Category Archives for "Personal Income Tax"

Avoid These Common Mistakes When Claiming Charitable Contributions

By Randall Orser | Personal Income Tax

Donating to a charity can be a very feel good experience; as well it can help on your taxes by reducing how much you pay. However, most people make some pretty common mistakes when either donating or claiming the donations on their personal tax returns. We’ll do our best to enlighten you on what to avoid when claiming donations.

Each Spouse Claims Only Their Donations

This is the most common mistake most taxpayers make, each claiming only their donations. As a married, or common-law, couple you can combine your donations. This allows one spouse to take advantage of a higher deduction, or maybe they benefit far greater than the other spouse claiming the donations. Whose name is on the donation receipt is irrelevant. 

You get a higher deduction when claiming more than $200 in donations. On the first $200 of donations you get a 15% tax credit, and the amount over $200 you get a 29% tax credit.  

For Example, Susie has $50 in donations while her husband, Eric, has donations of $190. Separately, they are under the $200, and Susie would get a tax credit of $7.50, while Eric would get $28.50. If they were to combine these donations, one would be claiming $240 in donations. The credit would be $30 ($200 x 15%) plus $11.60 ($40 x 29%) for a total of $41.60. If Eric were to claim the donations he’d get an addition $13.10, and, if Susie were to claim them she’d get an additional $34.10. This may make more of a difference on either’s tax bill depending on their income.

No Receipt For The Donation

This is a common one for people who drop coin or bills into the boxes and cans strewn throughout their city or town. This may add up during the year, however, without a receipt or other proof, you probably won’t get away with the deduction. 

This also occurs when you get people coming to your door, and asking for a donation. If it’s a legitimate charity, you will get a receipt right there and then.

What are donation schemes and why should I avoid them?

People are sometimes approached to donate to charities or other qualified donees through tax shelter arrangements. Before you decide to donate in this way, you should be aware of the risks associated with participating in certain tax shelter donation arrangements including:

  • Gifting trust arrangements;
  • Leveraged cash donations; and
  • Buy-low, donate-high arrangements.

Promoters of such shelters must obtain a tax shelter number from the Canada Revenue Agency (CRA). The CRA uses the tax shelter number to identify the tax shelter and its investors, but offers no guarantee that taxpayers will receive the proposed tax benefits. 

The CRA reviews all tax shelters to ensure that the tax benefits being claimed meet the requirements of the Income Tax Act. The CRA has audited many of these gifting arrangements. Generally, the CRA reduces the amount of the tax credit to no more than the taxpayers' cash donation, and in many cases it is reduced to even less than that. In some cases the credit is reduced to zero. The CRA may also charge interest and penalties.

I have found that when these kinds of schemes go to court, CRA usually wins. I know someone who was caught up in the art scheme some time ago, where you buy a piece of art for cheap and then donate it to a charity at an inflated price (usually way above fair market value). 

What types of gifts qualify for charitable tax credits? 

Examples of donations that do usually qualify for charitable tax credits include:

  • Money;
  • Securities;
  • Ecologically sensitive land;
  • Certified cultural property;
  • Capital property;
  • Personal-use property (such as prints, etchings, drawings, paintings, sculptures, jewellery, rare folios, rare manuscripts, rare books, stamps, and coins); and
  • Inventory (such as art, antiques, rare books).

The following do not usually qualify for charitable tax credits: 

Contributions of services, such as time, skills, effort;

Certain admission fees to events or to programs (e.g., fees for daycare or nursery school facilities);

The purchase price of a lottery ticket or other chance to win a prize, even though the lottery proceeds benefit one or more charities; and

  • The payment of tuition fees (exceptions exist). 

These common mistakes for charitable donations can end up costing you quite a lot in taxes. Always make sure you get a receipt, look at the best possible scenario when it comes to deducting charitable donations, and don’t fall for the schemes that may save you initially but end up costing you way more later on.

 

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.

Why does Your Marital Status Matter for Taxes?

By Randall Orser | Personal Income Tax

I get this question a lot. People who are married usually just assume that they have to file together as they’re married, and that’s correct. However, those living together, but not married, must also state their marital status to Canada Revenue Agency (CRA). And, you must file as common-law if you are in a relationship with the person you’re sharing accommodation.

So why does marital status matter? Your marital status affects your child and family benefits. The Canada Revenue Agency (CRA) uses your family net income to calculate them, so they may change when your marital status changes.

The CRA will recalculate your benefits and credits based on:

  • your adjusted family net income
  • the number of children you have and their ages
  • the province or territory you live in

What is your marital status?

The definitions of the following terms will help you determine your marital status.

Spouse

A spouse is someone you are legally married to.

Common-law partner

You have a common-law partner if you are living in a conjugal relationship with someone who is not your spouse and at least one of the following applies:

  • you have been living together for at least 12 continuous months
  • this could include any period you were separated for less than 90 days because of a breakdown in the relationship
  • he or she is the parent of your child by birth or adoption
  • he or she has custody and control of your child (or had custody and control right before the child turned 19) andyour child is completely dependent on that person for support

Separated

You are separated when you start living separate and apart from your spouse or common-law partner because of a breakdown in the relationship. The breakdown in the relationship must last for at least 90 days and you do not reconcile in that time. A separation of less than 90 days is not considered a separation for child and family benefits. Once you have been separated for 90 days, the effective date of your separation is the first day you started living separate and apart.

If you continue to live together and share parental and financial responsibilities, the CRA will not consider you to be separated for administering the CCTB and GST/HST credit legislation.

If the separation is involuntary, you are still considered to have a cohabitating spouse or common-law partner. Involuntary separation could happen when one spouse or common-law partner is:

  • away to go to school
  • away for work or health reasons
  • incarcerated 

How does your marital status affect your benefits and credits?

Canada child tax benefit

If you get married or are now considered to be living common-law, and you or your new spouse or common-law partner has children who live with you, the CRA will put all of the children on the female parent’s account.

If you are married or living common-law with a person of the same sex, one of you will get the Canada child tax benefit (CCTB) for all of the children in the household.

To continue getting the CCTB, you mustfile an income tax and benefit return every year, even if you did not have income in the year. If you have a spouse or common-law partner, they also have to file a return each year.

Goods and services tax/harmonized sales tax credit

If you are married or are considered to be living common-law, only one of you can receive the goods and services tax/harmonized sales tax (GST/HST) credit. The CRA will pay the credit to the person whose return it assesses first. The amount will be the same, regardless of who in the couple receives it.

If you become separated, widowed, or divorced, the CRA will determine your eligibility and tell you if you are entitled to receive the GST/HST credit.

Working income tax benefit advance payments

If your marital status changes, you will need to submit a new working income tax benefit advance payments application. If you do not submit a new application, your advance payments will stop until the CRA receives a new application. The application deadline date is August 31 every year.

What you need to do if your marital status changes

If your marital status changes, you need to tell the CRA before the end of the month after the month your status changed. For example, if your marital status changes at any time in August, tell the CRA about the change by the end of September.

If you have become separated, tell us after you have been separated for more than 90 consecutive days.  You can tell the CRA about your new status and the date of the change by:

  • using Change my marital status in My Account calling 1-800-387-1193

If you receive payments based on an incorrect marital status, you may have to pay back any differences in amounts once your status is changed to the current status. The CRA will go back to the month after the month your marital status changed and change your benefits from then. Visit Balance owing - Benefits overpayment for more information.

A Little Story

Dick and Jane met and decided to live together and did so happily for 15 years. Jane had two children from another relationship whom she had full custody, and Dick had one child whom he didn’t have custody. Dick was a much higher income earner, and never qualified for any benefits; however, Jane was a low-income earner with two kids. Of course, they did their taxes separately, and never thought to file as common-law. 

Then one-day Dick gets audited. It wasn’t a particularly nice audit either. The auditor found out that Jane was living in the same house, were in a relationship, and that they had been filing as single. CRA can go back as far as they wish when adjusting returns, if they believe there’s fraud, even if the fraud wasn’t necessarily on purpose. 

Unfortunately, for Dick and Jane, the auditor went back to when they first started living together, less one year, and bounced their returns, and refiled them based on being common-law. Jane being low income had benefited greatly with having two kids and received many benefits. With Dick’s income added onto Jane’s she no longer qualified for those benefits and ended up having to pay back all of the benefits she’d received in those years. In the end, this added up to over $50,000 for the benefits payback and the penalties and interest on those benefits received. Needless to say, Jane didn’t have that kind of money, and they ended up getting a loan to pay it all back.

Your marital status is very important when filing your taxes, and you must be honest, and file with the appropriate status. As you can see it could end up costing you a small fortune later on.

 

Should I Teach my Kids About Taxes?

By Randall Orser | Personal Income Tax

I think that one of the inevitabilities of life, taxes, is something that we should learn about early in life. From why we need to levy taxes, how they affect your life, from your job, business, to what you buy, it’s a good thing to know about taxes. Sadly, school doesn’t do this as well as it should, or at all, so it’s up to you parents to teach your kids about taxes. 

Working Teens

Do you have a teen with a part-time job? This is a good time to show them how taxes work and helping them prepare their tax return come the following tax season. With online resources, it would be easy for them, let’s face it their more tech savvy than their parents, to file online. Better yet, get them to find a tax preparer on their own, so they can see what it’s like when they’re an adult and have to deal with their taxes.

The younger we teach them to do something, the better they can handle it as an adult. You’d be surprised how many young adults (early to mid-twenties) come to us, and have absolutely no clue what to do, or even what they need to provide to us.

The good thing about filing a tax return each year the teen has a T4 is that this accumulates his RRSP contribution room, so when they turn 19, they can start to contribute to an RRSP. Or, for later in life the monies they earned as a teen are contributing to that future contribution limit.

Of course, when they turn 19, it’s time to register for the GST/HST tax credit too. If your child has the confidence to figure that on their own, then the better. Get them reading about taxes, and what they need to do for filing their taxes.

Purchases

When your kid, no matter the age, wishes to buy something this is a good time to teach them about consumption taxes (GST/HST and PST). It’s fun to save for something they want, they know how much that toy will cost; however, they go to buy it and now don’t have enough money as they didn’t know about the taxes (from 5% to 15% depending on the Province). They’re now sadly disappointed and have to save more for the taxes.

If you teach that whatever they want to buy they need to think about the consumption taxes, then they know they need to add more to their savings to cover such taxes. Here in British Columbia you need to add 12% onto most purchases, food is mostly an exception except for pets. For example, if your kid wants to buy a toy that’s $39.99 then they need to add $4.80 for GST/HST ($2.00) and PST ($2.80). The kid needs to save $44.79. 

As a parent, you should think about teaching your kids about taxes as early as they would be able to understand. This way the kids won’t be disappointed when buying something, nor, later in life, will they get in trouble with Canada Revenue Agency because they didn’t file their taxes for five years. Ideally, the schools would teach such things too, maybe parents need to start demanding that schools start teaching kids about real life. As Crosby, Stills & Nash sang, “Teach Your Children Well”. 

Resources

Where Your Tax Dollars Go (Department of Finance Canada)

https://www.fin.gc.ca/taxdollar/text/fanfold/pamphlete.pdf

CBC News report, Feb 2018

https://www.cbc.ca/news/business/tax-dollars-1.4545415

Doing Your Taxes (Canada Revenue Agency)

https://www.canada.ca/en/services/taxes/income-tax/personal-income-tax/doing-your-taxes.html

Get ready to do your 2017 income tax and benefit return (Canada Revenue Agency)

https://www.canada.ca/en/revenue-agency/campaigns/taxes-get-ready.html

How to Retire the Right Way

By Randall Orser | Personal Income Tax

An Ipsos poll stated that 55% of respondents indicated they planned to spend their retirement years travelling, while 54% indicated they wanted to spend more time with their family. Are you a small business owner harboring those same retirement dream? If so, you need to start thinking long and hard about how you plan to retire from your company. Retiring from a small business is not quit the same as retiring from that 9 to 5 job. You need to figure out how your retirement plans will impact your business, and how you will make a graceful exit from it. The following planning tips will help you retire the right way from your business.

Succession Planning

The best move that you can make on your retirement plans is to come up with a succession plan way ahead of when you eventually plan to retire. The earlier you start thinking about training your successor, the quicker you can start imparting your knowledge to someone on your team. When hiring employees have management training in mind, focus on helping team members learn to do your job in your absence, and do whatever you can to build a team that is invincible. Are you planning on selling your small business as part of your succession plan? Having a strong team in place will make selling the business that much easier.

Tax Planning

For small business owners who plan on retiring someday, the critical thing is advanced tax planning. You need to know how the tax laws will impact your retirement plans if you don’t want to get hit with unpleasant tax penalties when you retire. Find a good accountant and financial planner that specialize in retirement, so you know the significance of everything from a diversified retirement savings plan to self-directed retirement funds and capital gains taxes. When you adopt a ‘big picture’ mentality in regard to your tax planning, making your retirement dreams a reality becomes an easier goal to achieve.

Retirement Age Planning

Have you determined an age when you plan to retire? As a small business owner, you need to figure that out, however, that doesn’t mean you have to retire at 65, it can be before or after that. Find someone who is a certified retirement specialist to better understand your options. With careful financial planning, you could retire early, maybe 45, 50 or 55. You might even be able to develop a retirement plan that allows you to hand over control of your small business while retaining ownership rights. Your retirement doesn’t have to begin at 65, and you may find it amazing what options you have to explore.

For a sound financial future as a small business owner, it’s critical that you start retirement planning. Once you realize how many events can impact your future and small business (health, technology, etc.), you start to see the importance of developing a long-term retirement plan for your company. 

 

Is a Registered Education Savings Plan (RESP) Worth it?

By Randall Orser | Personal Income Tax

You may already know what a RESP is; however, here’s some information just in case you aren’t sure. A registered education savings plan (RESP) is a contract between an individual (the subscriber) and a person or organization (the promoter). Under the contract, the subscriber names one or more beneficiaries (the future student(s)) and agrees to make contributions for them, and the promoter agrees to pay educational assistance payments (EAPs) to the beneficiaries.

A RESP is a great way for you to save for your children’s education, much like you’re saving for your retirement with an RRSP. Look at what you can afford to put away and do a monthly contribution so it’s easier on the pocketbook. A RESP is also a great way for the grandparents or aunts/uncles to contribute, just remember that you can only contribute up to a lifetime maximum of $50,000 per child.

Rather than all those toys, and other things that kids just grow out of, this is a great present (the kid may not realize it now though) for when the child is grown and off to post-secondary education. You can even show the child how the fund is growing, and maybe have them contribute when they get jobs.

The advantage of a RESP is that the withdrawals are taxable to the beneficiary. The income earned is paid as educational assistance payments (EAPs). Beneficiaries include the EAPs in their income for the year in which they receive them. However, they do not have to include the contributions they receive in their income. The student will get a T4A with the EAPs in Box 042.

An educational assistance payment (EAP) is the amount paid to a beneficiary (a student) from a RESP to help finance the cost of post-secondary education. An EAP consists of the Canada Education Savings Grant, the Canada Learning Bond, amounts paid under a Provincial Education Savings Programs and the earnings on the money saved in the RESP.

Another great thing about RESPs is the government gives you money in the form of grants. These grants can be the Canada Education Savings Grant (CESG), Canada Learning Bond (CLB), or any designated provincial education savings program. If the government is giving out money you may as well take some and help your child out at the same time. 

Canada Education Savings Grant (CESG)

Employment and Social Development Canada (ESDC) provides an incentive for parents, family and friends to save for your child's post-secondary education by paying a grant based on the amount contributed to a RESP for the child. The CESG money will be deposited directly into the child's RESP.

No matter what your family income is, ESDC pays a basicCESG of 20% of annual contributions you make to alleligible RESPs for a qualifying beneficiary to a maximum CESG of $500 in respect of each beneficiary ($1,000 in CESG if there is unused grant room from a previous year), and a lifetime limit of $7,200.

Canada Learning Bond (CLB)

Employment and Social Development Canada (ESDC) also provides an additional incentive of up to $2,000 to help modest-income families start saving early for their child's education after high school (post-secondary education). 

For families entitled to the national child benefit supplement (NCBS) for their child, the CLB will provide an initial $500 to children born on or after January 1, 2004. To help cover the cost of opening a RESP for the child, ESDC will pay an extra $25 with the first $500 bond. Thereafter, the CLB will also pay an additional $100 annually for up to 15 years for each year the family is entitled to the NCBS for the child. 

Certain provinces encourage families to plan and save for their children's post-secondary education by offering incentives to open an RESP. Currently, only Alberta, Quebec, and Saskatchewan offer such incentives. 

Let’s face it, and education is somewhat pricey, and will probably only go higher. We’re better off than some counties as our post-secondary education system is highly subsidized. That said, it doesn’t hurt to start early in a child’s life to start saving for their education and get other family members involved. Make it fun and let the child know that you’re thinking of them by saving for their future.

 

What Child and Family Benefits are Left?

By Randall Orser | Personal Income Tax

The federal government in its infinite wisdom decided to eliminate many benefits for families with children and did prop up the one benefit left giving families a monthly stipend depending on their income. Now the only benefit left is the Canada child benefit (CCB).

What is the Canada Child Benefit (CCB)?

The Canada child benefit (CCB) is a tax-free monthly payment made to eligible families to help them with the cost of raising children under 18 years of age. The CCB might include the child disability benefit and any related provincial and territorial programs, such as the BC early childhood tax benefit.

The Canada Revenue Agency (CRA) uses information from your income tax and benefit return to calculate how much your CCB payments will be. To get the CCB, you have to file your return every year, even if you did not have income in the year. If you have a spouse or common-law partner, they also have to file a return every year.

Benefits are paid over a 12-month period from July of one year to June of the next year. Your benefit payments will be recalculated every July based on information from you and your spouse’s (if applicable) income tax and benefit returns from the previous year. If any of your information from the following list changes during the year, we will recalculate your benefit the month after the change occurs.

For July 2018, in its Fall Economic Statement, the Government proposes to strengthen the CCB by increasing the benefits annually to keep pace with the rising cost of living. In the fall of 2016, the Government committed to index the CCB to inflation starting July 2020, but the government believes that a growing economy and improved fiscal track means it can deliver on this commitment two years sooner. 

To be eligible for the Canada child benefit (CCB), you must meet all of the following conditions:

  • You must live with the child, and the child must be under 18 years of age.
  • You must be primarily responsible for the care and upbringing of the child.
  • You must be a resident of Canada for tax purposes.
  • You or your spouse or common-law partner must be:
    • a Canadian citizen
    • a permanent resident
    • a protected person
    • a temporary resident who has lived in Canada for the previous 18 months,                    and who has a valid permit in the 19th month
    • an Indian within the meaning of the Indian Act

What Benefits or Credits Could you Get?

When you apply, the Canada Revenue Agency (CRA) will determine if you are eligible for:

  • the Canada child benefit
  • any related provincial or territorial programs

The CRA will also register your child for the goods and services tax/harmonized sales tax (GST/HST) credit.

When Should you Apply?

Apply for the CCB as soon as possible after:

  • your child is born
  • a child starts to live with you
  • you or your spouse or common-law partner meet the eligibility conditions

CCB payments can begin the month after you become eligible, as long as you are still eligible at the beginning of the current month.

You should apply even if:

  • you share custody of your child
  • your child is living with you for a determined temporary period of time
  • your current family net income is too high to get the CCB (you might be eligible for other benefits)

Although the Canada child tax benefit and the universal child care benefit are no longer being issued, you can still request an adjustment for previous years, if you were eligible.

Who Should Apply?

The individual who is primarily in charge of the care and upbringing of the child should apply for the CCB. You are primarily responsible for the care and upbringing of the child if you:

  • supervise the child’s daily activities and needs
  • make sure the child’s medical needs are met 
  • arrange for child care when necessary

For CCB purposes, when a male and a female parent live together in the same household as the child, the female parent is usually considered to be primarily responsible for the child. In this situation, the female parent should apply. If the male parent is primarily responsible, he must attach a note to his application from the female parent. The note must state that he is primarily responsible for all of the children in the household.

If two parents of the same sex live together in the same household as the child, one parent should apply for the CCB for all of the children in the household. You are not considered primarily responsible if the child is legally, physically, or financially maintained by a child welfare agency. For more information on this situation, see children's special allowances.

Do you Share Custody?

You share custody if the child lives with you and another individual in separate residences on a more or less equal basis. The child might regularly alternate between residences in the following cycles:

  • four days with one person and three days with the other
  • one week with one person and the next week with the other
  • any other regular alternating cycle

Both individuals must be primarily responsible for the child's care and upbringing when the child lives with them. Each eligible individual will get 50% of the payment he or she would have received if the child lived with him or her all of the time. If you have just entered into a shared custody situation you have to apply for benefits.

Although a court order might state which individual should receive the CCB, the CRA is bound by the Income Tax Act, which is the legal authority the CRA uses to determine who eligible individuals are. If you start or stop sharing custody of a child, let us know as soon as possible.

How is the CCB Calculated?

Your Canada child benefit (CCB) payments are calculated for the period of July of one year to June of the next year using the following information:

  • the number of children who live with you
  • the ages of your children
  • your adjusted family net income
  • your child’s eligibility for the child disability benefit  

CRA recalculates your payment every July based on your adjusted family net income from the previous year. Your net income is the amount from line 236 of your income tax and benefit return. Your family net income is your net income plus the net income of your spouse or common-law partner, if you have one.

CRA "adjusts" your family net income so that we don't count any universal child care benefit (UCCB) and registered disability savings plan (RDSP) payments you receive. CRA does this to make sure that people with low and modest incomes get the most benefits they can. However, if you have to repay any UCCB and RDSP amounts, they will include them as part of your adjusted family net income.

Your marital status affects how your benefits are calculated. If your marital status changes, you need to tell CRA before the end of the month after the month your status changed. For example, if your marital status changed in August, tell them about the change by the end of September.

To estimate the amount of CCB you might be entitled to, as well as any benefit from CCB-related provincial or territorial programs and other benefits, use the child and family benefits calculator. Calculations are based on the information you enter in the calculator fields.

Basic Benefit for July 2018 to June 2019

CRA calculates the Canada child benefit (CCB) as follows:

  • $6,496 per year ($541.33 per month) for each eligible child under the age of six
  • $5,481 per year ($456.75 per month) for each eligible child aged 6 to 17

We start to reduce the amount of CCB you get when your adjusted family net income (AFNI) is over $30,450. The reduction is calculated as follows:

  • families with one eligible child: the reduction is 7% of the amount of AFNI between $30,450 and $65,976, plus 3.2% of the amount of AFNI over $65,976
  • families with two eligible children: the reduction is 13.5% of the amount of AFNI between $30,450 and $65,976, plus 5.7% of the amount of AFNI over $65,976
  • families with three eligible children: the reduction is 19% of the amount of AFNI between $30,450 and $65,976, plus 8% of the amount of AFNI over $65,976
  • families with four or more eligible children: the reduction is 23% of the amount of AFNI between $30,450 and $65,976, plus 9.5% of the amount of AFNI over $65,976

The CCB is now pretty much the only kid friendly tax benefit from our government. Only time will tell if it will actually benefit the lowest income people or not.

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.

 

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 Secure is Your Information as a Taxpayer?

By Randall Orser | Personal Income Tax

The big thing today is online security, or cyber security, and you need to know whether or not your data online with Canada Revenue Agency (CRA). For the most part it is, but there is always a chance. Just remember that the hackers aren’t someone sitting in their mom’s basement in their underwear hacking away on their laptops. It’s criminal organizations as well as government organizations, such as Russia’s FSB or China’s MSS, that are doing the hacking in what’s called ‘hacking farms’ that are the real problem. So, how is CRA taking care of your data?

The Canada Revenue Agency (CRA) takes the security of all taxpayer information very seriously. The CRA keeps a close watch on internal processes to prevent unlawful attempts to obtain tax information and to make sure that taxpayers’ rights are protected.

Safeguards

For the security of taxpayer information, the following policies and procedures are in place:

  • Personnel screening – All prospective CRA employees are screened for security before employment.
  • Employee awareness of their responsibilities – New employees are trained on their security obligations and security awareness information is regularly communicated to all employees. All CRA employees are subject to strict standards of conduct as defined in the CRA's Code of Ethics and Conduct.
  • All taxpayer information is protected – Taxpayer information must be kept physically secure. Employees may not send taxpayer information by email or leave voice messages containing taxpayer information. Employees have to make sure information is shared only with the taxpayer concerned or with a third party only after the taxpayer has given written consent, except where the disclosure is authorized by law.
  • Security markings on forms and documents – All CRA forms and documents containing taxpayer information are marked Protected. These markings help CRA employees make sure sensitive information is handled securely.
  • Access to taxpayer information is on a need-to-know basis – CRA employees, such as taxpayer services personnel, auditors, investigators, and those handling income tax files, have only the levels of access to taxpayer information required to do their jobs.
  • Regular risk assessment – The CRA performs regular risk assessments and internal audits to ensure its internal processes are secure.
  • Suspected breaches of confidentiality of taxpayer information – If a taxpayer tells the CRA about a suspected breach of confidentiality of his or her personal information, the Agency can protect that taxpayer's account by disabling all online access whether it is My Account for Individuals, My Business Account, Represent a Client, NETFILE, or EFILE. Online access can later be restored at the taxpayer's request by calling the e-Services Helpdesk at 1-800-959-8281.
  • Investigating possible breaches – CRA officers immediately and thoroughly investigate any security breach or allegation of unauthorized access or disclosure of taxpayer information. Any employee found to have acted inappropriately is subject to disciplinary action, up to and including the end of employment. Potential criminal acts are referred to the RCMP for investigation.

Legislative framework

The CRA’s legal obligation to safeguard the confidentiality and integrity of taxpayer information for which the CRA is responsible is stated in the following legislation:

Under the Income Tax Act, the Excise Tax Act, and the Excise Act, 2001, an employee may disclose taxpayer or confidential information to the person about whom the information relates. However, no employee can give that information to a third party without the written consent of the taxpayer, except where authorized by law to do so. Similarly, both the Privacy Act and the Access to Information Act do not allow the disclosure of personal information, except under circumstances as stated in the legislation.

The CRA's controls to protect information from external threats

Protecting the Canada Revenue Agency's (CRA) integrity includes ensuring that we have the proper systems and technologies in place to safeguard the sensitive information that we hold from external threats.

The CRA adheres to the Policy on Government Security and direction provided by lead security agencies like the Communications Security Establishment Canada (CSEC) and Public Safety Canada (PSC). Additionally, the CRA publishes, promotes and monitors its own security policies that guide and support the CRA's culture of integrity.

Ongoing improvements

The CRA's team of highly qualified information technology professionals works in conjunction with other departments such as Shared Services Canada and the Treasury Board Secretariat to identify and mitigate cyber threats and risks to privacy and the security of the data we hold. The CRA follows a continuous improvement security program where the effectiveness of the security tools are continuously evaluated and improved.

As part of our commitment to continual improvement and as a result of the CRA's experience in addressing vulnerabilities to caused by the Heartbleed bug, our security controls and policies are being reinforced and updated to ensure that this or similar types of incidents do not re-occur. The CRA is working closely with Shared Services Canada and the Treasury Board Secretariat to ensure our response to security threats and software vulnerabilities is timely. In addition, more monitoring has been put in place to identify potential vulnerabilities in our environment. With these enhancements the CRA is able to respond even more swiftly in the unlikely event of another incident.

A layered approach to security

As threats to security can occur prior to, during, or after the receipt of electronic data, the CRA employs a layered approach to security.

All communications and transactions with the CRA are protected and are conducted on secure platforms. As phishing scams become more frequent, the CRA is proactive in warning the public about fraudulent communications claiming to be from the CRA.

External services are protected by firewalls and intrusion prevention tools to detect and prevent unauthorized access to CRA systems and block malware. During online transactions we ensure that all sensitive information is encrypted —or scrambled—when it is transmitted between your computer and our Web servers. Controls in place to protect our data from external threats include network and host security systems like corporate firewalls, anti-virus software, intrusion detection and prevention measures, and identity and access management controls.

CRA employees must use approved levels of encryption on all removable devices (such as USB storage media) and when transmitting private information externally to authorized recipients. Personal storage devices are not authorized to be connected to the Agency's network and are not permitted on CRA equipment.

Network components such as servers and routers are stored in secured and locked rooms or cabinets, accessible only to authorized personnel. Agency networks and workstations are equipped with malware and virus detection and removal software which are updated daily and protect the CRA environment from increasing threat of malicious code and viruses. At the CRA employee level, computers are secured with a suite of security products ranging from anti-virus software to host intrusion software. Malicious or potentially malicious internet sites, email (e.g. spam) and email attachments are blocked to ensure the CRA's environment remains secure. All software used by the CRA undergoes a rigorous certification process which must meet our strict standards for security.

For more information about the controls in place at the CRA to protect data from external threats, go to Access online services safely.

Internal controls to ensure privacy and security

The Canada Revenue Agency (CRA) is proud of its reputation as a leading-edge organization committed to excellence in administering Canada's tax system. However, inappropriate or fraudulent activity can occur in the workplace. The CRA has incorporated a broad array of checks and balances to ensure that those who access your information are strictly limited to employees required to do so as part of their job, and to detect misconduct in the rare instances when it occurs.

Monitoring of employees' access to taxpayer information is centralized, ensuring an independent process that enables the CRA to detect and address any suspect transactions in our systems. This provides assurance that authorized users are accessing only the applications and data they are allowed to access based on our business rules

The CRA's Internal Fraud Control Program uses a strategic approach to managing the risk of internal fraud by preventing fraud where possible, detecting fraud when it occurs, and fostering a heightened level of deterrence in the CRA. The program is an important component of the CRA's Integrity Framework and contributes to the range of compliance-based activities that detect and deter fraudulent and unethical behaviour.

The CRA has also strengthened its internal audit processes for small and medium-sized enterprises by creating, in 2013, Business Intelligence and Quality Assurance units. This measure further strengthens the integrity of the CRA's internal processes by segregating the duties of auditors during the audit process to ensure strong independent oversight and review of actions taken on a file, and quality control of the files audited. No one auditor can carry an audit file from start to finish. Similar processes are already in place for audit processes pertaining to large corporations.

In addition to the current personnel screening for appropriate security clearance, additional verifications are also conducted for individuals who hold or apply for positions that require a high degree of public trust.

As you can see CRA is doing everything it can to ensure the safety of your data online, and that only yourself, or those you authorize, have access to that information. While nothing can be 100% secure online, it’s good to know our government agency that controls our tax information is doing everything it can to protect that data.

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