Category Archives for "Small Business"

Common Income Tax Business Deduction Myths

By Randall Orser | Business Income Taxes , Small Business

If you think that running your own business means you can write off all your expenses well sorry to disillusion you but that is a common myth about Canadian Income Tax.  In reality you can only write off business expenses if you meet all the requirements as defined by the CRA.  If you do not comply with all the requirements, then you could find yourself with a hefty bill.  Here are some other tax myths you might want to consider:

Your volume of sales does not determine if you have a business or not – NOT TRUE

You may think that making and selling a few things or do some things as a hobby does not mean that you have a business.  The CRA does not see it this way, they define a business as “any activity that you do for profit” so you need to file your taxes to include any additional income you make from your hobby. 

If you run a business from your home, you can write off all your home expenses – NOT TRUE

You can write off some expenses specific to your home-based business, but there is a limit.  If you claim excessive expenses, it might cause the CRA to take a closer look and disallow some of them.  You can basically claim for home-business expenses under the same rules as for any other business.

You can write off all your entertainment expenses – NOT TRUE

There are very strict rules for business tax deductions for entertainment.  You can usually only claim up to 50% of the cost of meals or entertainment, and club membership fees are not deductible when the main purpose is for dining, recreation or sporting activities such as golfing.

You can write off all the equipment that you buy – NOT TRUE

The CRA sees the equipment that you buy as being depreciable.  When you purchase these items, you cannot deduct the total cost of the item, you will deduct the cost of the item over the several years of its life through a Capital Cost Allowance claim.  How much you can claim each year depends how the item is classed for more information see Capital Cost Allowance for Depreciation (CCA).


Rather than believing the myths, make sure you are up to date on all the income tax rules pertaining to your home-based or small business.  Your accounting professional will be able to help you with this or you can consult the Revenue Canada Website at:

https://www.canada.ca/en/services/taxes/income-tax/business-or-professional-income.html

 

 

How to Keep a Mileage Log for Business Vehicle Expenses

By Randall Orser | Business Income Taxes , Small Business

If you have used your vehicle to earn business income over the past year then you can claim the related expenses on your income tax. However, you must be able to verify your claim with evidence in the form of a mileage log book which is maintained for the entire year. 

You need to record the following information in the log book each time you use your vehicle for business purposes:

  • The date
  • The starting point
  • The destination
  • The purpose of your trip
  • The vehicle starting mileage
  • The vehicle ending mileage
  • The total kilometers driven

Mileage log books are available at office supply stores or it is easy to make one up yourself.  Alternatively, there are apps available for Apple and Android smartphones such as:

Business Use vs Personal Use 

Claiming excessive use of your personal vehicle for business purposes is a sure way to attract extra scrutiny and possibly an audit from the CRA.  So, it is important that you know how many non business-related kilometers you drove in a year.  The best way to calculate this is to record your odometer reading at the beginning of the year and at the end of the year, this will give you your total mileage for the year.  When you deduct your recorded business mileage this will leave you with the total for personal use.  

Employees who use company vehicles must also keep track of the mileage driven for business vs personal use.  Mileage for personal reasons is a taxable benefit that must be included in employee income.  Mileage recorded between home and place of business is considered to be commuting and is classed as personal use.

For more information about claiming business expenses related to the use of your vehicle to earn business income see What Motor Vehicle Expenses Can You Claim on Income Tax in Canada?

Don’t Miss These Six Home Business Tax Deductions

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

Running a home-based business is just the same as running any other business in Canada for income tax purposes.  If you are making money from your home-based business, then you can claim tax deductions.  However, there are some additional deductions that you can also claim.

1. Vehicle Expenses – You may use your car both for business and personal use, but you can claim the business portion of your car use expenses.  This includes the following:

  • Fuel and oil, registration and insurance.  Supplemental insurance for business use is fully deductible, but if you do not insure your vehicle for business use and have an accident then your insurance company may deny your claim.
  • Maintenance and Repair
  • Interest on money borrowed to purchase a vehicle that you use to earn income, but there is a limit to the amount of interest you can deduct for a passenger vehicle
  • Leasing costs
  • Accident Repairs – if the accident happens while you are driving for business purposes you can claim the entire cost of the repairs.

Important to know:  You can only deduct a portion of your vehicle expenses, so it is important to keep a record of the mileage you drive in order to earn income.   Your expenses are prorated for the business portion of the total kilometers you drive in a year.  For further information see:    What Motor Vehicle Expenses Can You Claim on Income Tax in Canada?

2. Insurance – You should be able to deduct insurance premiums for your home-based business.  However, home-based business insurance is seen as commercial insurance and is entirely separate from your home insurance.   If you are running a business out of your home and you do not have this separate insurance, then you may not be covered at all as your insurance may be invalidated as you did not inform your insurer that you were running a home-based business.

Important to know:  You may also be able to write off part of your home insurance if your home-based business meets the conditions for claiming business-use-of-home conditions.

3. Office Expenses: Even if your “office” is just a desk in a part of your home, you will still be able to claim office expenses, but you will need to separate your office expenses from your home expenses.  You will be able to claim for depreciable assets such as your computer, filing cabinet, phone, printer and other equipment under the rules of Capital Cost Allowance.  As these assets depreciate over time you can only claim for part of their original cost each year.  The CRA has categories for depreciable assets with different rates of Capital Cost Allowance. For more information see: Capital Cost Allowance and  Capital Cost Allowance hub.  

Important to know: You don’t have to claim Capital Cost Allowance in the year that it occurred, you can roll it forward and claim in a year when you have a higher income.

4. Mortgage interest and Property Taxes– As long as your home-based business expenses meet the requirements for business deductions you can claim your mortgage interest.  You must use the work space in your home as your principle place of business to earn income, and you regularly meet clients, or customers there. You can also claim your property taxes or the cost of your rent.  

Important to know: You can only claim a deduction dependent on how much of your living space and time is devoted to business use.  For more information see Calculating the Home-Based Business Tax Deduction

5. Other Business-Use-of-Home-Expenses – these include:

  • Water
  • Maintenance and Repairs
  • Cleaning Materials
  • Telephone
  • Internet Connection

Important to know:  The CRA allows you to deduct “any reasonable expense you incur in order to earn business income” but your expenses must be supported by a receipt or invoice.

Carry Forward of Unused Work Space in Home Expenses – business use-of-home expenses cannot be used to create or increase a business loss.  Should you have more expenses than income for your home-based business then you will have unused Work Space in Home Expenses which like the unused Capital Cost Allowance you can carry forward to use against a higher income in a future year.

It is important that you keep good records and that all your expenses are documented with receipts so that you can claim them against your business income.

How to Maximize Tax Deductions for Your Small Business

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

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

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

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

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

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

Should you Claim Business Expenses without a Receipt?

By Randall Orser | Business Income Taxes , Small Business

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

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

What is Your Chance of Being Audited?

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

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

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

In General, No Receipts equals No Deduction

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

Common Tax Mistakes that Small Businesses Make

By Randall Orser | Business Income Taxes , Small Business

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

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

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

Meals and Entertainment

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

Business use of Vehicles

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

Home Business Expenses

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

GST and HST

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

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

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

From an article by Augusta Dwyer Globe and Mail 2017

 

Best Business Opportunities for Retirees

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

Are you getting ready to retire but don’t see yourself filling your days with tv reruns, golf or playing cards?  Already retired but you could use some extra income? These are good reasons to start your own business when you retire.  Here some businesses to consider that can offer you part-time work and can be operated from home.

  1.  Chauffeur – If you are still fit and have an outgoing personality then working as a chauffeur helping other seniors with transportation to medical appointments, shopping and more can be a good option.  You will need to check Provincial licensing requirements, upgrade your driver’s license and maybe do CPR training and have a criminal record check done.
  2. Travel Tour Guide – If you love to travel, being a tour guide and getting paid to travel can be a dream job for you.  All your travel expenses will be paid for and in addition to wages you will also get tips. Contact the International Tour Management Institute for more information.
  3. Hauling – If you have a truck or a van hauling can be a good business for you.  There is always a demand for people to take away garden waste, trash and discarded household items.
  4. Painting and Interior Decorating – If you have a good eye for colour and are creative, why not share your skills?
  5. Translation Services – Good at languages? then being a translator could be ideal for you. You will need excellent writing skills, and knowledge of a particular industry can allow you to specialize.
  6. Arts and Crafts – If you are skilled at making pots, painting or creating wooden items you can sell your creations at local craft fairs or create an on-line store to sell your products.
  7. Tutoring – If you have teaching skills then becoming a tutor could be ideal for you. In addition to in-home tutoring, on-line tutoring is now becoming very popular.  One area particularly in demand is teaching second languages, or teaching English as a second language at home or even as a teacher in another country.
  8. Pet Services – There is always a demand for reliable people for dog walking and pet sitting.  Many people prefer to keep their pets at home rather than put them in a kennel and are willing to pay for a pet sitter who will also keep an eye on their home while they are away.
  9. Security services – Trained security personnel are always in high demand especially those who are retired police officers or members of the armed forces. 

These ideas are not likely to make you lots of money but they are inexpensive to start and will keep you active and give you purpose in your retirement.

From an article by Susan Ward

How to Protect your Small Business Data

By Randall Orser | Cloud-computing , Small Business , Technology

Backing up your business data is vitally important.  Only keeping data on your computer can be a big mistake.  Programs on your computer can be reinstalled but if you lose all your correspondence, documents and transaction details then your business could be seriously compromised.  Having paper copies is not the answer.  If there is a catastrophe such as a flood or fire, then again, your data could be lost. 

If losing your data will seriously affect your business, then you need to set up a more reliable back-up system.  Your business data should be backed up regularly, should be saved on reliable media or in the cloud, and should be kept in a secure off-site location.

Backing up or Archiving your Data

Your data should be backed up for the short term, but data that is no longer in regular use should be archived.  This includes everything from emails to accounting information.  A good reason to use cloud-computing in your business is that you can retrieve your information should something happen to your desktop computer.  

However, cloud services can still be hacked or sabotaged which can cause a loss of data, so it is a good idea to save it to a storage device such as a USB drive or an external hard drive.  Once you have identified the data to be archived you can install a backup software program that will do that for you on a regular basis.

Once again, do not leave these backups on site unless you have a fire-proof safe, they need to be stored elsewhere.  Some businesses will store their backups in a security box at a bank and others at the homes of different friends and family members.   

If you have a local area network, you can back up files to another computer or server, but it should be in a different location that is secure.  If you want to back up a lot of information for long term storage, then tape backups can be the best option as they are reliable and can store huge amounts of data.

Most importantly make sure that you use strong passwords to protect your data and change them regularly.   For extra security make sure that the backup files are encrypted.  If you use cloud storage this is done for you.

Why you Should Consider Cloud Computing for your Small Business

By Randall Orser | Cloud-computing , Small Business

Cloud-based computing is perfect for small businesses because you can get access to all your company data from anywhere, anytime and it is not expensive.  Cloud-based computing helps you to compete with other businesses by giving you access to technologies previously not available to you. 

You have probably noticed that many software companies are no longer offering desktop applications but instead they now offer a monthly subscription-based service.  For a small monthly payment, you have access to many applications for invoicing, tracking expenses and more, so using Cloud-based computing can save you lots of money here’s how:

  1. All of the maintenance of the service or app is done by the cloud vendor, so you no longer need to pay for the installation and updating of software, and management of email servers.
  2. Cloud applications can be cheaper and are more convenient as you no longer have to install software programs on your servers or computers.
  3. Using a multi-application app will consolidate all your needs into one cloud computing service.  You can get email, schedule appointments, create documents, do video conferencing, share files within your company and with clients, and much more.
  4. As you are using the cloud vendor’s server to store your data you can free up space on your in-house computer system or even get rid of some of it.
  5. Cloud computing can make integration of other apps much easier and cheaper.
  6. Cloud computing apps are regularly updated so you don’t have to, and you have access to all the latest features without having to spend money to update your desktop edition.
  7. Cloud applications are browser based so you can access them from your mobile phone or tablet.  This enables you to issue invoices or track expenses at anytime from anywhere.

Is it time to change to cloud-based computing for your small business?

 

Do you Have to Declare Hobby Income?

By Randall Orser | Personal Income Tax , Small Business

Did you know that what you think is a hobby the CRA may see as a business?  If you are making a profit from your hobby, then it is a defined as a business by Canada Revenue.  It does not matter if your hobby is small, you still have to declare any income from it on your tax return.

However, it may not always obvious to you whether your hobby is taxable or not.  For example:  

  • Producing crafts to sell at a Christmas sale might be seen by the CRA as a business, but if you are actually spending more on the materials to make the crafts then you ARE NOT making a profit, so you don’t have to declare any business income.  
  • However, in a second example you may be buying items at clearance or garage sales, marking them up and reselling them on-line.  In this example you ARE making a profit, so you need to declare this as income.

The income you make must be reported on Form T2125 Statement of Business or Professional Activities, which is included with the T1 income tax return package.

Doing this extra paperwork does have some major advantages.  You can write off your business expenses against income, including business-use-of-home expenses, meals and entertainment expenses, motor vehicle expensesetc.  You can also use the Capital Cost Allowanceto annually write off a portion of assets.  To claim these expenses, you must keep track of all your sales and expenses and all of your receipts.

If you have income from a regular job, the net loss from your hobby gets deducted against your total income which may result in a lower tax bill.   However, there are limits: you cannot continue to write off losses from your hobby year after year without the CRA using the profit test to see whether or not your activities are conducted with a “reasonable expectation of profit”.

 From an article by Susan Ward

 

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