Category Archives for "Personal Income Tax"

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

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

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

Business Salary

Advantages:

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

Disadvantages:

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

Payment by Dividends

Advantages:

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

Disadvantages:

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

Payment by a Mix of Salary and Dividends

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

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

Sole Proprietorships or Partnerships

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

From an article by Susan Ward

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

By Randall Orser | Personal Finances , Personal Income Tax

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What is CRA ReFile and How Does it Work?

By Randall Orser | Personal Income Tax

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

Advantages of ReFile:

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

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

You Cannot Use ReFile when:

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

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

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

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

 

What are Input Tax Credits?

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

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

What qualifies as Input Tax Credit?

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

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

These capital expenses also qualify:

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

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

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

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

What Happens if You File Your Income Tax Return Late

By Randall Orser | Personal Income Tax

Are you procrastinating about filing your tax return? Wondering what will happen if you file late?  Well what happens will depend on whether you have to pay this year or whether you will get a refund.

Late Filing Penalties:

Those who file individual tax returns late and have a balance owing to the CRA will be subject to a late filing penalty: 

  • 5% of your balance owing, plus
  • An additional 1% of your balance owing for each month your return is late up to a maximum of 12 months

If you have already been charged a late penalty in any of the three previous years, then your penalties for the current year will increase to:

  • 10% of your balance owing, plus
  • 2% of your balance owing for each month your return is late up to a maximum of 20 months

So, to save yourself money you need to file on time by the 30thof April.

Exceptional Circumstances That Can Result in Late Filing:

If you are filing late due to circumstances beyond your control, then the CRA may waive the late filing penalty and interest for more information see IC07-1: Taxpayer Relief Provisions. The CRA will considers the following exceptional circumstances:

  • If you have suffered a serious illness or accident
  • You in emotional distress from a divorce or death of a family member
  • You have suffered a disaster such as a flood, fire, or earthquake
  • If you are filing by mail and there is a disruption of service due to a mail strike

You may also be able to avoid penalties when your delay in filing is a result of action by the CRA such as:

  • Processing errors by the CRA
  • Incomplete or incorrect information on the return which has to be corrected or where the CRA asks for additional information
  • A CRA delay in processing which results in a late assessment of your balance owing
  • Delays caused as a result of reviews, audits, objections or appeals

Financial Hardship:

The CRA can also cancel all or some of your penalties and interest if your inability to pay is due to financial hardship caused by loss of employment, loss of business income, medical bills etc.  If you are unable to pay you will need to provide the CRA with detailed financial information including statements of assets, income, liabilities and expenses. 

If you are unable to pay the amount that you owe on your taxes by the filing deadline you should still file your return on time to avoid late filing penalties.  

From an article by Susan Ward

How to File Your Income Tax Return Electronically

By Randall Orser | Personal Income Tax

Out of more than 25 million tax returns filed each year over two-thirds are filed electronically.  This number is going to grow as the CRA is encouraging people to go paperless 

There are two ways to file your return electronically. If you do your own return you can file through Netfile.  If you have your return done for you or you do one for others you need to submit those returns through Efile Online.  

It is important to keep your personal information up to date with the CRA for the best results when filing electronically.  It is a good idea to set up a MyAccount on line with the CRA so that you can check the status of your return as well as sign up for direct deposits of your tax refund and GST payments. 

Service Canada’s My Service Canada Account or MSCA gives you access to your employment insurance, old age security and Canada pension plan information.  It will also give you access to electronic versions of your T4’s for these services.

Netfile only processes tax returns from the current year, so if you are filing for previous years or wish to make amendments to previous returns you will need paper copies of the relevant tax return forms.   You also cannot use Netfile if you have declared bankruptcy or if you have income from a different province to the one where you live.

When you file electronically you need to collect all your T4’s and T5’s which show your employment and investment income.  You should also have last year’s notice of assessment which shows your RRSP limits and deductions you can carry forward.  You will also need all receipts that support claims for deductions and tax credits such as medical expenses and children’s activities.  You need to keep all your receipts in case you have a future review or audit. 

You will need to use certified software such as TurboTax to prepare your return which will also guide you through the Netfile process.  

For more information about filing with Netfile see https://www.canada.ca/en/revenue-agency/services/e-services/e-services-individuals/netfile-overview.html

From an article from Turbo Tax

Who Should File a Tax Return in Canada?

By Randall Orser | Personal Income Tax

Even if you have no income there are good reasons as to why you should or are required to file an income tax return; 

  • You owe tax to the government or have to repay any of your Old Age Security or Employment Insurance benefits.
  • You are self-employed and have to pay your Canada Pension Plan employment insurance premiums.
  • You are your spouse want to split your pension income.
  • You are a participant in the Home Buyer’s Plan or Lifelong Learning Plan and have repayments due.
  • You disposed of capital property for example you sold your home.  In this instance you must file a return even if you don’t have to pay capital gains on the sale under the principal residence exemption.
  • You have received a Working Income Benefit advance or payments in 2018.
  • The CRA has sent you a Request to File, or a Demand to File in which case they are serious about your lack of filing, so you had better get on it!

Whatever your residency status in Canada, you have to file a return especially if any of the above criteria apply to you.  

If you live abroad but receive income from a business that you own, investments or property you own in Canada you will need to file an income tax return.

There is no age exception - if you meet one of the criteria above you need to file.

Students are not exempt, if you earned over $3500 in 2018 you will need to file a return even if you are still in school.

Even if you are not required to file it is usually in your best interest to file anyway;

  • If you want to claim a refund
  • If you are eligible for certain benefits programs.  Even with no income you may qualify for GST payments.
  • Your RRSP contributions limit increases as soon as you have any income which may benefit you in the future when you are able to contribute.
  • If you want to claim tuition credits you need to declare the amounts on your tax return.  It may not result in a refund this year, but you can apply these unused credits to a future return.

From an article by Turbo Tax Feb 2, 2019

 

What’s New for the 2019 Tax Season?

By Randall Orser | Personal Income Tax

Did you know that according to a report on Global news we pay 42.5% of our income in tax?  That's a sobering thought so we need to make sure that we know about any new deductions that can be claimed on our return. 

The 2019 tax filing season was off and running on February 19th, the official day when the CRA began processing returns. According to the CRA, improvements have been made to ensure that tax-filing is a user friendly, fast, easy and secure process.  There have been improvements to their call-centres, featuring improved accessibility for callers.  When you call you will now get an estimated wait time, so you can decide to wait, call back or use the self- serve options that are available.  Call-centre agents have also received improved training to enable them to better answer questions from callers.

For most of us the filing deadline is April 30th but If you are self-employed you usually have until June 15th to file. However, as this date falls on a Saturday, you get two extra days! Returns are due by midnight July 17th; however, any balance owing is still due by April 30th.

So, what else is new for individuals and families in 2019?

  • Increases to the Canada Workers Benefit– for an individual this increases to $1355 for a single person and $2335 for a single parent or couple, this is an increase of between $300 and $400.
  • Climate Action Incentive– an extra tax credit for Canadians living in Saskatchewan, Manitoba, Ontario and New Brunswick to offset the cost of the carbon tax in provinces that have not established a carbon price of their own. 
  • Medical expense credit for service animals – Canadians suffering from severe mental impairment are now able to claim the cost of caring for a service animal as a medical expense.
  • Accelerated capital cost allowance rates – If you are a business owner or are self-employed you may be able to get more money back for the cost of your business equipment and office furniture bought after November 2018.  The former amount you can claim in the first year has increased by 50%. Unfortunately, this change will only apply until the end of 2023 and will be phased out between 2024 and 2027.
  • Lower Tax Rate for small businesses – The federal small business tax rate which applies to business incomes up to $500,000 has dropped from 10.5% to 10% in 2018 and dropped to 9% in January of 2019.
  • Pay your taxes with an app – You can now pay your taxes through your phone.  The        MyCra web based app lets you view and pay your tax balance with Interac, or Credit card or by pre-authorised debit.

For more information about filing your taxes in 2019 see the CRA website at https://www.fin.gc.ca/n18/data/18-123_1-eng.asp

How Far Back can a CRA Reassessment go?

By Randall Orser | Personal Finances , Personal Income Tax

After you file your taxes you will receive a Notice of Assessment which details the amount of tax that you owe or the refund you will receive.  Sometimes you will be asked to do a preassessment review in a situation where the CRA will ask you for additional information or documentation. The CRA can reassess your taxes after they have sent out your Notice of Assessment.  This usually happens later in the same year.  You should respond to the CRA by the deadline (usually 30 days from the date of the letter) with the information requested. 

A CRA reassessment or audit can be very worrying for most taxpayers and a common question is “How far back can the CRA reassess me?”  There are limits as to how far back the CRA can go to reassess someone’s taxes returns and the usual time limit is three years from the date your return was filed.  However, they can extend the reassessment period if they believe that you may have carelessly or willfully misrepresented your tax situation, or if they suspect fraud. In order to reassess the CRA must prove that fraud, neglect or willful fault occurred. This does not mean that you made a simple mistake on your return but that you made a serious misrepresentation such as in reporting your income.  

It is important that you keep all your tax information and documents for six years in case they are requested by the CRA.  Should you be subject to a reassessment or audit it would be difficult to prove your case without supporting receipts.  The CRA must have proof of your financial and tax situation and if you are unable to provide the documentation then you could end up dealing with a lengthy audit.  

If you are being audited there is nothing that you can do to stop it, and the worst thing that you can do is to ignore communications from the CRA.  The best thing you can do is to get organized with your paperwork and receipts and to be as cooperative as possible.  Also, it is advisable to get professional help as soon as you get your audit letter so that you can prepare a better case. 

An audit can be a “desk audit” which is common if you have business income and declared losses, or, if you have real estate transactions reported on your return.  In a “field audit”, the taxman will show up at your home or place of work. 

For more information on CRA Tax Audits visit: 

https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4188.html
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