling your old home, including advertising, notary or legal fees, real estate commission, and mortgage penalty when the mortgage is paid off before maturity.

Cost of buying your new home if you or your spouse or common-law partner sold your old home because of your move.

It includes legal or notary fees that you paid for the purchase of your new home, as well as any taxes paid (other than GST/HST) for the transfer or registration of title to the new home.

Calculation methods

Detailed Method

Meal expenses
If you choose to use the detailed method to calculate your meal expenses, you must keep all your receipts and claim the actual amount that you spent.

Vehicle expenses
If you choose to use the detailed method to calculate your vehicle expenses, you must keep all receipts and records for the vehicle expenses. Claim the actual amount that you spent for your moving expenses during the tax year.

Simplified Method

Meal expenses
If you choose to use the simplified method to calculate your meal expenses, you may claim a flat rate per person. For 2016 tax year it’s $17/meal up to a maximum of $51/day (including sales tax), and can be Canadian or US dollars. Although you do not need to keep detailed receipts for actual expenses, we may still ask you to provide some documentation to support your claim.

Vehicle expenses
If you choose to use the simplified method to calculate the amount to claim for vehicle expenses, multiply the number of kilometres by the cents/km rate for the province or territory where the travel began. For 2016 tax year it ranges from 43.5¢ for Alberta to 59¢ for the Yukon. CRA may still ask you to provide some documentation to support your claim. You must keep track of the number of kilometres driven during the tax year for the trips related to your moving expenses.

New for 2016 tax year is Reporting the sale of your principal residence for individuals

On October 3, 2016, the Government announced an administrative change to Canada Revenue Agency's reporting requirements for the sale of a principal residence.

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

Starting with the 2016 tax year, generally due by late April 2017, you will be required to report basic information (date of acquisition, proceeds of disposition and description of the property) on your income tax and benefit return when you sell your principal residence to claim the full principal residence exemption.

This could have a profound effect on anyone who runs a business or rents out part of their principal residence.

If only a part of your home qualifies as your principal residence and you used the other part to earn or produce income, you may have to split the selling price and the adjusted cost base between the part you used for your principal residence and the part you used for other purposes (for example, rental or business). You can do this by using square metres or the number of rooms, as long as the split is reasonable.

In other words, you are going to be taxed on the gain that relates to the business part of your home. For example, if you’re writing off 10% of your home for business then 10% of the gain must be included in income (less expenses for selling the home).

If you moved during the year, remember you may be able to write off your moving expenses, so keep all your receipts, and keep track of your mileage (remember must move over 40km away).

Paperwork Nightmare Rules

Four Financial Rules To Live By In The New Year

By Randall Orser | Budget , Personal Finances , Personal Income Tax , Small Business

People set ambitious goals when the new year hits, but one of the best goals you can make is to improve your finances and the way you handle them. This article outlines 4 financial rules that you should live by this year.

  1. Save every month

If you do not already have a savings account set up, now is the time to do it. You might have lots of money in your checking account, but it’s a good idea to have a separate account set up specifically for saving. This way you won’t spend it without thinking. You do not have to add every extra penny to the new savings account, but adding a nice chunk to get you started it a good start. It will motivate and inspire you to continue saving. You should also leave a little money to have fun with. Once you have a saving account you can decide how much you will save every month.

  1. Stop indulging so often

It’s fun to treat yourself to things now and then, but if you’ve made a habit out of treating yourself to a $5 coffee every day or a new piece of clothing every time you get a pay cheque, you are overindulging and spending money that you don’t need to be spending. Just because you have money doesn’t mean that you need to spend it. By cutting out three coffees each week, you will save money automatically.

  1. If you want something, save for it

Credit cards have made the need to save seem obsolete. This isn’t the case though. Once your credit card bill comes in, you still need to pay for whatever you bought. If you don’t have the money in your account when you buy the item you want, then it’s better to not buy it. Save up for what you want and then buy it. You’ll appreciate things more when you save for them before rushing out to buy them.

  1. Pay off credit card in full

It’s important to your credit score that you pay off all bills in full and on time. If you tend to forget what you’ve bought and what your balance is going to be when you get your bill, hold on to all receipts so that you can add them up. If you don’t pay off your bills on time, the interest will add up and it’ll be even more difficult to pay off.

Improving the way you deal with money will not only help you this year, but also for life. Good money habits will last you forever.

Number Crunchers

Tips For Tax Success Before You Use A Professional Tax Preparer

By Randall Orser | Freelancing , Home Based Business , Personal Finances , Personal Income Tax

“We’ll get you a bigger refund.”

“Get your refund before you leave our office!*”

And the guarantees get more outlandish with each new firm of “tax professionals.” For anywhere between $99 to a couple hundred dollars, you too can drag all of your personal information to a complete stranger so they can type your information into their special tax software.

Before you use a tax professional to prepare your income taxes, there are steps you should take to protect yourself from mishaps. The biggest problems with using a tax professional are:

  • Paying high fees for a fairly simple preparation.
  • Miscommunication between client and tax preparer leads to penalties for the tax payer.
  • Signing up for unnecessary refund now programs or protection on an incorrectly prepared return.
  • Exposure of personal information to unscrupulous individuals.

Paying High Fees for A Simple Return Preparation

If addition, subtraction, multiplication, and division are not tough for you, and you only have a job and very few deductions, you could do your own taxes. The chain tax preparation services charge flat fees for tax preparation, so you may end up paying high dollar for something that could take you less than an hour to complete. Taxes only begin to get complicated when there are varied income sources, such as investment and self-employment or business income, and multiple schedules of deductions.

Protection: Give your own tax preparation the old college try before you see a tax professional. Even if you only prepare you own taxes once it can be valuable. Feeling nervous about your results? Pay for professional tax preparation after you finish and if you receive similar results to your own attempt, you now have confidence to do-it-yourself next tax season.

Miscommunication Between Client and the Tax Preparer Results in Penalties for Taxpayer

Ignorance of the law is never an excuse to break it. Even tax professionals with great reputations and flawless credentials make mistakes. One of the biggest sources of mistakes derives from misinformation from the client, you! The tax professional may ask questions about activities and purchases with the hope of securing additional deductions. Incorrect statements result in a tax return with ineligible deductions, a higher refund, but serious problems for the taxpayer when the return is reviewed by government officials.

Protection: Educate yourself in a general way about the types of deductions you have taken in the past, and the “What’s New for [this tax year]” page in the federal tax return instruction guide. If you are ever confused about why a tax professional is asking a question, speak up. Clarification about what qualifies for a particular line item could save you headaches and hefty penalties later on.

Signing Up for Unnecessary Refund Now Programs or Tax Return Mistake Protection

Both of these products are useless. The first is actually a loan product and if your return is less than you anticipated, you will face payday loan type interest rates on the difference. It is not worth the hassle to get your refund check that day from the tax preparation firm. You’ve lived without that extra money the entire year; a few more weeks won’t hurt you. Additionally, many chain tax preparation firms now scare clients with “audit protection.” What is the point of hiring a tax professional to complete your tax return if you still aren’t sure you can trust their results?

Protection: Use direct-deposit for any tax refunds. You won’t bother with any loan products, debit cards that tack on fees for use, and on average a direct-deposit refund arrives within two to three weeks. Currently, CRA is depositing refunds within 10 days from filing. The “audit protection” programs are a waste because you should always be truthful with your tax preparer. Keep your records, and if there is an audit, it is unlikely it will be a major mistake. Even when an adjuster finds an issue during an audit, it doesn’t automatically mean a charge of tax fraud. Most minor cases require a payment of any difference, and modest penalties. Still an extremely rare occurrence if both you and the tax preparer are vigilant, so skip the useless insurance policy.

Exposure of Personal Information to Unscrupulous Individuals

For anyone to prepare your taxes, they will need social security numbers, bank account information and statements, and T-slip records showing your employment. In the wrong hands, this sensitive information can be exploited for great gain. Many chain tax preparation firms rely on seasonal labor, making detection of any wrongdoing by disgruntled employees more difficult once tax season ends.

Protection: Only bring the information you know you need, and keep it organized in a folder or some other collection. As your tax professional works with you, only give him or her the forms needed for that particular step. Ensure the forms are returned to you, other than some records which must be sent to CRA, for your records. Other than your physical tax return and records, the tax preparer shouldn’t be making copies of bank statements and other supporting documentation, unless it will be submitted with the return.

The bottom line is even when you are using a professional tax preparer, it is ultimately up to your own common sense to make sure your taxes are filed correctly. If a deduction sounds odd to you, or too-good-to-be-true, question it! Unless you have had major life changes between tax seasons, such as a large shift in income, the birth of a child or marriage, there should not be a large difference in your refund or taxes owed. If you encounter a problem, do not hesitate to speak with a branch manager. After all, it’s your money and tax obligation to the government, not theirs.

Common Adjustments Made to Your Tax Return

By Randall Orser | Personal Finances , Personal Income Tax

Every year Canada Revenue Agency (CRA), adjust returns for various reasons, and many of the adjustments are because you, the taxpayer, didn’t respond to their requests for more information, or the information you did submit was incorrect according to what they’ve received from your employer, etc. Here’s just a few tips on how to reduce the number of adjustments CRA could make on your return.

No reply received

If you do not provide the information requested within the timeframe indicated on the letter, CRA will deny or modify your claim based on the information available to them. If your tax return has been selected for review by one of CRA’s review programs, they will first try to verify your claim based on the information that’s on file. If more information is needed, a representative from one of the tax centres will contact you or your authorized representative by telephone or in writing.

When responding to a request from CRA for more information, be sure to:

  • include the reference number found at the upper right corner of the letter;
  • send your reply and all requested documents to the address in the letter within the time frame indicated;
  • provide all receipts and/or other documents requested.

Change of address

Due to possible changes to your mailing address during the year, CRA’s mail may unknowingly be misdirected. This could result in your claim being disallowed resulting in an amount owing. Therefore, always make sure the CRA has your current mailing address.

The easiest way to do this is go into My Account or the MyCRA mobile app and select “Manage Contact Info”. Yes, they have an app now too. You can also call 1-800-959-8281, however, be prepared with your latest filed tax return, SIN, etc.

Of course, you can avoid worrying about mail completely by signing up for direct deposit for all refunds, credits, etc. And, use their Online Mail via My Account so you never have to worry about postal service disruptions or lost/stolen mail.

What if you don’t have all your information slips?

Do not delay filing an income tax return because of missing T4s or other information slips. If you cannot get the missing slip(s) by the filing due date, use your pay stubs or statements to estimate your income and any related deductions and credits you may be eligible to claim. Usually, the last paystub for the year has all the pertinent information to file your taxes.

If your return is selected for review, all requested receipts and supporting documents have to be provided at that time. If they are not provided within the set timeframe, your claim may be reduced or disallowed. Slips are prepared by your employer, payer, or administrator. You should have received most of your slips and receipts by the end of February. However, T3, and T5013 slips do not have to be sent before the end of March. If you have not received, or have lost or misplaced a slip for the current year, you have to ask your employer, or the issuer of the slip, for a copy. Note that your employer must provide you a copy of your T4 upon request and at no charge.

You can also use My Account to get copies of all slips filed in your name, including RRSP contributions.

Documents in a foreign language

If you are submitting documents in a foreign language, you will need to provide a copy of the original documents and a certified English or French translation to the CRA.

The translation has to be certified by an official who has the authority to administer an oath or solemn declaration (commissioner of oaths, notary public, or lawyer) unless it has been completed by a translator who is a member in good standing of one of the provincial or territorial organizations of translators and interpreters of Canada. The signatory’s name has to be printed in the Latin alphabet.

Other deductions – Line 232

Use this line to claim allowable amounts not deducted anywhere else on this return. Specify the type of deduction that you are claiming in the space to the left of line 232.

Various non-deductible items such as funeral expenses, wedding expenses, loans to family members, a loss on the sale of a home, and other similar amounts are sometimes claimed in error at this line and then disallowed. If you would like additional information on whether a particular expense is deductible at this line or not, talk to your tax preparer or CRA.

Legal fees incurred in employment wage disputes are one item that would go on this line. Note only legal fees incurred for wage disputes can be claimed.

Northern Residents’ deductions – Line 255

If you resided in a prescribed northern or intermediate zone, on a permanent basis, for a continuous period of at least six months, you may be able to claim the northern residents’ deductions. There are two deductions possible, a residency deduction for having lived in a prescribed zone, and a deduction for travel benefits for medical or other travel that you received from employment in a prescribed zone that was included in your income. This continuous six-month period can begin or end in the tax year.

When completing Form T2222, Northern Residents Deductions, you have to clearly indicate the full address where you resided in a prescribed zone and not simply a post office box number. A travel itinerary or other proof of travel, including the receipts for accommodations may be required to support the travel part of a claim.

You are not eligible to claim the additional residency amount if another person has claimed the basic residency amount for the same period and dwelling.

Tuition fees – Line 320 of Schedule 11

Schedule 11, Tuition, Education, and Textbook Amounts, has to be filed with the student’s income tax return and not with the income tax and benefit return of any individual designated by the student to claim the transfer of tuition, education, and textbook amounts.

Fees for non-credit courses or courses that are below the post-secondary level are not deductible. This includes courses such as driver’s education, academic upgrading, or English or French as a second language. The tuition receipt provided by the educational institution has to clearly identify the name and academic level of the course or program, otherwise your claim may be disallowed.

Fees for courses that provide or improve skills in an occupation are deductible if taken at an educational institution certified by Employment and Social Development Canada.

Claims have to be based on fees for a period during the calendar year, not the academic year. Fees that were reimbursed to you or to a parent or spouse on your behalf cannot be claimed unless the reimbursed amount is included in income. Only the eligible tuition fees minus the amount received as a tuition reimbursement can be deducted.

If supporting documents are requested, ensure that the official receipt is issued by the educational institution is submitted.

Education and textbook amounts – Lines 321 and 322 of Schedule 11

You can claim only one education and textbook amount for each eligible month, either the full-time amount or the part-time amount.

Claims have to be based on the calendar year, not the academic year. You cannot claim the education and textbook amounts if the tuition fees paid for the course were reimbursed to you or to another person on your behalf. This applies whether or not the reimbursed tuition was added into income.

If supporting documents are requested, ensure the official receipt issued by the educational institution is submitted. The number of months claimed has to agree with the number of months indicated on the T2202A, TL11A, TL11B, or TL11C.

Medical expenses – Lines 330 and 331 of Schedule 1

Prescription drugs

Amounts paid for vitamins, supplements, or similar medicaments are not deductible even if prescribed by a medical practitioner and recorded by a pharmacist.

Ensure that receipts are dated, indicate “paid”, and that the type of goods or services received is clearly identified. It can also be helpful to provide a list or summary of your expenses, including a clear indication of whether any part of certain expenses was reimbursed to you (for example, through an insurance plan).

Attendant care or care in an establishment

Generally, you can claim the entire amount paid in a nursing home (full-time). In all other cases, the fees claimed have to be for salaries and wages paid for attendant care services.

Attendant care expenses may be eligible as medical expenses (line 330 and line 331) and for the disability supports deduction (line 215). The total you claim cannot be more than the total amount paid. Special rules apply when claiming medical expenses as well as the disability tax credit or the attendant care expenses.

To claim attendant care expenses paid to an establishment, you have to send us a detailed breakdown from the establishment that clearly shows the amounts paid for staff salaries that apply to the attendant care services.

The above are the most common items adjusted on your tax return, and why they’re adjusted is usually the lack of your response, or not providing the correct information in a timely fashion. Fortunately, the CRA is making it easier for people to gather the information, at least that which is filed with them. Just remember to keep your slips and receipts for at least six years, and you’ll be fine.

What do I do with a Bad Debt?

By Randall Orser | Budget , Personal Finances , Retirement , Small Business

bad-debtYou’ve been generous enough to give your customers credit, and now one of those customer’s debt has become uncollectible. You need to determine just how old is the debt, and what are your chances of collecting it. You can definitely write-off any debts that become uncollectible during the year; however, you must take steps to show that you at least tried to collect said debt. For our purposes today, we’re talking about customer invoices, and not loans or other debts.

Bad Debts

Canada Revenue Agency (CRA) considers a debt to be bad when:

(a) The debt was owing to the taxpayer at the end of the taxation year,

(b) The debt became bad during the taxation year, and

(c) The debt was included or is deemed to have been included in the taxpayer’s income for that taxation year or a previous taxation year.

You can’t claim a bad debt where a debt was sold, discounted or assigned absolutely by the taxpayer during the course of the year, even though the taxpayer may remain liable to indemnify the purchaser or assignee if the debt should prove to be uncollectible. If you use a factoring company, where you sell off your accounts receivable (customers who owe you money) then you wouldn’t be able to write off the debt as bad until the factoring company reassigned that debt back to you. This would also apply if you have assigned the debt over to a collection agency. Once the collection agency has determined the debt absolutely uncollectible then you can claim the bad debt as a business expense.

As with anything to do with the CRA, you must have proof, and the same goes for bad debts. You can’t just say that the debt is bad and write it off. You need to show a trail of letters, emails, etc. that prove you have tried to collect the debt (of course, you need to have the actual invoice too).

You determine what bad debts you have at the end of your fiscal year. Look through your customer accounts and decide, which accounts you are not going to be able to collect. Have you really tried to collect the debt? Have you kept an audit trail of your attempts to collect the debt? If you’ve done all that and it still appears not to be collectible then by all means write it off.

Allowance for Doubtful Accounts

You may find at the end of your fiscal year there are some accounts, which you think you may not be able to collect; however, as per the rules you can’t just claim a bad debt because you think it may be uncollectible. In this case you can claim a reserve for doubtful accounts. For example, you have $10,322.50 in invoices that you think you won’t be able to collect. In this case you claim a reserve for this amount, or lower, in the current fiscal year. If you do happen to collect them during the next fiscal year, you just reduce this reserve by the amount of that particular debt.

However, any doubtful account reserve claimed in one taxation year, must be included in income in the next fiscal year, even if the debt wasn’t collected. Basically, you’d take the leftover reserve as income and then write-off the debts completely as bad debt to get rid of the reserve. It’s basically a neutral effect on your bottom line.

You must establish that a reserve for doubtful debts is reasonable in amount, it is necessary to identify the debts that are doubtful of collection having regard for such indications as the period of arrears or default, the financial status and prospects of the debtor, the debtor’s past credit record both with the taxpayer and, if available, with other creditors, the value of any security taken and any other factor that is relevant in judging the debtor’s ability or willingness to pay.

Don’t despair that you have uncollectible accounts, as you get to write those debts off eventually. You do have to be careful though as a debt may be thought to be bad by you, however, CRA may have a different idea. You need to do your due diligence when it comes to customer debts, and that you keep a paperwork trail.