Category Archives for "Personal Income Tax"

Tax

What does an authorized representative do?

By Randall Orser | Personal Income Tax

Canada Revenue Agency (CRA) allows you to assign a representative to deal with them in regards to your personal or business accounts. This consent allows the representative to deal with CRA on your behalf for your personal taxes and your business taxes (GST/HST, payroll, corporate and importation). You can add or change your representative via My Account on CRA’s website or by filing either a T1013 – Authorizing or Cancelling a Representative or an RC59 – Business Consent Form.

There are two levels of authorization. Level 1 allows CRA to disclose information only, and Level 2 allows CRA to disclose information and accept changes from the representative. An example of Level 1 would be where you have a payroll administrator and that person needs to find out information about the account, such as payments received; in this case you’d do a Level 1, as they only need access to information. An example for Level 2 would be where an adjustment needs to be made on your personal tax return, the representative can get the information needed to make the adjustment as well as file the adjustment on your behalf.

If you are a small businessperson, the representative can represent you in all the different accounts you have with CRA: GST/HST, payroll, corporate tax, contractor payments, and importation. For these accounts you would file the RC59. If you want the representative to also work on your personal taxes you have to file the T1013 as well. Someone can file many of these accounts without being a representative as they are online forms or you may paper file. A representative comes in handy when they are working on these accounts and need access to confirm installment payments or what payments you have made on the account.

The advantage to authorizing a representative online is that this person gets immediate access to your business accounts. The paper forms can take several weeks to process, and, if you’re going through a review or audit this wastes precious time. The same can be done for your personal taxes, if you’ve set up My Account you can authorize a representative there.

What’s really cool now is the “Submit documents” service, which allows your representative to electronically send documents to CRA on behalf of either your individual or business clients. “Submit documents” can be accessed directly through Represent a Client and allows you to submit documents on behalf of multiple clients without leaving the “Submit documents” service. At this time, the service can only be used to submit documents in response to letters from CRA’s Processing Review and Corporate Assessing Review Programs that contain a case/reference number.

NOTE: don’t get an authorized representative confused with a legal representative. A legal representative can be someone with your power of attorney, your guardian, or an executor or administrator of the taxpayer’s estate.

Your representative will not be allowed to do the following:

  • Change your address;
  • Change your marital status;
  • Change your direct deposit information; or
  • Authorize other representatives;
  • View other representatives you have on your file; or
  • Cancel other representatives you have on your file.

Responsibilities of authorized representatives 

  • Act in the interest of your clients, employers, and interested third parties.
  • Not to disclose any taxpayer information the Canada Revenue Agency (CRA) to anyone else without the taxpayer’s prior consent provides that to you.
  • Ensure the security and privacy of all transactions you conduct on behalf of the taxpayer(s).
  • Ensure that all documents are properly disposed of to protect the taxpayer’s confidentiality.
  • Comply with all provisions of applicable legislation (i.e. Income Tax Act (ITA), Excise Tax Act (ETA), etc).
  • EFILE service providers are subject to the terms and conditions of EFILE.

Authorizing a representative is a good idea when you need to have someone access your account or have to make changes to a tax return or business account. Your representative can be an employee, bookkeeper, accountant, lawyer, or family member. It’s always a good idea to know who you have on your accounts, and to cancel any representative that you no longer need.

Tidbits – I have a customer claiming they’re exempt from GST/HST?

By Randall Orser | Personal Income Tax

Paying TaxThere are many people out there that will refuse to pay GST/HST on your goods/services. They say ‘let’s make a deal’ and pay cash without the taxes. Some people just want a deal and think they’re being savvy by not paying the taxes; however, not realizing that the poor vendor eats the tax as you still have to claim the sale (at least you should be). Some of them are calling themselves “Freemen”. Sadly, these are mistaken individuals who are really deluding themselves that the laws, and the tax laws of Canada, do not apply to them. The Supreme Court of Canada has said otherwise.

The only exempt person is a Status Indian (the legal term used according the Indian Act). Indians, Indian bands, or unincorporated band-empowered entities can buy goods on a reserve without paying the GST/HST if they have the appropriate documentation to show the vendor. Indians, Indian bands, and unincorporated band-empowered entities, as well as incorporated band-empowered entities purchasing for band management activities, may buy goods off the reserve without paying the GST/HST if:

  • They have the appropriate documentation to show the vendor; and
  • The goods are delivered to a reserve by the vendor or the vendor’s agent.

However, if the purchaser uses his or her own vehicle to transport the goods to the reserve, the purchase is subject to the normal GST/HST rules.There are some special rules for the Provinces that are charging the Harmonized Sales Tax (HST). Check CRA’s website for those rules. Also, many Provinces exempt Indians from their Provincial Sales Tax, check with your Province for details.

Goods bought on a reserve by non-Indians will be subject to the normal GST/HST rules.

What do you do?

In a situation like this it’s hard to say ‘no’ as you don’t want to give up a sale. However, you have to be careful in this situation as Canada Revenue Agency has ‘spies’, yes that’s right, and they are hired to find people avoiding taxes. Someone will call you and say they would like to perform your service or buy your product from you. Of course, they’ll approach you with the ‘if I pay cash, can we avoid the taxes’ and you say yes and just get the sale without the taxes and you take the cash. You then don’t bother recording the sale since it was cash and no one will know anyway. The next thing you know you’re getting audited. Now, I don’t have definitive proof, however, there are a couple of stories I’ve heard that this does make sense.

The best thing to do is either don’t take cash, or if you do, just say, sorry I have to charge GST/HST whether it’s cash or not. If you lose the sale, then so be it, they weren’t worth dealing with in the first place. Let’s face it, if someone is willing to cheat on the taxes, then more than likely they’ll end up cheating you.

Some of my clients have been including the taxes in their quotes. For example, if the amount before GST/HST is $300 (and they need to charge 5% GST/HST) then they say it’s $315. If the client asks about taxes then he says that includes the taxes. One client I know adds 20% to his quotes initially, and then if the client balks, he lowers it by 10% and still gets most of the taxes. If you’re finding you’re getting a lot of these types of people, you really need to find new clients.

The ones I love are those people who write you a cheque but forget to include the taxes; ensure you look at the cheque before you leave, as it is very hard later on to get another cheque for the taxes. Some clients have found they need to invoice with the taxes included as many people just look at the subtotal and not the invoice total.

Running a business has all sorts of issues, and you don’t want to get into a situation where you’re not collecting the taxes on your gross sale amount and then eating the taxes. The main issue this tax situation raises is the types of clients you’re attracting. Attract the right clients and the taxes shouldn’t be an issue.

Tidbits – Can I donate property?

By Randall Orser | Personal Income Tax

Haus in handFor our purposes here, when we say property we’re talking about land and buildings. Of course you can donate property, however, that may not get you out of the capital gain you may acquire due to the transfer of that property. Once property is transferred it triggers a capital gain. If it’s been your principal residence, then you can designate it as such for tax purposes. If it’s other property then it needs to be ecologically sensitive land (including a covenant, an easement, or in the case of land in Quebec, a real servitude), or it has a heritage value. Any other land would trigger a capital gain on the donation.

Ecologically Sensitive Land

For ecologically sensitive land you would have a zero rate of inclusion, which means you would have no capital gain per se. However, you must still report the capital gain on your income taxes. You can claim a tax credit based on the eligible amount of a gift of ecologically sensitive land you made to Canada, or one of its provinces, territories, or municipalities, or a registered charity approved by the Minister of the Environment. Under proposed changes, gifts of ecologically sensitive land made to a municipal or public body performing a function of government in Canada, will also qualify for a tax credit.

The Minister of the Environment, or a person designated by that minister, has to certify that the land is important to the preservation of Canada’s environmental heritage. The Minister will also determine the fair market value (FMV) of the gift. For a gift of a covenant or an easement, or a real servitude (in Quebec), the FMV of the gift will be the greater of:

  • The FMV of the gift otherwise determined; and
  • The amount of the reduction of the land’s FMV that resulted from the gift.

Your claim for a gift of ecologically sensitive land is not limited to a percentage of your net income.

Other Property

You will have to include a capital gain, or loss, on your income taxes. You would calculate this loss based on the adjusted cost base and the fair market value of the property at the time of the donation. You must have the property appraised by someone familiar with the property you are donating, which in the case of land and buildings would probably be a realtor. Many times the charity will hire the appraiser. If the fair market value of the land is greater than the adjusted cost base then you have a capital gain, and if it’s less then you have a capital loss.

If you donate cash or other property to a registered charity or other qualified donee in the year, your total donations limit will generally be 75% of your net income for the year. However, you can increase your total donations limit if you donate capital property in the year. If you received an advantage in respect of the donation of the property, include, in your calculations, only the portion of taxable capital gains and recapture of depreciation that related to the gift portion of your donation.

Your receipt from the charity must include the usual suspects plus:

  • Eligible amount of the gift for tax purposes (fair market value of the property)
  • Description of property
received by charity
  • Appraised by
  • Address of appraiser

Donating a property can be a great way to help the charity of your choice, however, there can be tax consequences for doing so. It’s always best to talk to a tax professional before you do any property donating.

Tidbits – What Happens If I Rent My House Out?

By Randall Orser | Personal Income Tax

Red estate FOR RENT sign isolated on white background 2You’ve decided to take the big leap and have a rental suite. This is a big step and may end up costing you a bit of money in order to comply with local by-laws, etc. If you’ve every watch the show on HGTV called Income Property you’ll realize that it’s not all sunshine and rainbows, it’s work and getting the right tenant can be a challenge. We’re not talking about the mother-in-law suite here; any rental to an immediate relative (parent or sibling) is not considered a rental and the income is not reportable for tax purposes.

The first thing you need to do is ensure that you’re suite is legal. You need to check with your municipality and register the suite. Yes, this is a cost, however, in the end it may end up costing you way more by not registering the suite. You may have to do some updates on the suite to make it fit to code for your municipality. Any updates you do to the rental suite would be part of the cost of getting the rental ‘rentable’ so you can write off those costs; just ensure you keep receipts and get a receipt for any work you have done to the rental suite.

Second, get a good tenant agreement ready. Get it in writing is very important when it comes to landlord/tenant relationships. There are standard agreements you can get from your office supply store or online. Ensure that any agreement meets your provinces tenancy laws. You should also check out your provinces tenancy laws. For BC, check out the Residential Tenancy Branch website. Here you’ll find all the rules regarding tenancy, and what you can and cannot do as a landlord.

Third, you need to decide what the rent will be. You can go online and search for rental properties in your area. Don’t be the lowest, as you’ll just attract the dollar shoppers, and they’ll leave the second they find something cheaper. Look at suites that are similar to yours and what amenities they have and what amenities are close to those properties.

Now it’s time to market your property. You can do this yourself on Craigslist, newspaper ads, etc. You can also hire a property management company. These companies can take care of finding tenants, collecting rents, maintenance, etc. They charge a fee, and this fee is tax deductible. Check online for your area, and if you know any landlords ask them you they are using as a property manager.

There are other considerations for a rental suite. What will be the effect on the price or saleability of your home in the future? Will it increase my assessed value? Or decrease it? If you’re the only rental suite in the area, it may be attractive to buyers later on. However, if you’re in an upper class neighbourhood, it may be frowned upon to have a rental suite. You have to decide if it’s worth the extra income to have a rental suite.

For tax purposes, any income you receive from a rental (even room and board) is considered taxable income. You must report it on your personal tax return using the form T776 Statement of Real Estate Rentals. Here you state your rental income received and any related expenses. You can claim advertising, insurance, interest, office expenses, legal/accounting/professional services, management fees, maintenance & repairs, salaries/wages/benefits of employees, property taxes/city utilities, travel (if rental is out of town), and automobile expenses. You must keep receipts in order to get the deduction.

If you have a loss from the rental suite, you can deduct that from other income you have for the year, thereby, reducing your tax burden. However, don’t buy a rental property or put in a rental suite to produce a loss. You have to think of rental suites/properties as a business, and most businesses exist to make a profit, not produce a loss.

A rental suite or property can be a great way to make additional income, however, like anything it’s not as easy as it looks and there are tax implications of doing so. You have to look at all the facts and then decide whether or not a rental suite/property is right for you.

Don’t File Late, Watch That Date!

By Randall Orser | Personal Income Tax

tax-return-tnToo many people today are filing their tax returns, GST/HST returns, and other government remittances late. This is costing Canadian taxpayers millions of dollars every year. The government loves it, and, though I can’t confirm it, does probably make as much from penalties and interest as they do from the taxes collected.

You must pay attention to due dates for when returns and other remittances are due. Your personal income tax return is due by April 30th of the next year, so if you’re filing for 2013 the return is due by April 30th 2014. For self-employed/partnerships then the return is due by June 15th of the following year. Remember though that any income taxes or Canada Pension Plan amounts owing are due by April 30th. This is why it’s best to make installments.

For the businessperson, there’s GST/HST, payroll, corporate tax (for those who are incorporated), and PST (Provincial Sales Tax or sometimes referred to as RST—Retail Sales Tax). These all have different due dates and penalties that accrue when they are not filed on time. We’ll talk about GST/HST and payroll.

GST/HST

For GST/HST you file either annually, quarterly (every three months) or monthly. For annual filers, the return is usually due by June 15th for self-employed/partnerships (though any amount owing is due by April 30th); for corporations the GST/HST return is usually due 3 months after the cut-off. For quarterly and monthly filers, the return and any amount owing is due by the end of the following month.

If you’re self-employed/partnership, and you file quarterly, you generally follow the calendar year. You’re returns are January to March due April, April to June due July, July to September due October, and October to December due January (the returns are due by the end of that month).

As an annual filer, if you owe more than $3,000, you must pay installment payments during the year. This is done quarterly, and the easiest solution is to take the prior year and divide by four. If you believe your balance owing will be less or more you can adjust the installment payments accordingly.

There are penalties for failure to file, failure to file upon demand, failure to file electronically if you are required to do so, and failure to accurately report information. These can add up.

Payroll

Well, this is where the penalties can really add up. You not only can get a penalty for failing to remit your regular payroll remittance every month, but also you’re T4s.

The penalty for remitting your regular payroll remittance late is:

  • 3% if the amount is one to three days late;
  • 5% if it is four or five days late;
  • 7% if it is six or seven days late; and
  • 10% if it is more than seven days late or if no amount is remitted.

This can add up if your payroll remittance is in the thousands. Your payroll remittance is due the 15th of the month following deductions taken. CRA goes by when the payroll is paid, not the cut-off date. For example: You’re payroll is cut-off on the 28th of September but not paid until October 4th. In this case, the deductions are considered paid in October not September, so the remittance is not due until November 15th.

For T4s, it can get real nasty when you file these late. Here’s what you can be fined for not filing your T4s on time:

Number of informationreturns (slips) Penalty (per day) Maximum penalty
1 – 50 $10 $1,000
51 – 500 $15 $1,500
501 – 2,500 $25 $2,500
2,501 – 10,000 $50 $5,000
10,001 or more $75 $7,500

 

If that doesn’t scare you, I’m not sure what would. This can be costly for a small business.

As you can see filing your remittances on time is very important. You need to know when you’re remittances are due, or at least ensure your bookkeeper/accountant knows when they are due. You are much better off to file your remittances one time, and have a balance owing, than to just wait until you have the funds. I have found that CRA can be accommodating when it comes to balances owing. I just helped a client get is large balance of GST/HST owing spread out over 8 months. Unfortunately, he waited to long to get help filing and will end up owing thousands in penalties and interest.

Rental Income, Yeah or Nay?

By Randall Orser | Personal Income Tax

For sale sign, vectorMany people today are getting a mortgage helper, a rental suite in their home or a mother-in-law suite. Or are deciding to buy a rental property or properties to make some extra income. It can be a big decision and requires some thought about the tax implications, but also time, management and other implications. Do you have what it takes to be a landlord? Do you have the funds to finance the property if there are no renters? Is it an easily sellable property if you get into trouble? We’ll mostly talk about the tax implications.

Tax Implications

As with anything we do today, what are the tax implications is one thing we need to think about. If you rent out a part of your home, and earn income from doing so, then you may have to include those funds as income on your tax return. However, if you rent to an immediate relative, such as a parent or sibling, then you won’t have to include this in income, as you’re not dealing with them at arm’s length (used to describe a transaction between unrelated parties; each party acts in his or her own self-interest). You also won’t have to include in income, monies received from ‘homestay’ exchange students, as you’re being reimbursed for costs and not really renting.

You are allowed to deduct from rental income expenses used to earn that income, within reason. The amount you can deduct will depend on whether the rental property is part of your principal residence or a separate property. If it’s a separate property and you do not use it personally, then you can deduct 100% of the costs associated with renting it out. If it’s your principal residence, then you can deduct a percentage based on the square footage of the rental and the total square footage of your residence.

Some of the expenses you can deduct include:

  • Hydro
  • Gas
  • City Utilities
  • Insurance
  • Property Taxes
  • Mortgage/Loan Interest
  • Maintenance & repairs (includes landscaping)
  • Management & administrative fees (contracted out property manager)

One thing I don’t recommend is taking the capital cost allowance (depreciation) deduction. Yes, you get to deduct an expense from your rental income; however, this also reduces the book value of your property. When you go to sell your property you will incur a capital gain based on the value of the property when you bought, plus any additions you added along the way, and the value at the time of sale. If you’ve been deducting CCA then the book value is much less and now your gain is that much more. If you’re renting out part of your principal residence, then CCA only affects the portion you’re renting out not the whole home. In the end, this deduction is not worth it.

Rental income can be a great way to make extra income, help pay for your existing home, or maybe even become a ‘Donald Trump’ type (perhaps with less attitude). You just have to realize that it’s as much a business as opening up a restaurant, etc. You need to think about what you’re doing, and whether or not you can really handle being a Landlord and deal with the tax implications.

How Do I File My Tax Return?

By Randall Orser | Personal Income Tax

Tax return papers lying next to folder and calculatorThere are a couple of ways you can file a tax return today. You can still paper file, though that is going to disappear within the next 5 years, I believe. You can electronically file using Netfile® for individuals. And, you can hire a tax preparer, such as Number Crunchers®, to prepare and Efile® your return. Note that tax preparers are now required by Canada Revenue Agency (CRA) to electronically file all returns, unless stated otherwise by CRA.

Note that personal tax returns are due by April 30th of each year for the prior year’s filing. Self-employed, or proprietorship/partnership, returns are due by June 15th; however, any taxes owing are due by April 30th. I believe making installments is the smarter way to handle you taxes each year. Yes, the government gets your money early, however, you won’t have a whopping balance on April 30th that you may not be able to pay.

Be Prepared!

That’s not just a Scout slogan, but what you have to be before you file your taxes.

Gather up all your slips T4s, T5s, etc., a copy of last years return, donations, medical receipts, etc. You can register for My Account which gives you online access to your notices of assessment, allows you to make any adjustments to an already filed return, and more. If you need to change your address or direct deposit information (or want to set it up) makes sure you have all that information handy including: old address, new address, bank information, etc. Also, look at the various tax credits and find out if you qualify, and if you do then have all necessary information for those available. For a comprehensive list of what you’ll need to prepare your taxes ask for a copy of our Tax Info Needed sheet.

Paper Filing

You can still paper file (2013) and I believe it will be phased out over the next five years. You can get a copy currently at any Canada Post outlet or go online to CRA’s website and make sure you pick the return for your province. You must fill out the return as required and attached an original copy of all slips (T4s, T5s, etc.), donation receipts, medical receipts, arts credit and fitness credit, public transit receipts (monthly fare card as well as proof of payment), and any other slips/receipts for which you are claiming a deduction or income.

You must either mail or drop off your tax return to your local tax services office. CRA does not accept returns by email.

Netfile®

The Netfile® transmission service allows an individual to file your personal tax return directly to CRA, usually via a tax preparation software. You must use a CRA accredited software, and there are some free ones, check CRA’s website. With Netfile® you do not have to send your slips and receipts with the return. CRA will look at your return initially and send you a notice of assessment with your balance owing or refund. Since CRA does not get your slips/receipts with the return, they do ‘reviews’ either during the tax season or after the season (usually September onwards). Generally, CRA just wants proof of any deduction you’re claiming or may want to validate your income.

Netfile® is only for filing the current year tax return (2012 at the time of writing this). You cannot change your address, name or direct deposit information through Netfile®, do that before you file (see Be Prepared!).

The advantages to filing electronically are: faster refunds, it’s generally fast and easy (if you have a simply return), you can file for free (again, if you have a simply return), your information is secure and safe as CRA uses security levels equal to your bank, and filing electronically does not increase your chance of an audit.

Hire a Tax Preparer

The third option is to hire a tax preparer, and one that we recommend for those with a more complicated return, or you just don’t have the time to figure out the software or the paper return and file yourself.

Your tax preparer will have the software to be able to Efile® your return, and has the knowledge to get the job done right. Your tax preparer won’t need your Netfile® access code either as they would have their own account access for filing.

I have found many times deductions for clients they had no idea they were entitled, sometimes saving them thousands of dollars on their taxes. For what it costs to have someone prepare and Efile® your return, can be saved just in the hassle of filing and possible deductions you may have missed by filing it yourself.

Be prepared (see paragraph above) applies even more so with a tax preparer. Please ensure you have all your slips and receipts ready as anything you forget delays your return getting processed. Ask us for a copy of our Tax Info Needed sheet, which covers everything we’ll need to do your taxes.

For proprietorships/partnerships, I believe, it’s more imperative to get a professional tax preparer to prepare your tax return. A professional tax preparer will know what you can and cannot write off for tax purposes, or what deductions are only partially a write off. The three main things CRA looks at with proprietorships are automobile expenses, meals, and home-office expenses. So, you want your tax return to be as accurate as possible.

Filing your tax return is important and you want it to be accurate. Electronic filing is the best way to file your return. I find many people don’t file because they are going to owe taxes. That is a big mistake and can hurt you worse than filing and owing. As long as you file on time, you won’t be penalized, and you will only be charged interest on the balance owing. That is why it is better to make installment payments so you won’t have to worry about a balance owing at tax time.

If I give a gift to an employee, is that taxable?

By Randall Orser | Personal Income Tax

Shopping cart with giftsYour employees are doing a great job, and you want to reward them with some kind of gift. However, you wonder if anything you give them will have to be considered income, and you are probably right. It’s pretty sad really that the government has to get its dirty paws on everything we earn.

A gift has to be for a special occasion, such as a religious holiday, birthday, anniversary (marriage or day started as an employee, wedding or birth of a child.  You may also give awards (employment-related accomplishments), such as for outstanding service, employees’ suggestions, or meeting or exceeding safety standards. Don’t confuse this with a reward, such as performing well in the job or exceeding production standards; these are performance related reasons. You can give an employee a gift, award or reward, and you can give it to them in either cash or non-cash, however, it’s still a taxable benefit.

This also means that as it’s a taxable benefit, Canada Pension Plan (CPP) and Employment Insurance (EI) may also apply to the gift, award or reward. If it’s a taxable benefit, it is also pensionable, so CPP applies. For EI, if the taxable benefit is paid in cash, then it’s insurable and EI applies. If the benefit is non-cash, it is not insurable, and EI does not apply. Remember, tax applies all taxable benefits.

You may be thinking, what about gift cards? Sorry, gift cards are considered an equivalent to cash, and, as such, are a taxable benefit to the employee. This also applies to items that are not cash, but cash be converted into cash, such as securities or precious metals.

There is hope though. You can give non-cash gifts and awards with a combined total of $500 annually. The fair market value of the goods must not exceed $500, and if they do, then the difference is considered a taxable benefit. For example, you bought an employee a couple of gifts over the year and the total was $750. In this case, the difference of $250 ($750 – $500) would be added to their income and taxed accordingly.  You can also give gifts or awards for long-term service every five years, so at the 5, 10, 15 etc. years of service marks, and up to $500.

Items of small or trivial value will not be considered a taxable benefit. These items are not included when calculating the total value of gifts and awards given in the year for the purpose of the exemption. Examples of items for small or trivial value include: coffee or tea; T-shirts with employer’s logos; mugs; plaques or trophies.

You may be thinking, well why don’t I just throw them a party. That won’t be taxable, right? Well, maybe. If the social function costs less than $100 per person, then it won’t be taxable. However, if you cover the cost of transportation home (taxi fare or other transportation) or accommodation this must be included in the $100 per person. If the total exceeds $100 per person, then the entire amount is a taxable benefit. For example, you throw a huge party for staff and the cost comes to $125 per person, then you must add to each employee $125.

If you want to do something for your employees on birthdays or anniversaries, then start a social committee. The social committee would be set up by, contributed to, and controlled by the employees. They could put so much per week into a fund that would then go to pay for cake, gifts, etc. for the birthday person. The employer should not contribute any funds to this social committee, as then it becomes a taxable benefit for the portion that the employer contributes. Now, you, as the employer, could have some say in when, where, etc. the party takes place, you just can’t contribute any monies towards it.

Sadly, in this day and age of taxing us to death, you need to check that what you’re giving your employees won’t become taxable to them. It’s always advisable to check with your bookkeeper, accountant, or even Canada Revenue Agency, before you give anything to an employee.

Can I Get Penalties/Interest Waived?

By Randall Orser | Personal Income Tax

rote karteCanada Revenue Agency (CRA) may either ‘waive’ or ‘cancel’ a penalty and/or interest. ‘Waive’ refers to a penalty or interest amount that is not yet assessed or charged for which relief is granted, in whole or in part, by the CRA. ‘Cancel’ refers to a penalty or interest amount that is assessed or charged for which relief is granted, in whole or in part, by the (CRA). You may never be charged penalty/interest as it’s too small or maybe you’ve been really good in the past and this one slip-up is forgiven.

What circumstances warrant relief?

Extraordinary Circumstances

You may have you run into a situation that is completely beyond your control. There could be extraordinary circumstances that prevented, or may prevent, you from making a payment when due, filing your taxes on time, or filing a government remittance on time.

These extraordinary circumstances could be:

  • Natural or human-made disasters, such as a flood or fire;
  • Civil disturbances or disruptions in services, such as a postal strike;
  • Serious illness or accident; and
  • Serious emotional or mental distress, such as death in the immediate family (sorry your third cousin twice removed doesn’t count).

CRA Errors

There could also be circumstances where penalty/interest are waived because CRA made an error, and yes they do make mistakes, they’re human too [don’t laugh]. This could be because of processing delays and you’re not informed in a reasonable time that you have an amount owing. You followed a CRA guide, or website material, that led you to file a tax return or make a payment based on incorrect information. You called CRA and the representative gave you incorrect information (note that CRA representatives now give you an ID number, so write that down). Errors in processing also happen and information may have been entered incorrectly by CRA; I had a client have income go missing because CRA misfiled a T4A.

Financial Hardship

If you’re going through a financial hardship and can show your inability to pay amounts owing, CRA may waive or cancel any interest in whole or part so you can pay the amount owing. Financial hardship doesn’t apply to waiving or canceling a penalty, unless an extraordinary circumstance prevented compliance, or an exceptional situation existed. For example, when a business is experiencing extreme financial difficulty and enforcement of such penalties would jeopardize the continuity of its operations, the jobs of the employees, and the welfare of the community as a whole, consideration may be given to providing relief of the penalties.

CRA may consider waiving or cancelling interest in the following situations:

  • A collection has been suspended because of an inability to pay caused by the loss of employment and the taxpayer is experiencing financial hardship;
  • A taxpayer is unable to conclude a payment arrangement because the interest charges represent a significant portion of the payments; or
  • Payment of the accumulated interest would cause a prolonged inability to provide basic necessities (financial hardship) such as food, medical help, transportation, or shelter; consideration may be given to cancelling all or part of the total accumulated interest.

If you’ve found yourself in a pickle with CRA, don’t panic and don’t procrastinate in filing your tax returns, government remittances, etc. It is much better to file and owe than not file and owe. You may have a balance owing, however, if you file on time you won’t face a penalty just interest on the balance owing. Currently (Sep 2013), the prescribed rate of interest on balances owing to CRA is 5%.

What Is The Scientific Research And Experimental Development (SR&ED) Tax Incentive Program?

By Randall Orser | Personal Income Tax

Quantum ComputerWe’re getting a little sciencey with this Tidbits post, but don’t worry, we’ll keep it simple (lord knows I need to do that). So what is Scientific Research And Experimental Development (SR&ED) [pronounced ‘shred’] Tax incentive program? It’s a federal government tax incentive program administered by the Canada Revenue Agency (CRA) that encourages Canadian businesses of all sizes, and in all sectors to conduct research and development (R&D) in Canada. It is the largest single source of federal government support for industrial R&D. The SR&ED Program gives claimants cash refunds and / or tax credits for their expenditures on eligible R&D work done in Canada.

With SR&ED there are two benefits. The first lets you deduct SR&ED expenditures from income for tax purposes. Second, you get a SR&ED Investment Tax Credit (ITC), which you can use to reduce Part I tax payable (corporations). And, you could a refund if the ITC is greater than your taxes owing.

You can be a Canadian-Controlled Private Corporations (CCPC), other corporations, proprietorship(s) or trusts. Partnerships are treated quite differently, as they are not considered a taxpayer, and, as such, cannot earn Investment Tax Credits (ITCs).

SR&ED Investment Tax Credit (ITC)

Generally, a Canadian-controlled private corporation (CCPC) can earn a refundable ITC of 35%, 100% refundable on qualified SR&ED current expenditures and 40% refundable on qualified SR&ED capital expenditures, up to a maximum threshold of $3 million of qualified SR&ED expenditures for SR&ED carried out in Canada. A CCPC can also earn a 20% non-refundable ITC on any amount over that threshold. However, for a CCPC that meets the definition of qualifying corporation, the 20% ITC on any amount over that threshold is refundable, 40% refundable on qualified SR&ED current and capital expenditures.

For other corporations, the ITC is 20% of qualified SR&ED expenditures. The ITC can be applied to tax payable and is not refundable.

For individuals (proprietorships) and trusts, the ITC rate is 20% of qualified SR&ED expenditures, only 40% of which is refundable. After applying the ITCs against tax payable, individuals and trusts can get a refund for part of the ITCs.

What work qualifies for SR&ED tax incentives?

To qualify, the work must meet the definition of Scientific Research and Experimental Development (SR&ED). “Scientific research and experimental development” means systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis and that is:

a)     Basic research, namely, work undertaken for the advancement of scientific knowledge without a specific practical application in view,

b)    Applied research, namely, work undertaken for the advancement of scientific knowledge with a specific practical application in view, or

c)     Experimental development, namely, work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto,

And, in applying this definition in respect of a taxpayer, includes

d)    Work undertaken by or on behalf of the taxpayer with respect to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or psychological research, where the work is commensurate with the needs, and directly in support, of work described in paragraph (a), (b), or (c) that is undertaken in Canada by or on behalf of the taxpayer,

But does not include work with respect to

e)     Market research or sales promotion,

f)      Quality control or routine testing of materials, devices, products or processes,

g)     Research in the social sciences or the humanities,

h)    Prospecting, exploring or drilling for, or producing, minerals, petroleum or natural gas,

i)      The commercial production of a new or improved material, device or product or the commercial use of a new or improved process,

j)      Style changes, or

k)    Routine data collection;

How do I calculate my SR&ED expenditures and investment tax credit?

If you have done work that qualifies for Scientific Research and Experimental Development (SR&ED) tax incentives, you can claim the following expenditures:

  • SR&ED salary or wages
  • Expenditures for materials for SR&ED
  • Contract Expenditures for SR&ED Performed on Behalf of a Claimant (policy)
  • SR&ED Lease Expenditures (policy)
  • SR&ED overhead and other expenditures (traditional method only)
  • Third-party payments
  • SR&ED capital expenditures

To calculate your SR&ED expenditures, you have to choose between the traditional method and proxy method. The traditional method involves claiming all of the SR&ED overhead and other expenditures you incurred during the year. The proxy method involves calculating a substitute amount for overhead and other expenditures, called the prescribed proxy amount.

Your SR&ED expenditures are accumulated in a pool of deductible SR&ED expenditures. This pool is your current and capital expenditures carried out in Canada, which you can deduct when calculating the income from your business. Any payments you get whether government, non-government or contract, such as research and development tax credits from a province or territory, will reduce this pool of deductible SR&ED expenditures and the total qualified SR&ED expenditures.

Are you using equipment both for SR&ED and commercial purposes? If so, you can claim a partial ITC for this shared-use equipment. However, if you dispose of this equipment and used it for a SR&ED ITC then there could be a recapture of the ITC and you may have to repay back part of it.

SR&ED is a great way for those businesses doing research and development for a product, whether physical or intangible, that they want to bring to market. If you think your R&D could fall into SR&ED then you need to talk to a professional that specializes in SR&ED. It can be very complicated, and needs to be done by someone specializing in this area.