JBS BUSINESS SERVICES

JBS BUSINESS SERVICES

 “B U I L D I N G   S U C C E S S   T O G E T H E R”

778 Rossland Ave, Trail, BC, V1R 3N3 

250 364 2235             info@jbsbiz.ca            www.jbsbiz.net

 

TIPS & PITS

“Ron Clarke has earned his MBA and is a business owner in Trail providing accounting and tax services.  He contributes a column weekly January through April to the Times.”   

                          Sheri Regnier, Editor        Trail Daily Times

 

JBS columns for the Trail Times – January to April 2024

TAX TIME:  Tax Season or Scam Season?

At the best of times, scams run rampant. Add tax time to the picture, and the scams ramp up. In addition to the ever present hidden threats rolling around in cyber space, there is the constant barrage of direct scams designed to disrupt your life.

Given this reality, here’s some insight on how to identify and protect yourself from targeted scammers pretending to be Canada Revenue Agency (CRA).

Phishing through the internet and cell service is the act of broadcasting masquerading websites, links, and messages in an attempt to have you supply personal information, make a direct payment, or corrupt your software on your computer or phone in order to pirate your friends, access your banking info, or worse, steal your identity. To combat phishing, use a spam filter and firewall software, and keep it current since things change so fast.

More to the point, CRA will never use text messages or instant messaging such as Facebook Messenger or WhatsApp to communicate with taxpayers under any circumstance. If you receive a text or instant message claiming to be from the CRA, it’s a scam.

Regarding emails, CRA can only connect with you via email if you have set up “My Account” (or “My Business Account”) and authorized email communications with CRA. If you have, when you receive an email from CRA, it will only state within the email that there is a message for you within your CRA “My Account” and ask you to log into your “My Account”. An email from CRA will never offer a direct link to your “My Account”, or any link to anywhere for that matter and this includes a link to take you directly to a refund or to make a payment. CRA emails will never have an attachment. CRA will never ask you to reply to their email.

Some other tips about emails, CRA does not use Gmail, Hotmail, etc.  Also, look at the messaging for poor spelling, grammar, math, and images. And don’t skim read. Actually read it word for word so you have a better chance of spotting errors.

When it comes to phone communications, if a CRA rep calls you they will identify themself by name and an employee number. Then they will ask you to prove your identity by name, date of birth and social insurance number. A CRA rep will not ask for any detail from your passport, drivers license or health card.

Noteworthy to the identification process, after the CRA rep has identified themself, before giving your personal detail, you can choose to ask for their contact phone number and offer to call them back. Then you contact CRA’s general enquiry phone number to verify that the CRA rep who called you is actually a CRA employee, and if all is legit, then call the CRA rep back.

A CRA rep may leave a voicemail, but the message will never state your personal or financial information, nor leave any message designed to anger or entice you to call back immediately. The CRA rep will leave their employee number and likely a phone number. As noted above, for your protection you can go through the routine of investigating the CRA rep before directly calling the CRA rep back.

A CRA rep, whether on the phone with you or on voicemail, will never demand immediate payment by credit card, interac e-transfer, prepaid gift cards or bitcoin. A CRA rep will never set up a meeting with you to pick up a payment. A CRA rep will never use aggressive language or threaten to send the police.

Something you already know … be a critical thinker as you consider any message you receive via email, text, phone, or letter. Of course this not only applies to CRA and other government agencies, but also charities, not-for-profits, and businesses. They are all subject to masquerading scammers.

 

TAX TIME:  What to Expect After Filing Your Tax Return

I’ve filed. I’m all good for another year, right?

Let’s start with these facts. After you file your tax return, be confident in knowing that Canada Revenue Agency (CRA) will not send or request a payment by e-transfer or prepaid card, CRA will not leave personal information on a phone or with someone else, CRA will not request you to meet a representative at some described location, and CRA will not threaten police action or arrest.

What CRA will be, is proactive after you file your tax return. To ensure a tax return is not assessed prematurely, CRA has a “pre-assessment review” program. That is, after filing but before assessing the tax return, CRA may ask for supporting documentation. The pre-review is a targeted action to save time by catching basic errors, omissions, or conflicting information on file with CRA. By reacting quickly to CRA’s request, if necessary, things will be adjusted and move forward as if the tax return had been filed correctly.

If nothing triggers a pre-assessment review, the tax return is assessed by CRA, possibly with minor adjustments if errors are identified in calculations, transfers, or carry forward amounts for example, and the Notice of Assessment (NoA) forwarded to the taxpayer either by mail or on-line through My Account if set up with CRA.

The NoA explains any adjustments made by CRA to the tax return as it was filed. Also included may be a request for instalment payments. This is generated if an assessment of $3,000 or more is due at the time of filing. CRA assumes the same thing is going to occur this current year as what transpired in the prior year and asks for quarterly payments in advance. Simply put, CRA wants the tax revenue sooner rather than later.

It’s best not to ignore the instalment request unless this past year was a one-off year that will not be repeated, and the current year is back to normal. If this is the case, the instalment requirement may not be applicable and a call to CRA to explain the situation is likely in order.

If quarterly instalments are not remitted and should have been, penalties and interest will be charged effective the due date of each instalment. If instalments are remitted and it’s more than is necessary, CRA will refund the difference next April.

After assessment, CRA has its “matching program”.  CRA’s super computers identify tax slips that are on file with CRA but not reported or are reported differently on the taxpayer’s assessed tax return. The other situation is when a taxpayer has reported a tax slip that is not on file with CRA. The taxpayer is asked to clarify the information reported or not reported, and CRA adjusts as necessary. This matching takes place after assessment, so any necessary adjustment often results in a reassessment completed by CRA.

CRA also conducts its formal “review program” that runs throughout the year, and in fact CRA can review tax returns from the six prior tax years. As opposed to a targeted audit of a taxpayer, this is random taxpayer selection that essentially tests to make sure Canadians are self-assessing and filing accurate tax returns. In essence, CRA presents the review program as an education program for taxpayers.

Again, if reviewed, respond completely and promptly to the request from CRA because if not, whatever is being reviewed will be removed and your tax return reassessed accordingly. To reinstate what was removed, a T1 adjustment has to be filed.

Then there is the CRA “audit”…

Enough said on that one?

 

TAX TIME:  Taxpayer Relief

Have you been charged penalties and/or interest by Canada Revenue Agency (CRA) for taxes you owe and did not pay on time, or for a late filing of a tax report of some sort like a T1 or T2 Tax Return, or GST Report?  Did you know CRA has the discretion to waive penalties and interest?  It’s called taxpayer relief, and CRA can relieve penalties and interest up to 10 years back from the year of request.

To be clear, the taxes owing will not be waived by CRA. You may have an argument to lower the amount of tax, but that’s a different story. This is about applied charges by CRA on amounts owing and late, and also reports due and late.

It requires the completion of Form RC4288, although completing those four pages is not the end of it. The success of the application rests with your reason for the claim and the proof you can provide to support your case. So how does one qualify for taxpayer relief?

The key is to be able to demonstrate extraordinary circumstances outside of your control that directly affected you. Here are the more common circumstances claimed.

An obvious one is a delay or error on CRA’s part in getting necessary information to you, or providing incorrect information that delayed or confused the process. An extension of this is the delayed provision of information or slips by third parties such as employers or financial institutions. However, this requires the cooperation of the third party providing a written description of the fault resting with them.

An accident or serious illness of the taxpayer or the owner/shareholder of a business. Specific medical documentation from health professionals is required. To an extreme, this is obviously includes the death of the taxpayer, or in some cases next of kin.

Natural or human caused disaster such as a fire or flood of your home that destroyed documents that resulted in a delay in acquiring new copies. This can include a broad based disaster that may not have destroyed documents but did prevent access to them or access to persons or organizations that provide documents or support services. The BC wildfire evacuations come to mind on this front.

Another example of large scale interruption of life’s normal routine that could prevent timely reporting and payment is the case of civil disobedience blocking access to those things and services needed to file. The Ottawa blockade of a couple years back would be an example.

The final example of the more common reasons for asking for taxpayer relief is the case of financial hardship. This encompasses a broad list of justifications for presentation to CRA, the obvious one being bankruptcy.  Notably, being unable to pay does not excuse a taxpayer or business owner from filing the return or report so a penalty may still be applicable.

To be successful in a taxpayer relief application, you must provide proof of a direct connection between the reason you are claiming taxpayer relief and your inability to do the filing and/or pay on time. For the most part this is all about the provision of descriptive and supportive information from third parties familiar with the situation, whether it’s your doctor, employer, banker, investment broker or even a string of emails or letters from a CRA representative.

By the way, “I forgot to file” doesn’t qualify.

 

TAX TIME: It’s Here!

Do you have taxes due? Or is a refund coming?

Either way, it’s time for tax prep.

Some people feel overwhelmed when it comes to the preparation of their tax return. If Canada Revenue Agency (CRA) tax rules and its perennial changes aren’t intimidating enough, there are the confusing tax slips, convoluted tax forms and complex tax schedules.

Here’s a simple plan for tackling tax return preparation if you choose to do it yourself.

Step 1. Find a copy of last year’s tax return and review it. In general, it may be a useful road map. Not that every year is the same, but it may draw your attention to items you may have forgotten about.

Step 2. Make notes and a list of questions that must be investigated, or information found. It could be costly if something is missed so don’t trust your memory.

Step 3. Enter all your personal information. Be accurate and complete. It appears CRA is asking for more and more personal detail each year.

Step 4. Fully open and lay flat all your slips, setting aside information clearly not needed for input. For tax slips, check the name and set the slips in piles gathering like items such as T4 income, T5 interest, etc. If there is a spouse or dependant also being prepared, complete this for each person. In fact, preparing them at the same time, or “coupling,” is best so that full advantage of the transfer of incomes, expenses and credits can take place. Typical of this reporting are medical expenses and donations. Also, joint slips with two names can be input on either person’s tax return but all information on that slip must be put on that one person’s tax return. Or the joint slip can be apportioned 50/50 between the two people. Notably, it needs to be reported consistently year to year.

Step 5. Enter the information onto the tax return, ticking each item as it’s input. Once input, take a second look at the detail and then check what you have input. Correct figures? Numbers transposed? Right box or line? Enter what you can easily identify. Surprisingly, those items you aren’t sure about or aren’t sure where to enter, often become apparent moving through the input of familiar items, just like doing a test in high school. And when math is required, use a calculator… your cell phone has one.

Step 6. For those items still without a home, read carefully because there may be instructions, including directions not to enter on the tax return. Another option is to visit the CRA website or even Google it.

Step 7. When you think you’re done, double check to make sure everything has been answered and input. If using do-it-yourself software, this is the time to use the optimization option, if it has such a feature. This may do a pension split, or move the medical claim from one person to the other, or do the same for donations. Then check the diagnostics and investigate. On this point, some software programs accept overrides and then permit e-filing, only to be rejected by CRA or end up as a CRA review. Further, personal changes and reporting of certain assets, incomes and expenses may require separate e-filing of schedules or even paper filing of your tax return. The diagnostic check should identify these requirements.

A note for proprietors, while it’s true that your tax return doesn’t have to be filed until June 15, if taxes are payable, the tax balance must be paid by April 30.

There you go. Tax prep done.

 

TAX TIME:  What’s new for tax year ‘23?

Despite the title of the column, let’s start with what’s gone for 2023.

Any COVID benefits you have received in prior years and had to repay in 2023 can only be reported as a deduction in 2023. You can’t carry them back to the tax year you received them.

Speaking of COVID, and this is the last it will be mentioned, if you still worked from home in 2023, the flat rate business use of home expense claim is no longer an option for 2023. To make the claim, you will have to follow the standard criteria for making this claim.

Here are some reminders and updates on tax changes brought into effect in 2022.

On the medical front, as of 2022, allowable expenses include fertility clinic and donor bank services provided to an individual, and for a surrogate mother. Also, Type 1 diabetes is an approved diagnosis to grant a Disability Tax Credit, conditional on the person requiring a weekly regimen of medical life sustaining therapy.

Also brought into play in 2022, the Labour Mobility Deduction (LMD) for tradespeople and apprentices working for an employer and having a job greater than 150 km away and therefore having to set up life temporarily away from home. If costs are not reimbursed by the employer, the worker can claim up to $4,000 of expenses, if supported by paid receipts for travel, food, and accommodation.

The “home accessibility renovation” expense limit was increased in 2022 from $10,000 to $20,000 with the credit being 15% of the amount. The credit is to support people to remain living in their home. To be eligible a person must qualify for the Disability Tax Credit or be at least 65 years of age.

So, what’s new for 2023 tax reporting?

Announced in 2022 and now applicable for 2023, the new “multi-generational home renovation credit” is a refundable tax credit of 15% of up to $50,000 of renovation expenses. This is designed to transition a family member into a home owned by another family member.

Also announced in 2022, The Property Flipping Rule came into effect January of 2023. Otherwise known as the “365 day rule” or the “anti-house flipping rule”. This new tax rule denies the capital gains exemption if a house is bought and sold within 365 days. Instead, the full profit from the sale is included as taxable income. However, there is a list of defined exceptions to the 365 day rule such as change in marital status, employment change, health issues for self or immediate family member, and the list goes on and on.

A very popular 2022 announcement was the First Home Savings Account (FHSA). It came into effect April of 2023 so if an account was set up and a contribution made prior to December 31, this is the first year a T4FHSA slip will be issued to claim a tax deduction, just like an RRSP contribution. If funds were withdrawn from an FHSA in 2023, this tax slip is also issued but as long as a home was purchased there is no tax consequence since these investment funds aren’t reported as taxable income if used for that purpose.

New for British Columbians is the BC Renters Tax Credit. It’s a $400 refundable tax credit for a household income under $60,000, reducing down to a zero credit at $80,000. The renting of a unit in 2023 must include a minimum of 6, one month rental periods. There is only one $400 claim for spouses whether they live in one rental together or two separate rentals. However, unrelated roommates living in one common rental can each make a $400 claim. There is a broad definition of rental unit, including long term care facilities and student housing. Excluded are rentals owned by a family member, free employer provided rentals, rent to own agreements, and rentals in mobile and trailer parks.

Now for some very basic changes for 2023 tax preparation.

For those situations when travel expenses can be claimed, the mileage reimbursement rate for 2023 is down from $0.58/km to $0.565/km, but the flat meal rate remains at $23/meal.

The CND-USA 2023 annualized exchange rate is 1.3497.  The annualized rate is used when related multiple conversions are spread throughout the year. In the case of one-off transactions, the exchange rate for that particular month should be used.

There is a new box on the T4 slip this year due to the enhanced CPP program. It’s box 16A. Will you sleep better tonight knowing that box 16A now exists?

Oh, one last thing. There’s something that never changes … unless it falls on a weekend … the tax filing deadline including the payment of any taxes owing is April 30. It’s on a Tuesday this year.

 

TAX TIME:  Moving Expenses

Moving is stressful and can be emotionally draining. However, on a practical note, a moving expense claim can be a valuable deduction that should not be overlooked. It’s not a simple process but the effort is typically worth it.

There are key criteria that must be met to make it an allowable claim. Moving for work is the well known eligible reason for making a moving expense claim. The new home for the new work must be at least 40km closer by the shortest public route to the new work.

A person moving for new employment is eligible for a moving expense claim provided they have a job offer in hand prior to moving to the job. This also includes transfers within the same company. In either case, a letter must be provided stating the job, start date and what, if any, moving expenses were covered by the employer noting whether these covered costs are included as taxable income.

Noteworthy, a person who is moving to start up their own business in a location that will be operational at least 40km away from their current home qualifies for a moving expense claim provided it can be proven that the move to the new location was necessary for the business to earn money.

The moving expenses must be deducted from income earned at the new place of work so if the move is late in the year, the moving expense claim is reported on the current tax return and then carried forward to the next tax year for claiming against the new work income.

Now let’s look at the case of an employer providing a moving allowance or reimbursing moving costs.

If an employer offers a standard moving allowance and the employer includes this in the employee’s income, the employee is then eligible to make a full claim of all allowable moving expenses to legitimately offset this additional taxable income.

When an employer directly reimburses for specific moving expenses, any cost that is reimbursed cannot be claimed as a moving expense because reimbursements are not factored into earned income. However, if not all moving expenses are reimbursed, for those costs that are allowable expenses for tax purposes, they can be claimed as a moving expense.

A person moving for post secondary education is also eligible for a moving expense claim if the course load is at least 60%. However, the expenses for moving to school can only be used against taxable scholarships, so often this claim can’t be made. That being said, moving for co-op employment or back home for summer employment does qualify the student for making a moving expense claim against that income.

The list of allowable moving expenses is extensive and researching this before making a move may avoid lost opportunities within an expense claim. To this point, a few often overlooked expenses include the cost of breaking a lease (not including any rental payments), utility disconnections and hookups, changing addresses on legal documents and licenses. Also, temporary living expenses for a total of 15 days at the old or new location. And costs to maintain the old home to a maximum of $5,000 if reasonable effort to sell the home can be proven. Renting the old home disqualifies this claim even If it is listed for sale.

Allowable costs of selling the old home include advertising, legal fees, mortgage penalties, real estate commissions and the GST on these specific costs. If there is a loss on the sale of the house, this is not an allowable expense. Costs of purchasing the new home include the applicable expenses noted above. However, if GST is paid on a newly built home, the GST is not an allowable moving expense.

Also not an allowable moving expense, are job interview or house hunting trips. Not even one trip.

Finally, simplicity is offered for travel and meals with the use of the simplified flat rate method to claim these types of expenses which allow 56.5 cents/km and $23/meal. Choosing not to use the simplified method requires an extensive paper trail of slips.

Good luck with the move, and the new job!

 

TAX TIME:  Tax breaks for the quest for a child

Bringing a child into your life is a wonderful experience. In addition to all the love and excitement, there is expense. Just as with a natural child, this also is your life in the case of adoption, in vitro, and surrogate parenthood – both the wonderment and the expense.

Adopting a child involves different expenses not borne by those having a baby. And Canada’s tax policy acknowledges this reality. If you adopt a child, defined as a person under the age of 18, you will likely qualify for the Canada Revenue Agency’s (CRA) adoption tax credit.

Allowable expenses are broad and include fees paid to a licensed adoption agency, legal fees and court costs attributed to an adoption order, necessary travel and accommodation expenses for adoptive parents and the adoptive child during the adoption process. In the case of an adoption of a child born or residing outside of Canada, allowable expenses include mandatory fees paid to the foreign country and to Canada for the immigration of the child, along with translation fees.

Timing is important to making an adoption expense claim. For an expense to be eligible for inclusion in the claim, the expense must have been incurred after the adoption process has begun by way of an adoption application registered with the government, and before the application order is recognized by the government or before the child begins to live with you permanently. This is referred to as the adoption period, and regardless of the length of time of the adoption period, the claim on your tax return must be made in the year of the completion of the adoption.

The federal adoption tax credit for 2023 is based on a maximum $18,210 of expenses, in the end translating into a 15% maximum tax credit equaling $2,731. The BC Government adds a 5% tax credit based on the total expense to a maximum of $910. Further, this credit is a non-refundable credit, meaning only the amount of the credit needed to reduce your taxes to zero qualifies, and any balance remaining is not refunded to you.

And it’s important to know that for couples adopting a child, CRA permits the adoption credit to be claimed entirely by either spouse, or split between them as they choose, so be sure to calculate and claim this credit to take full advantage of it for you and your spouse.

Sticking with the kid theme, for those couples unable to conceive a child, and choosing to try various natural methods to make it happen, or as CRA states, “pursing the medical intervention to conceive a child,” some very specific medical costs can now be claimed on their T1 medical schedule as an expense. In addition to regular type medical services in aiding the couple, allowable expenses now include fertility clinic and donor bank services provided to an individual, and also expenses to support a surrogate mother.

 

TAX TIME:  Budget 2023 Tax Announcements

Yes, it is 2024, but still quite topical is the 2023 budget.

To offer some perspective on the 2023 budget, for the first time in decades the federal budget was packed with detail for public view. Why? The thought is that the government was trying to mitigate the complaints from the general public that arise after the presentation of a budget with its little offering of the meat and potatoes behind the headlines.

Or perhaps the quantity of detail given in the budget may have been offered because of several high profile good news taxation stories the government wants to talk about.

The highest profile announcement in the budget was the new First Home Savings Account (FHSA) that began April 1, 2023. Given the high cost of buying a home, especially for those not in the market yet, this program is designed to help first time home buyers, as defined by not having owned a home in the past five years and that includes the spouse who also can’t have owned a home in that period.

The best way to describe the FHSA is that it offers the best features of the RRSP and of the TFSA. This is to say, the contributions into a FHSA are a tax deduction like an RRSP, and the withdrawals from a FHSA are tax free like a TFSA. There is a $8,000 annual maximum contribution to a maximum of $40,000 in total. And each spouse can have a FHSA, potentially creating an $80,000 combined pool of funds. As an aside, the FHSA funds can be combined with the maximum $35,000 RRSP Home Buyers Plan withdrawal, and with both spouses having an RRSP, the home purchase pool of funds could be as high as $150,000. Reminder that the funds withdrawn from an RRSP for a Home Buyers Plan must be re-contributed to the RRSP or they will become taxable income.

Final point regarding the FHSA, the $40,000 contribution room does not exist until the FHSA is opened with an initial deposit, as minor as it may be. So, longer term foresight is needed to ensure there is enough timing to take full advantage of the FHSA. If there is intention to use one, open it now.

Second final point, any FHSA funds not used can be transferred to one’s RRSP account tax free and without effecting the contribution limit.

Okay, the final, final point. For tax deduction purposes, the FHSA contribution period is the calendar year and does not extend 60 days into the new year like RRSP contributions. So, if you want to use a FHSA contribution as a tax deduction, you must make that contribution before December 31.

Second announcement of note within the 2023 budget. The Registered Education Savings Plan (RESP) withdrawal amounts have been increased from $5,000 for full time programs to $8,000, and half that amount for part time programs. Good news when one considers the cost of going to school, and that’s not just talking about the cost of tuition.

RESP contributions are not a tax deduction and any investment growth within the RESP plus the government grant top-ups are considered taxable income. When withdrawn, these amounts are taxable income in the student’s hands.

The third announcement in the budget is the increase to the Alternative Minimum Tax (AMT). The AMT has been around for years and to keep its explanation simple, it’s designed so that the wealthy who may have access to many tax tools to reduce tax, do have to pay a minimum level of tax on investments sold. The AMT tax rate has been increased from 15% to 20.5%, although the AMT will not apply until the specific investment profit is over $173,000, up from $40,000.

Finally, and quite frankly the most far reaching announcement, is the government’s strengthening of the 1987 General Anti Avoidance Rule (GAAR), a law that the Courts of Canada have sided with CRA time again when a case reaches this level. The use of the GAAR law comes into play when it can be proven that a transaction was not completed for commercial purposes, but rather it was an abusive transaction undertaken or tax shelter created to simply avoid tax. If this catches your attention, do your research.

 

TAX TIME:  BC PST Registration & Exemption

If you sell goods or provide a service in BC, is it always necessary to register and charge PST on the goods you sell or the service you provide? A common question, and the short answer is, it depends.

Generally, the description goes like this. If your business is located in BC and sells or leases taxable goods or provides software or other taxable services within BC, you must register and charge PST. This definition is extended to businesses located outside of BC and selling into BC, just as a BC business selling into another province may have to register and charge the PST applicable to that province.

What are taxable goods? Some obvious examples include cars, boats, building supplies, furniture, furnishings, clothes, plus consumables such as pop, alcohol, tobacco, cannabis, and vape products. Also, goods that are leased like vehicles, tools and artwork are also included as taxable goods.

Taxable services? These are services provided to taxable goods like repairs and maintenance to vehicles, appliances, electronics and jewelry or the application of materials or protective services to taxable goods like furniture or vehicles.

Some specialized taxable services that don’t necessarily lend themselves directly with taxable goods include the sale and provision of software, telecommunications, on-line marketplace services, some specific types of accommodation and legal services. But not accounting services … surprised? … perhaps to aid in the filing of tax returns!

Besides accounting services being exempt from PST, other exempt services include transportation and dry cleaning. Non-taxable goods include most food products, children’s clothing, and non-motorized bicycles. If you remove the food products from this list, it’s a pretty short list.

It’s also important to distinguish between retail sales and wholesale sales. If your business “sells” goods to retailers who then sell those goods to consumers, your business is considered a wholesaler and is exempt from charging PST on your sales to the retailers.

What about the really small seller or service provider? The BC Government does recognize that there are many small businesses that will always remain small but nonetheless provide to their community, and collectively contribute to the economy, so the government offers the PST small seller exemption.

To qualify for the small seller exemption, first and foremost, the sales of taxable goods and services must not exceed $10,000 in any 12 consecutive month rolling timeframe, the calendar year is immaterial. If that test is passed, then all the following conditions must also be met.

The business must be located in BC. It must not operate within an “established premises,” in other words it has to operate out of one’s house, but the business can’t have its own dedicated separate space that acts as a retail shop or office within the house. The business must sell only as a retailer, it can’t sell wholesale to retailers. The business can’t sell taxable alcohol, tobacco, cannabis, vape products and almost all vehicles. For service providers, the business can’t be a contractor service that sells taxable goods and then installs them within real property. The service business can’t function as an independent sales contractor, it can’t be an on-line marketplace facilitator, and it can’t provide a service that leases taxable goods.

As a footnote to the $10,000 sales threshold exemption. As the rule reads, the business owner must register for PST as soon as it’s realized that the $10,000 sales threshold will be surpassed, even if that realization occurs before the first sales dollar is earned.

 

TAX TIME: Contractor Income Reporting

A contractor self-reports income earned just as other businesses do. However, Canada Revenue Agency (CRA) several years ago began an initiative that more closely tracks the reporting of contractor income, in that the reporting of revenue paid to a contractor is no longer solely reliant on that contractor’s own self-reporting.

To be clear, the term CRA “initiative” is not so much encouragement as it is requirement. Under specific rules, CRA now requires a company that pays a contractor to report the year’s payments made to that contractor on one of three CRA tax slips.

Why? These tax slips having to be supplied to CRA is part of the CRA’s effort to promote compliance with the requirements of reporting earned income, thus reducing activity in the underground economy that evades taxation.

“Contractor” is defined as either a freelance business service or freelance construction service, with “freelance” generally meaning a self-employed individual whether proprietorship or incorporated.

The T5018 slip, although having been around for years, until recently was used little. Referred to as the “statement of contract payments” slip, CRA now requires a company that derives at least 50% of its income from within the construction industry to submit to CRA a T5018 slip for payments made to any contractor such as a plumber, painter, roofer, etc, who is paid $500 or more in the year. If payments to the contractor include GST, the amount reported on the T5018 will include the GST paid to the contractor. Amounts paid to the contractor for clearly identifiable goods supplied, but not installed, are not included on the T5018 slip.

A copy of the T5018 must be submitted to CRA within 6 months of a company’s year-end, or a company may choose to follow the calendar year and submit the slips by June 30 each year. There is a penalty applied by CRA for late filing. A copy of the T5018 does not have to be given to the contractor.

The T4a slip, although a well-known tax slip, quietly had Box 48 added to it in 2010. This box, although used little until recently, was established for inputting payments made to contractors who provide $500 or more of services such as engineering, accounting, training, cleaning, etc. If payments to the contractor include GST, the amount on the T4a does not include the GST paid to the contractor. Likewise amounts paid for clearly identifiable goods supplied, but not installed by the contractor, are not included on the T4a slip.

A copy of the T4a goes to CRA and a copy must go to the contractor. It is based on the calendar year, and the deadline is Feb 28 to submit.

The T1204 slip is issued by the government when any contractor is paid $500 or more in a year. Because the government is GST exempt, the amount reported on this slip will have no GST included. Amounts paid to the contractor for any goods supplied are included on the T1204 slip.

A copy of the T1204 goes to CRA. It is based on the calendar year, and the deadline is Mar 31. A copy of the T1204 does not have to be given to the contractor.

How does a contractor report the revenue reported on these slips on their tax return?

The T5018 detail is reported as revenue directly onto the personal tax T1 Schedule 2125 or the corporate tax T2 Schedule 125, remembering that any GST included in the amount must first be deducted and accounted for separately from the revenue. Also, as per CRA rules, a T5018 does not have to be given to the contractor, only to CRA. Of course, whether or not a contractor has been given a T5018, the contractor must report the revenue.

The T4a and T1204 detail is reported on a tax return just as any other tax slip. For a proprietor, it’s reported in the T1 tax return’s T4a or T1204 input form which flows through as self-employed revenue onto the T1 Schedule T2125. For an incorporated contractor, it’s reported directly onto T2 Schedule 125.

Given the newness of these slips in the bookkeeping process, it’s particularly important for a contractor receiving these slips to not input the revenue twice. The classic situation occurs when a contractor paid early in the year reports that revenue in the company’s bookkeeping at that time, then receives a T slip at the end of the year and enters that same revenue a second time in the company’s bookkeeping.

Conversely, not reporting income that needs to be reported could prove problematic to a contractor since CRA has copies of these slips which generates the ability for CRA to track and review revenues paid to contractors, and then match and compare those figures with what the contractor has reported on their tax return.

 

TAX TIME:  Business Loss Or Hobby Loss?

Do you have a regular full time job? And are you running a hobby in your free time? Having some fun with it, making a little cash but not really looking to make any money from it. Maybe your approach is simply to provide a product or service to yourself, your family, and your friends and neighbours.

Why not report the hobby as a business on your tax return claiming the revenue and all the expenses, and the loss will offset your earnings at your “regular job” and reduce your taxes?

Because, the Canada Revenue Agency (CRA) has a keen eye to businesses running at a loss.

Let’s say you have a regular job and you also run a computer repair business out of your basement or make some crafts and sell them at markets. You have a loss almost every year, or at best you breakeven. You have been reporting your business on your tax return for four or five years, each year with a loss. As the calculations go, the business loss is netted against your other income and as a consequence your tax liability is reduced.

As each successive year goes by that you claim the business loss on your tax return, the odds increase for a CRA review. At that time, CRA could determine that you have no intention of profit and consequently your operation is a hobby and not a for-profit business operation, and the loss will be denied. In fact, CRA could deny losses claimed in past years and reassess those tax returns and require tax, penalties and interest be remitted to CRA.

Another common scenario is farming. Let’s say you have a full time job, and you live on some arable land that you operate as a farm that grows a few cash crops plus you raise chickens to sell fresh eggs. This past year you turned another loss, and this year the loss was larger again. You have had losses almost every year for the better part of a decade and have been reporting them on your tax return.

Given the continuous annual losses, CRA would likely review the farm operation and could determine this farm is a hobby, and not a business. CRA would argue that you don’t have a profit motive considering you work full time at a regular job and continue to operate the farm despite increasing losses. In other words, it’s not likely this farm will turn a profit.

Now let’s say you don’t live on the farm property. Is the farm operation then automatically considered a business operation? No. Where you live is not relevant.

As a final note regarding the reporting of business losses on one’s tax return. In 2017, CRA announced that taxpayers reporting a “prolonged period of business losses” may be subject to review. Reading further, “prolonged period of business losses” is defined as business losses reported for two consecutive years. Yes, only two years. And new business start-ups are not exempted.

With this all said, you do have to report your small business sales revenue to CRA, and you can claim direct and reasonable expenses. You just can’t run at a continuous loss.

For what it’s worth, now five years after the enactment of this CRA review policy, although its bark remains load for sure, the CRA follow through is spotty.

 

TAX TIME – Underused Housing Tracking & Taxing

The Underused Housing Tax Act (UHT) was introduced by the federal government in 2022. You may have heard about it, especially if you own rental residential property, but what is it all about?

It’s a tool for government to ferret out residential units that sit empty, or basically empty, in an attempt to reduce the housing shortage in Canada.  If a residential unit is identified as not being occupied, there may be a tax applied.

To set the stage with a simplified description of the UHT Act, for those owning a residential property it defines “excluded” people and business entities and “affected” people and businesses entities.

If “excluded,” there is no need to file a UHT tax form T2900 for the residential property.

If “affected,” there may be an applicable exemption from paying the UHT tax, but the UHT tax form T2900 must still be filed in order to prove the exemption. If this is the case and the T2900 is not filed, there is a minimum $5,000 penalty applied.

If the residential property owner is defined as an affected owner but without an applicable exemption, the T2900 must be filed and UHT tax paid. The tax is 1% of the value of the property … and the math on that can be staggering. If the T2900 is filed late or not filed, the $5,000 penalty is applied plus interest levied on the tax owing.

Who’s on the government’s radar given this new UHT Act?

Its initial impetus was focused on foreign individuals living outside of Canada buying residential properties in Canada as an investment, and then letting these residential properties often sit empty.

However, the UTH Act is not just focused on people living abroad and owning residential properties in Canada. It also includes people living in Canada who are not Canadian Citizens or Permanent Residents of Canada and owning residential property.

The UHT Act cannot be avoided by setting up a partnership, trust, or corporation to own a residential property since the UHT Act applies to these types of business entities. Additionally, even if a business entity is owned 100% by a Canadian Citizen or Permanent Resident, the business is not automatically exempted like individuals are. Instead, the business entity must file a T2900, and if the business entity is an affected owner, there may be an applicable exemption and the T2900 is filed as such. If the filing is missed or even late, these business entities face a $10,000 penalty.

Who or what is exempt from the UHT Act when owning a residential property?

Registered Charities, Co-op Housing Corporations and any Indigenous Governing Body are exempt. And public corporations listed on a stock exchange in Canada are exempt.

Canadian Citizens and Permanent Residents are generally exempt from the UHT Act provided the residential property is registered in their personal name as an individual. Notably, in the case of a spouse who is not a Canadian citizen or Permanent Resident, that spouse is affected by the UHT Act but may have an applicable exemption.

Clear as mud? Thankfully CRA offers a useful on-line self-assessment tool to check your situation’s applicability to the UHT Act. Given the hefty penalty, it may be worth an hour or two of your time, or perhaps pursuing some professional advice.

And even though the 2022 filing deadline was extended six months given the needed fine tuning of the legislation, the 2023 filing deadline will likely remain firmly as Apr 30/24.

 

TAX TIME:  Allowable Losses 

Are losses ever good? Likely not, but at least Canada Revenue Agency (CRA) defines several types of losses that are available to offset income and reduce taxes. Here is a basic presentation of several common ones.

The reference to “capital gain” and “capital loss” are recognizable terms. An asset that is expected to increase in value over time but is subject to value fluctuations, is considered a capital asset. Items like real estate, stocks, bonds, commodities, and collectibles to name common ones.

The loss from the disposal of a capital asset is called a capital loss. This type of loss is used to offset any capital gains in the current year. It cannot be used to offset any other type of income, however an exception to this rule is in the year of death, CRA does permit the use of capital losses to offset any type of income.

If a net capital loss is not usable in full, the balance of it can be carried back 3 years or forward indefinitely to offset capital gains in those years.

An interesting fact, at least to collectors of prized items, is that capital losses can also be claimed for “listed personal property” (LLP) such as precious metals, jewels and jewelry, artwork, sports cards and jerseys, and the like. As long as the taxpayer has made an LLP declaration to CRA identifying the individual collectibles along with their current market value, if the item is sold at a loss, it can be claimed as a capital loss. Of course, if there is a capital gain on the sale of an item in the LLP collection, a capital gain must be reported.

Notably, only 50% of a capital gain is reported as taxable income, and likewise only 50% of a capital loss can be claimed.

For owners of proprietorships, rental properties, and farms, if business operations don’t go well and a business loss results at the end of the year, CRA considers this a “non-capital loss” (NCL). In calculating the NCL for the business, if the owner took any wages they cannot be included as an expense against the revenue. The NCL can be used to offset other income in the current year or carried back 3 years or carried forward 20 years to net against income other than capital gains.

On the corporate front, an “allowable business investment loss” (ABIL) occurs with non-recoverable debt, or loss on the shares, of a qualified small business corporation that you loaned money to, or invested in, and now all or at least a portion of it has no value. One half of the ABIL can be used to offset any form of income and can be carried back 3 years or forward 10. If carried forward and not used within 10 years, the remaining ABIL is then treated as a capital loss to be used only to offset capital gains and is carried forward indefinitely.

From a tax planning perspective, regardless of the type of loss, if after the application of a current year loss to offset any applicable current year gain or income, there remains a net loss, the usual route is to carry back that loss and apply it to a prior allowable tax year that has an applicable gain or income in order to recover those historic taxes paid. This being said, if a large gain or income is certain in the near future, carrying forward that loss is an alternative route to consider in order to reduce the tax impact of the anticipated larger income.

 

 

ARCHIVED COLUMNS FROM PRIOR YEARS – Information within the columns listed below may no longer be applicable. Further investigation is recommended.

TAX TIME:  CRA’s enforcement

Short answer, file your taxes on time and pay any tax due on time.

That out of the way, here are a few things that can happen if you don’t follow that recommendation.

A late filed tax return with a tax balance owing, is charged a penalty of 5% of the tax balance.  Then 1% is charged monthly, so 17% after one year.  Well, if you add in the effect of compounding, it’s a few more points than that, but that math is for another day.

If you have been issued a “Demand to File” notice from CRA, these rates double, so after a year the basic math on that one is a 34% charge.  In fact, whether you are issued a demand to file notice or not, if you were charged any late filing penalties in any of the preceding three years, this same doubling of the interest rate applies.

A tax return filed on time with a tax balance owing, but the balance is not paid prior to the tax deadline is not subject to the late filing penalty and will be charged a prescribed interest rate adjusted quarterly. Currently it is 8% annualized rate. So even if you cannot pay the tax balance, at least get your tax return filed on time. It will save you money.

A late filed tax return with no tax balance owing is not subject to any charge, but that is not the end of the requirement to file.

What if you just don’t file a tax return?

If a taxpayer doesn’t file, this may remain a non-issue with CRA for an arbitrary length of time.  Arbitrary because if a taxpayer typically files and never has a tax balance, it could be years before they hear from CRA. On the other hand, if a taxpayer typically files and always has a tax balance, especially if it is a sizable tax balance, CRA may very quickly issue a Demand to File notice.

To this point, once CRA has issued a Demand to File notice and if it is not acted upon by the taxpayer, CRA will, and usually more quickly for those who typically have a tax balance, issue a Notional Assessment with a larger than normal tax balance owing to get the taxpayer’s attention to file their tax return.

Continued taxpayer inaction in filing the tax return will lead to CRA sending a Formal Demand speaking to criminal prosecution. CRA could also obtain a Compliance Order from the Court stating that not filing the tax return will be treated as a criminal offence for non-compliance with the Court Order.

When a tax return is filed, assessed and a tax balance remains outstanding, CRA Collections steps in for delinquent payers. Friendly reminders for payment are sent to the taxpayer, and if still unpaid after 90 days CRA Collections may take legal action to seize the taxpayer’s bank account or register a garnishment against the taxpayer’s pay with the taxpayer’s employer.

Filing a Notice of Objection will interrupt the CRA Collections process, although interest charges will still apply. If the Notice of Objection fails, it may be possible to address the Tax Court of Canada to argue the case opposing the assessment. If the case is lost, the Tax Court has the authority to impose a 10% penalty and award costs to CRA.

To the extreme, if the case is lost, the case may go to the Appeals Court of Canada and even all the way to the Supreme Court of Canada.  But only a few cases make it all that way each year. It may be a simpler life to file your return on time and pay your taxes on time.

 

TAX TIME: Adjusting a Filed Return

Let’s say you have filed your tax return. You now realize you forgot to report some income, resulting in under reported income.  Or you now realize you claimed a deduction that was too high or credit that you had not qualified for, resulting in under reported income.

What do you do?

You file a T1 adjustment to change your previously filed return. But what if it was a tax return from a few years back?  You can do a T1 Adjustment for up to 10 prior years for any tax returns filed during that time frame.

There is an exception to this 10 year time frame. If CRA adjusts a return that was filed from before that 10 year frame, and if the CRA adjustment does not fully represent all detail, then you can file an objection and if accepted by CRA, you can file a T1 Adjustment to fully disclose all detail surrounding CRA’s adjustment.

If you discover an error in your tax reporting and when this error resulted in a shortfall in tax due, especially if it is of large value, you may wish to make a “voluntary disclosure” to CRA using Form RC199. This action may mitigate, or perhaps even eliminate, the standard penalty imposed by CRA and perhaps may even reduce the interest charged.

This course of voluntary disclosure to CRA should be a serious consideration if the same or similar, or even different errors, were repeated over a number of years. It likely goes without saying that when disclosing voluntarily, full disclosure of all errors is required. If not, and if CRA does a full review and discovers additional errors, no leniency for penalty or interest is likely.

So … self-disclosure is the better path with CRA. Surprise!

But what if you choose to do nothing?  What could happen?

CRA operates with an active review period for the current and two prior tax years. If you are reviewed and if the issue is discovered and if it is serious enough, not only will a reassessment with penalty and interest be charged and possibly maximized, but a full audit may be undertaken if CRA determines that it was careless or negligent tax reporting.

Additionally, this three year review period does not define an end date. CRA can review back 7 years. And noteworthy, in the case of real estate sales, there no longer is an end date for a CRA review, so keep all your real estate sales records for your lifetime.

Wondering what the penalty is if you know something is wrong, do nothing about it, and get caught? And for the record, doing nothing is an omission not an error, so claiming you made a mistake in your tax reporting has no legs.

Depending on the type of omission, the penalty could be from the low of 10% of the resultant tax owing, up to 20% of the value of the amount of income not reported (not the unpaid tax owing, but the actual missed income) … plus interest.

So far, the scenario has been about not having paid enough tax. What about a missed opportunity to report an eligible expense or missed opportunity to claim a deduction you were entitled too but because you didn’t do it, you paid more tax than you would have had to have paid.

What to do? File a T1 adjustment? Correct, but the adjustment to your tax return must be a claim that you clearly would have made at the time of filing your tax return if you had known about it. As straightforward as that statement appears, what is being made clear is that moving around current claims for expenses and deductions within a tax year or between tax years or between spouses is not permitted.

This is referred to as retroactive tax planning. There are a couple of classics. One being the desire to move income, expenses, or deductions from one spouse to the other after the returns are filed. Another being the desire to adjust an already claimed RRSP deduction from one tax year and moving that RRSP as a carry forward to the next tax year. These adjustments are not allowable.

As a last note, to prove that Canada’s tax system is a voluntary reporting system, nothing within the Income Tax Act obligates a taxpayer to correct an error or omission they discover within their filed tax return. However, as described above, the pocketbook can be greatly impacted if CRA reviews and identifies the issue.

 

TAX TIME:  The Tax Court

We’ve all heard of the Supreme Court of Canada and the Federal Court of Appeal but have you heard of the Tax Court of Canada?

To set the stage, the legal basis for our tax system is the Income Tax Act. This is legislated by the government with guidance from the Department of Finance, and then implemented by the Canada Revenue Agency (CRA).

The Income Tax Act is a lengthy complex document that is open to interpretation. To this end, CRA produces many support documents to aid taxpayer understanding. The CRA tax assessment process involves assessors, and then perhaps reviewers, auditors and even appeals officers to move through the process of eventually determining a taxpayer’s outcome.

Once the assessment is complete, there are taxpayers who disagree with the CRA final determination, and because CRA only interprets the law, these interpretations can be challenged in court, the Tax Court of Canada to be precise, and in fact, the taxpayer may have the right to challenge to the Federal Court of Appeal, and even all the way to the Supreme Court of Canada.

If you have a genuine legal case for an appeal to your tax outcome, the Tax Court is described as open to taxpayers, even those without a lawyer who are appealing an amount less than $25,000.  This is called an Informal Procedure. It is still subject to standard court hearing procedures but the judge is allowed more flexibility and freedom in the process. This being said, the judge’s final decision will have its legal basis drawn from the Income Tax Act, and will not simply be based on apparent “unfairness” to the taxpayer.

As an FYI, for Tax Court cases involving an amount greater than $25,000, regular formal court procedures are followed.

A taxpayer losing to the Tax Court can challenge the decision in the Federal Court of Appeal on a question of law regarding the Income Tax Act. The facts of the case remain as presented in the Tax Court with no new evidence typically allowed.

Likewise, CRA can appeal to the Appeals Court when a taxpayer wins their case in the Tax Court.

From the Appeals Court, both a taxpayer and CRA can appeal to the Supreme Court of Canada if leave is granted by the Appeals Court, and leave is only granted for issues of national importance. A few cases per year make it this far.

The adage that no two things are alike holds true in the court system when it comes to tax rulings. Although a ruling may appear very broad in its application, in tax cases the courts tend to interpret and confine a ruling to that particular case, in effect allowing judges to ignore earlier decisions and base each case on its own facts.

In the end, if the government of the day is unhappy with the final ruling of a tax case of national importance, it has the authority to amend its legislation to correct the legislation’s error or omission. What this speaks to …  the closing of the proverbial tax loophole identified by the court system.

 

TAX TIME:  No Joke, it’s April Fools

With April 1 only about 48 hours away, why not lighten tax time up. Here are a couple of stories that might make you laugh, perhaps smile … or at least groan.

Have you heard about the $1,000 Staycation Credit? Only available in Ontario. Seriously. If you lived in Ontario and stayed in Ontario for your 2022 vacation, you can claim up $1,000 of your expenses!

To a more, serious funny side? The Tax Free Savings Account (TFSA) rules permit you to invest money with all interest earned, dividends paid, and capital gains earned accumulating tax free within your TFSA, and then you can draw it out of your TFSA tax free at any time.  Pretty sweet! And if that’s not enough, if you take money out, that contribution room is not lost.  You can re-invest that same amount, but you must wait until the next calendar year.

What’s so April 1^st funny about this? Well, if you become too interactive with your TFSA, Canada Revenue Agency (CRA) may investigate and determine that you are “carrying on business” or in the “business of investing”.  What will this mean? Well, the status of your TFSA will be cancelled and all your investment earnings will be determined to be taxable income.  Ok, so that’s not so funny.

What defines being too interactive with your TFSA? If you buy and sell a couple of times a month, no flags should run up the flagpole for CRA.  At the other end of the scale is buying and selling on a daily basis. And what will certainly trigger a CRA investigation is swapping securities in and out of your TFSA.

How about a third funny story? Are you ready?

Gambling winnings in Canada are typically not considered taxable income, but not always. It depends on whether CRA determines you to be in the “business of” gambling.  Just like with the TFSA, the level of activity helps make this determination by CRA.  Do you do on-line gambling daily? And if you do, do you have any other source of income, like a job to support you?

A gentleman who won $4,000,000 in the World Series of Poker was investigated by CRA and the CRA determined he was in the business of gambling and his winnings were deemed to be income and taxed.  The taxpayer took it to the Tax Court of Canada and that court disagreed with the CRA because CRA did not prove that the taxpayer had a “system” for winning, and this was proven by the many years he had significant losses.  The 4M remained tax free to the taxpayer.  Ok, that’s kinda funny.

Here’s one last attempt at tax humour. Maybe you will smile and say … “Oh, if only.”

A taxpayer with an undisputed diagnosed debilitating medical condition that had led to the replacement of joints with prosthetic devices was seeking warmer conditions to alleviate the personal suffering created by the prosthetics because of Canada’s cold winter climate.  To provide the relief needed for this medical condition, the taxpayer traveled to the sunny south and claimed the travel cost as medically necessary expenses on the T1 personal tax return.

The claim was denied by CRA.

The taxpayer appealed to the Tax Court of Canada where the claim was deemed allowable and reinstated by that Court. End of story, PLEASE!!

CRA then appealed the Tax Court’s decision to the Federal Court of Appeal where that Court ruled in favour of CRA stating that a more favourable climate cannot be defined as a “medical service”.

The take-a-way … don’t feel badly that you didn’t keep all your travel receipts from your recent sunny south trip. They are of no tax reporting value.

Despite April Fools Day, all these stories are true, even the Ontario Staycation Credit. No joke.

 

TAX TIME: Hot CRA Reviews

Anything happen after April 30 last year that sheds light on what may be sage advice for 2022 tax prep in terms of Canada Revenue Agency (CRA) attention? In other words, what may be on CRA’s radar that likely will lead to CRA reviews? And are there any tips?

Well not much changed last year over prior years. The typical CRA hot tickets for review, remained hot tickets for review, albeit with some shifting around of top priority items perhaps.

Your action plan for 2022 tax preparation should involve mindful reporting if any of the following occurred in your life in 2022.

A medical expense claim tops the review list, like every year.  This is such a wide ranging, all encompassing expensive personal cost, and perhaps emotionally draining memory. The sheer volume of CRA rules are intimidating enough, and then add perennial changes, plus the need for ascertaining specific detail makes this claim more and more complex every year, all leading to major scrutiny by CRA.

Donation reviews remain in the top teer, likely due to fraudulent organizations claiming to be registered charities and issuing bogus tax receipts. Also, the increase of on-line gifting to things like Go-Fund-Me pages which typically are not registered charities, but yet often are claimed as donations. Then there is the simple fact that people make a legitimate claim but fail to retain the necessary donation slip to prove it to CRA, and CRA knows that taxpayers toss these slips but still make the claim.

Reviews for a claim for a dependant have been increasing in recent years, in particular a child as a dependant. The typical scenario that prompts a review is the breakup of a couple with a child or two. Many scenarios play out. For example, the recency of the breakup can be an issue because the first year of break-up has different rules than subsequent years. How many children are involved can play into it. Paperwork is key to making this an eligible claim with proof of custody and child support responsibility topping the list.

Related to this situation are reviews surrounding spousal support as a deduction claim. Again, legal documentation is key, including proof of payment of the support.

Union dues, likely because of the frequency of a duplicate claim because the dues are sometimes reported on a T4 and also on an official slip from the union, and then entered twice in error on the tax return. Also, some dues that get claimed are not from eligible organizations.

Because governments worldwide are ferreting out tax dollars wherever possible and CRA is no exception, foreign income reporting and claims for the foreign tax credit has become a regular review item. This can be quite a complex review, so keep all your support paperwork.

A few other claims that top out the frequently reviewed list include moving expenses, employment expenses and tuition deductions.

Without doubt, there are many other claims reviewed by CRA, but these are the typical ones that appear at the top of the list each year, some increasing in frequency.

There’s no trick to avoid a review. The suggestion is to take tax prep seriously so if a review comes your way, what could be painful may likely just be annoying. Be sure to respond within the 30 day limit or CRA will re-assess automatically.  It will take a T1 adjustment to change it back, assuming you are entitled to the claim.

If you used a professional tax preparer, perhaps they will offer you some guidance or may even handle the review, although not all firms do this free of charge.

 

TAX TIME:  What’s new for ‘22?

Start with perhaps the best “what’s new” … the $1,000 Staycation Credit … but only available in Ontario.

On to serious info. Reminder April 30 falls on a Sunday this year so the tax filing and payment deadline is Monday, May 1, 2023.

There’s recently been lots in the news about support for first time home buyers, in particular the newly introduced First Home Savings Account (FHSA) that comes into effect in 2023.  The basic tax benefits are summed up like this. The FHSA is like an RRSP in terms of the contributions being tax deductible, and the FHSA is like a TFSA in terms of the withdrawal not being taxable income as long as it is used to purchase a home, or transferred to another registered account.  Many more details to come in 2023.

In the meantime, there is other news for the first time home buyer that is really not new, just better. The First Time Home Buyers Tax Credit that has been around for a number of years, has been doubled from $5,000 to $10,000. It’s simply claimed during tax return preparation. To qualify, a person can’t have owned a home within the four years prior to the year the home was purchased, and this includes a spouse or common-law partner.  And just to be nice, this doubling of the credit is applicable to homes purchased from January 1, 2022, onward.

Sticking with real estate, the recently announced “anti-house flipping” rule does not apply for 2022 tax prep. The new rule denies the capital gains exemption if a house is bought and sold within 365 days, with some defined exceptions to the rule.

From real estate to renovations. The “home accessibility renovation” expense limit has been increased from $10,000 to $20,000, to support people to remain living at home. To be eligible you must qualify for the Disability Tax Credit, or be 65 years of age.

Recently announced but not applicable for 2022 tax prep, the new “multi-generational home renovation credit” is a refundable tax credit of 15% of expenses to a maximum of $50,000.  This is designed to transition a family member into a home owned by another family member. Reminder, this is for the 2023 tax year.

On the medical front, the government has expanded the list of allowable expenses to include fertility clinic and donor bank services provided to an individual and also for a surrogate mother.  In addition, some costs incurred for a surrogate or donor are considered eligible expenses.

Also with medical, the government has now deemed type 1 diabetes as an acceptable diagnosis to grant a Disability Tax Credit, conditional on the person requiring a specific weekly regimen of medical life sustaining therapy.

New for the construction industry, the government has introduced the Labour Mobility Deduction for tradespeople and apprentices working in the industry who have to live away from home on a temporary basis.  The maximum claim is $4,000 for relocation expenses and must be supported by paid receipts and reported on Schedule T777.

Remaining with the work theme, continuing from the COVID days of 2020, again for 2022 the government is offering a business use of home expense claim for those employees who worked from home who would not normally have worked from home.  For those people preferring simplicity, the COVID $2/day “flat rate” method still applies, to a maximum of $500. To claim more than $500, the COVID “simplified” method must be used, and it’s really not that simple.

Speaking of COVID, for those who were required and did repay COVID benefits they had received, if the repayment was made in 2022, the government is allowing the repayment to be reported as a deduction for 2022, or it can be reported for either 2021 or 2020 to reduce income in those years. It does not have to be claimed as a deduction in the year the COVID benefit had been received.  Form T1B has been created to simplify this retroactive tax reporting if claimed for 2021 or 2020.

Finally, the CND-USA 2022 annualized exchange rate is 1.3013.  The annualized rate is used when related multiple conversions spread throughout the year are necessary. However, in the case of one-off transactions, the exchange rate for that particular month, or even day, should be used. This is the protocol for converting all foreign currency to Canadian funds. Check CRA or the Bank of Canada for rates.

 

TAX TIME: It’s Upon Us

Taxes due? Refund owing? Either way, it’s time.

Some people feel overwhelmed when it comes to tax preparation.  If Canada Revenue Agency (CRA) tax rules and its perennial changes aren’t intimidating enough, there are all those confusing tax slips, convoluted tax forms and complex tax schedules.

Here’s a simple plan for tackling tax preparation.

Step 1.  Find a copy of last year’s tax return and follow it. It’s your road map.

Step 2.  Make a scratch sheet of notes and questions that have to be investigated or information found.  Personal memory for such detail may not be reliable and it could be costly if something is missed.

Step 3.  Enter all your personal information. Be accurate and complete. It appears CRA is asking more and more personal detail each year.

Step 4.  Fully open and lay all your slips flat. Check the name and set aside slips that aren’t yours. Then set aside information clearly not needed for input. Organize your slips into a pile of incomes and a pile of expenses. Then gather like items such as T4 income, T5 interest, etc, and all medical expenses, donations, etc.

Step 5.  If there is a spouse or dependant also being prepared, complete step 4 for each person. In fact, preparing them at the same time, or “coupling”, is best so that full advantage of the transfer of incomes, expenses and credits can take place.  Also, joint slips with two names can be input on either person’s return but all information on that slip has to be put on that one person’s return.  That being said, the joint slip can then be apportioned 50/50 between the two people.

Step 6.  Enter the information, ticking each item as it’s input. Once input, look a second time at the detail and then check what you input.  Right box? Correct figures? Numbers transposed? When math is required, use a calculator. Enter what you easily can identify. Surprisingly, those items you aren’t sure about or aren’t sure where to enter, often become apparent moving through the input of familiar items, just like doing a test in high school.

Step 7.  For those items still without a home, read carefully because there may be instructions, including direction not to enter on the tax return. Another option is to visit the CRA website or even Google it.

Step 8.  When you think you’re done, double check to make sure everything has been answered and input. If using do-it-yourself software, this is the time to use optimization options, if it has such a feature.  Then check the diagnostics and investigate. On this point, some software programs accept overrides and then permit e-filing, only to be rejected by CRA or end up as a CRA review.  Further, personal changes and reporting of certain assets, incomes and expenses may require separate e-filing of schedules or even paper filing of your return. The diagnostic check should identify these requirements.

A special note for proprietors – while it’s true that your tax return doesn’t have to be filed until June 15, if taxes are payable, the tax balance has to be paid by April 30 so it may be wise to jump on that year-end bookkeeping now.

There you go. Tax prep done.

 

TAX TIME:  House Flipping V3.0

How can the selling of your personal residence be a taxation issue? There is no tax on the sale of a principal residence in Canada? The gain is tax free, right?

Certainly this basic tax rule permitting an exemption from taxation on the sale of your home has been appreciated by homeowners, but over the past decade or two (or more) it has been abused by some to avoid taxation on their planned profit taking.

As a result, rules are a-changin …. again.

Again?

Unless you have sold a home since 2016, you likely aren’t aware that in 2016, in pursuit of house flippers CRA began to enforce the filing of little known Schedule T2091 used to report the sale of a person’s principal residence (Update 1.0). It doesn’t affect tax calculations, but it does introduce a tracking system for CRA’s supercomputer to identify a person’s frequency of selling their home.

Then just a couple of years back, there was the “CRA review period” extension for any real estate sale (Update 2.0). Well, not really an extension, more like elimination of the seven-year maximum review period. In other words, from now on keep your buy/sale real estate records for your lifetime. CRA can ask for a review at anytime.

So now Update 3.0 may be underway. But first, some explanation is needed to set the stage on the tax advantage afforded by the principal residence tax exemption on the sale of one’s home versus the sale of other real estate.

CRA considers a dozen factors relevant to a person’s “intention of the purchase and ownership” of any particular real estate, including a person’s home.

If CRA determines the intention of the taxpayer is to resell property, the property is not a capital asset eligible for capital gains taxation which only includes 50% of the gain as taxable income. Rather, the property is considered inventory and the entire gain is considered income and fully taxed as business income.

For example, buying vacant land with the intention to sell it to a developer could define that land as inventory, resulting in the gain being classified as income and not capital gain.

The owning of rental properties is not only a rental income business, but if rental properties are bought with the intention of being re-sold, CRA may determine that there is also the “business” of buying and selling properties. This means the properties are inventory and the gain on any sale would be included as income and not treated as capital gains.

This also applies if a person buys a house or condo, briefly lives in it and then sells it, specifically if this is a reoccurring pattern. Thus, as mentioned above, the enforcement of Schedule T2091 by CRA for tracking purposes. If CRA determines that a person is in the business of flipping houses, the principal residence exemption will be denied and the entire gain will be considered income and taxed as such.

With this background, here’s the description of Update 3.0.  If pending legislation passes, the CRA “trigger” for “house flipping” expands from the identification of a “reoccurring pattern” identified with the aid of Schedule T2091, to also include a “one-time flip” identified with any principal residence sale within the defined time period of … one year after purchase.

In other words, it will be immediately determined by CRA to be house flipping when any residential property is purchased and then sold within 365 consecutive days after the date of purchase.

This doesn’t mean a reoccurring pattern of buying and selling every couple of years will not be recognized as house flipping by CRA. Instead, this new one-year rule is designed to identify the occasional abuser of the principal residence tax exemption.

There will be exceptions to the one-year rule. This includes a birth or death, marriage or separation, new job location or job loss, insolvency, or safety, with proof having to be provided to CRA.

Will there be principal residence Update 4.0? Funny you ask. The scuttlebutt is that the government is considering some sort of taxation on the gain on the sale of any principal residence. Stay tuned.

 

TAX TIME:  Superficial Loss

Do you have faith that some shares you currently own that were of high value when you bought them, but have now crashed, are going to skyrocket in value, or at least move north again? Shares in the numerous cannabis corporations come to mind.

Some investors with this mindset will sell their current low value shares to take advantage of a seemingly lucrative capital loss, only to repurchase identical shares at the same time so that when the shares take off in value as they expect them too, they will sell them and receive the capital gain.

And, of course the newly acquired capital gain can be offset by that prior capital loss.

This is a trading scheme that is used.

However, in tax terms, this sell/buy/sell routine is defined as a superficial loss by the Canada Revenue Agency (CRA), and there are rules to prevent a taxpayer or an affiliated person, from taking advantage of this type of investment loss. If a share disposition is determined to be superficial, the capital loss is not allowable.

The time frame of the sale of the shares and re-purchase of the identical shares is the key for CRA to determine the loss as superficial or not.  If the purchase of identical shares takes place within 30 days prior to the sale of the shares or within 30 days after the sale of the shares, then the sale of the shares and the associated capital loss is deemed superficial and denied as a claim on the person’s tax return.

To the earlier point of an affiliated person involved in the purchase of identical shares. This includes a spouse, common-law partner, and also a corporation of which you or your spouse or common-law partner have controlling interest. In logistical terms, this means one spouse can’t sell the shares and the other spouse repurchase them, CRA will determine this to be superficial loss. Interestingly, children, parents or other relatives are not considered affiliated persons.

Regarding the definition of identical shares. This refers to the same class of shares of the same corporation. The quantity of shares sold and re-purchased does not have to be the same. Likewise, the superficial loss rule applies to the sale and re-purchase of units of mutual funds and exchange traded funds (ETF) if they are in the same fund and same class of units.

Best of luck with the pot stocks.

 

TAX TIME:  P.U.P.

As much as the PUP acronym may naturally refer to a family pet, by the Canada Revenue Agency (CRA) it refers to your “Personal Use Property”, and the Income Tax Act defines this as your car, furniture, appliances, clothes and on and on and on.  All the items you own, but not dogs and cats, nor gerbils, hamsters, birds, fish …

To the point, this is for real. PUP is imbedded in the Income Tax Act.

If you sell a PUP item at a gain, 50% of the gain is to be included in your income on your Tax Return.

If you sell it at a loss, you cannot claim the loss.

However, to add to the explanation of the tax reporting of PUP, there is the $1,000 rule.  That is, the minimum cost of any PUP item is assumed to be $1,000 and the minimum proceeds of disposition is also $1,000.  Basically, low value PUP items are awash for tax purposes. No reporting necessary.

As for larger value PUP items like cars, these usually are depreciating assets. It’s not often that you sell a used vehicle for more than you paid for it, except maybe during this post-COVID period of supply chain shortages.

But what about the antique car you rebuilt, or grandma’s diamond ring she gave you, or the Group of Seven painting hanging on your wall. These items clearly are worth more than $1,000 and clearly can be sold for more than their original cost to you.

When these PUP items are sold, 50% of the proceeds that exceed the original cost have to be reported as capital gains on your tax return.  And as stated earlier, if by chance these are sold for less than what you paid for them, the capital loss cannot be claimed.

Must report a gain. Can’t report a loss. Fair?

Surprise, losses can be claimed, but there are rules.

The Income Tax Act recognizes valuable and appreciating PUP items and categorizes these items as Listed Personal Property (LPP).  Allowable LPP items include artwork, rare books and manuscripts, jewelry, stamps and coins.  Not collector cars.

LLP has a set of specific rules within PUP. First, the LPP items must be identified and reported to CRA.  Once this registration is in place with CRA, the future disposition of a LPP item, if sold at a loss, is an allowable capital loss that can be netted against other LPP item capital gains.  Any unused LPP capital loss can be carried back 3 years and carried forward 7 years to net against LPP capital gains. Netting the LPP capital loss against capital gains on non-LPP PUP items or other capital gains in general is not allowed.

Why register your high value PUP items? After all, registered or not, the gain has to be reported so it appears the only advantage to register LPP items with CRA is if you believe you will have a sizable LPP capital loss to use against some LPP capital gains, and with those dispositions taking place within a 7 to 10 year period to take advantage of the capital loss.

Question. Do hotrods, diamonds, and art decrease in value?

 

TAX TIME – Sched T1135: Disclosure of Foreign Assets

“Did you own or hold foreign property at any time in the year with a total cost of more than CAN $100,000?”

If you did, CRA would like to know. And this is about assets, not employment income earned outside of Canada.

This question has been on the T1 tax return since 1997, but until recently, not much attention has been paid to it by CRA.  However, over the past 5 years, it has become more and more important to CRA as it attempts to ferret out tax revenue that is not being reported.

The $100,000 figure is defined by the aggregate value of all the qualifying foreign assets held by a taxpayer and if exceeded, the answer is “yes” to the question, then Schedule T1135 must be completed.

The T1135 requires the disclosure of foreign owned assets, whether those assets are earning income or not.

This includes funds deposited in foreign bank accounts, shares in foreign companies, interests in foreign trusts, foreign bonds, and units in offshore mutual funds.

For cash type investments, the value is determined by the highest value anytime during the year, not on the last day of the year, so removing funds prior to year end cannot be used to prevent the reporting on the T1135.

Also to be reported is real estate, including vacant land, and in some cases even artwork, jewelry and vehicles. For capital assets, the value is based on its original purchase cost plus improvements over time. The current market value of the asset is irrelevant in the determination of its inclusion on the T1135.

To speak to the significance of foreign asset reporting, in 2017 an international accord was signed agreeing to the automatic financial information exchange between counties to reduce tax evasion. Each participating country requires all their domestic financial institutions to collect financial asset information held by residents of foreign countries. This detail is then reported to their domestic tax authority, and in turn this detail is exchanged with the tax authorities of the participating countries, such as CRA. No request needed, this is now a matter of international routine for over 100 countries, Canada being one.

There are exceptions to what has to be reported on the T1135. Assets to operate a foreign business are exempt, as are personal property type assets strictly used for personal use.

To this last item, if vacation property purchased for more than $100,000 is rented, the Canadian owner must not have an expectation of profit.  Rental revenue must only offset expenses associated with that property. Otherwise, the property has to be declared on the T1135, as does the rental revenue generated.

When it comes to joint ownership of an asset, the value is divided according to each person’s original investment.  So if an asset purchase was $250,000 with equal investment from both purchasers, both would report their $125,000 share on the T1135.  However, if one person had invested $200,000 that person would report $200,000 on the T1135 while the other person would not have to report their $50,000 investment since it’s under the $100,000, assuming they have no other foreign assets.

And being married or living common-law doesn’t automatically split things 50/50. If both partners aren’t listed as owners, the value remains 100% with the listed partner.

If you have $100,000 but less than $250,000 of foreign assets to be reported on the T1135, CRA does have a simplified method of reporting. If over $250,000, much more detail must be reported.

Finally, T1135 foreign investment reporting is required not only of individuals, but also corporations.  The penalty for late filing is $25/day to a maximum of $2,500.

 

TAX TIME:  Proprietorship or Corporation

Should I incorporate? A question often posed by small business proprietors.

The initial guidance typically lies within two key areas. Is there a need to reduce “personal risk” created by the business?  Is there “profit” at the end of the year that remains within the business?

Both these act as a litmus test for incorporation since just one, or a combination of both, may make the case for incorporating a business.

Incorporating limits personal liability when it comes to business risk. If sued, a corporation is its own entity and as such, only its assets or, ultimately, its net worth, is on the line.  However, if the shareholder signs a personal guarantee, then this protection is lost, at least for that particular item – let’s say a line of credit or a lease for equipment.  This is particularly the situation for start-up corporations when no credit worthiness has been established for the corporation itself and the lender wants to ensure recourse.

Besides defaulting on financial obligations, what other risks warrant the mitigation of liability?

Is there an abnormally high physical risk to clients in terms of the product or even visitation to the place of business? Is there risk of harm to clients in terms of the quality of the deliverables, or the lack or late delivery of the product or service for which they have engaged the business?  If insurances for liability and/or errors and omissions aren’t sufficient or don’t cover against identifiable risk, a case for incorporation can be made.

The second consideration for incorporating is the level of profit that is retained within the business.  Since Canadian Controlled Private Corporations have the first $500,000 of income taxed at only 11%, this tax rate is more attractive than the personal rate for proprietors – personal taxpayers in general – of anywhere from 20% to 53% of taxable income.

It’s a no brainer then! Why wouldn’t you incorporate?

Consider this. At the end of the day, when all the business bills are paid, is the remaining cash needed to make personal ends meet? To pay all the personal bills? If the answer is yes, then the “profit” will be drained from the corporation to pay for personal living expenses.  The cash will be paid out as wages to the owner and therefore will be taxed at the higher personal tax rate.  Of course there will be no corporate tax since the “profit” has been expensed as wages.

Even if paid out as dividends to the owner, these funds come from after corporate tax dollars and then taxed personally, albeit at a preferred tax rate, nonetheless the benefit of the corporate taxation scheme is diminished.

In other words, whether paid as wages or dividends there may be little tax benefit for incorporation when all the profit has to be removed for spending to sustain personal life.

Conversely, if considerable profit can be retained within the business, then the tax benefit of incorporation will be significant.  Or is it that simple?

Investment income produced from retained earnings is considered passive income and only the first $50,000 of it is eligible for the 11% tax rate, and amounts greater than $50,000 reduce the amount of eligible income to be taxed at 11%.  To the extreme, the tax rate for the corporation could be 27%, which is the tax rate for corporate income over $500,000. So growing a large investment nest egg within a corporation is not necessarily the answer.

These points summarize the initial look-see at incorporation. There are more complex scenarios with other options that may be applicable to consider. To this end, consulting with legal and accounting professionals may be wise before making the decision whether to operate as a proprietorship or corporation.

 

TAX TIME:  Self Employment – the Business Start-Up

The number of small business start-ups, under 100 employees, that get underway every year in Canada is impressive.  In the past 10 years the number has grown from around 900,000 to over 1.2 million annually, and interestingly the numbers remained very strong during the COVID years with people out of work and doing their own thing to make money.

To put into perspective the significance of small business in Canada, 98% of businesses have fewer than 100 employees, and half of these have under 5 employees. That’s right, about 50% of all businesses in Canada have fewer than 5 people working for them.

Typically, an entrepreneurial spirited person has been dabbling at something, maybe making a product or providing a service.  Their dabbling likely leads to a chat with family or friends, maybe a professional too, that fleshes out the business concept leading to their decision to take the plunge into self employment.

Of course there are also “forced” entries into the world of self employment.  Perhaps there has been an undesirable re-defined job description, or reduced hours, or uncertain continued employment, or the loss of a job … all very real experiences amplified due to COVID.

Regardless of the reason, after the initial excitement or the stark reality, what’s next for the budding entrepreneur?

If the new business is already operating, typically there are firefighting items like registering the business, setting up a bank account and getting insurance.  If not too much time has passed, this may be relatively painless but the longer the business has been operating the more problematic it may be.  Perhaps sales taxes should have been applied or other regulatory requirements are missing like Payroll Source Deductions or Worksafe BC if labour has been hired.

Whether you are already operating a new business or pondering an entrepreneurial start-up, being successful from start to finish requires a path.  To this point, entrepreneurs succeeding at their new business are completely taken aback when their business implodes and crashes because of being successful.  Note the word implode and not explode.

Why does success lead to failure sometimes?

The lack of a plan.

Without a plan – without a “foundation” – success can crash down upon itself.

Over the past decade the survival rate of small business start-ups, fewer than 5 employees, has been consistent.  About 5% of new businesses shut down within the first year although this number is under reported since many new businesses never register so they don’t get factored into the stats.  Within 5 years about 38% have shut down, and 57% within 10 years.

These stats should not discourage.

Instead, these stats should encourage the budding entrepreneur to investigate the required steps for starting a business, a key step being the creation of a business plan. “Failing to plan is planning to fail” – a maxim for business start-up.  A business plan is an invaluable roadmap for launching, managing, growing the business, and as a matter of fact it should even address how to retire from the business.

In order to put a business concept on paper, research is needed.  Thoroughness will pay dividends by identifying strengths and weaknesses of the business concept and as importantly, of the entrepreneur, and also define opportunities and threats within the specific marketplace and the economy in general.

The business plan researches and develops three key strategies:  The Marketing Plan – product, price, promotion, unique selling proposition, competition; The Operations Plan – people, production, equipment, facilities; The Finance Plan – a five-year projection identifying assumptions about revenues, expenses, financing and cash flow.

When the process is taken step by step, its actual complexity is not overwhelming.

Although the business plan is the end product, the understanding of the business planning process itself yields a skill set for the entrepreneur to make informed and wise decisions throughout the life of the business.

 

TAX: Did you say Tax Season, or Scam Season?

In addition to the ever present hidden threats rolling around in cyber space, there is the constant barrage of “in your face” scams designed to steal your money, or worse, your identity.

At the best of times, scams run rampant.  Add tax time to the picture, and the scams ramp up. Now add COVID-19 government relief measures, organizations fund raising, and businesses selling goods and services, and the scams have multiplied exponentially.

In light of this reality, here’s some insight on how to identify and protect yourself from targeted scammers masquerading as Canada Revenue Agency (CRA).

A CRA representative will never demand immediate payment by credit card, interac e-transfer, prepaid gift cards or bitcoin. A CRA rep will never set up a meeting with you to pick up a payment. A CRA rep will never use aggressive language or send the police or threaten arrest or prison sentence.

Specifically by phone, if a CRA rep calls you they will identify themselves by an employee number. They will ask you to prove your identify by name, date of birth and social insurance number. A CRA rep will not ask for any detail from your passport, drivers license or health card.

Alternatively, after the CRA rep has identified themself, you may ask for their contact phone number and offer to call them back. Then you contact CRA directly to verify the CRA rep is a CRA employee, and call the CRA rep back.

A CRA rep may leave a voicemail, but the message will never state your personal or financial information designed to anger or entice you to call back. A CRA rep will leave a phone number for you to call but remember this doesn’t guarantee it isn’t a scam.

CRA will never use text messages or instant messaging such as Facebook Messenger or WhatsApp to communicate with taxpayers under any circumstance. If you receive a text or instant message claiming to be from the CRA, it’s a scam.

Specifically by email, CRA will only state within the email that there is a message for you within your CRA “My Account” and ask you to log into your account.  However, CRA will never offer a direct link to your “My Account”, or any link for that matter and this includes a link to take you directly to a refund or make a payment. CRA emails will never have an attachment. CRA will never ask you to reply to an email.

As a tip, look at messaging for poor spelling, grammar, math and images.  And don’t skim read.  Actually read it word for word so you have a better chance of spotting errors.

As you consider any message on your computer or phone, or listen to a person on your phone, or read a letter from your mailbox, don’t jump to the conclusion that whoever is contacting you is really who they say they are. This applies to CRA and other government agencies, charities and not-for-profits, and even businesses.  They are all subject to being impersonated by scammers.

Do your research before committing.

 

TAX:  What’s New for 2021?

First, and very importantly, those who received a COVID government benefit during 2020 and also had taxes payable qualified for an interest free extension to pay the taxes payable to April 30, 2022.  That date is coming quickly.

Ok, here are the changes for 2021 tax preparation.  They aren’t too exciting, so don’t hold your breath.

Face masks:

If you own a business that requires face masks to be worn by staff and/or clients and you supply the face masks, you can expense the cost of the masks against income on your financial statement.

If you wear a mask in your workplace and supply them at your own expense, if your employer completes a T2200 Conditions of Employment Schedule stating that you have to buy your own face masks, you can deduct that cost as an employment expense by reporting it on Schedule T777.

If neither of those two options define your situation and you buy and wear your own face masks, you will need a doctor’s note stating that the wearing of a face mask by you is medically necessary, and then you can claim the cost of the masks as a medical expense on Schedule T1-Medical.

Home Office Expense:

As it was with 2020 tax preparation, again for 2021 tax prep the government is offering a home office expense claim for those employees who worked from home in 2021 who would not normally have worked from home.  This is a claim traditionally available only to those employees who are always required to work from home, COVID or not.

For those people preferring simplicity, CRA is again offering the COVID “flat rate” method to claim the home office expense for 2021.  Noteworthy, realizing that 2021 was a full year of COVID protocol, the 2020 $400 limit is raised to $500 for 2021.

CRA is also offering the COVID “simplified” method for an employee who wishes to claim more than $500 of home office expense or wants to claim employee expenses beyond normal office type expenses. This would include expenses such as vehicle, travel, meals and entertainment, etc.

Finally, the “detailed” method is the traditional method to claim home office expenses, and for an employee who normally uses this method, they cannot choose to use one of the two “COVID’ methods.

Before leaving the home office subject, the government has introduced a non-taxable employee benefit of up to $500 for an office equipment purchase that is reimbursed by the employer.  Did you personally buy a fancy desk chair?  Your employer can reimburse you up to $500 and that $500 will not be considered taxable income to you … and you get to keep the chair!  The equipment can have been purchased as far back as March 15, 2020, but before Dec 31, 2021.  And it appears the only criterion for an employee to qualify for this non-taxable employee benefit is the fact that they worked from home sometime between those dates.

Vehicles that qualify to be used as a business or employment expense:

The traditional class 10 vehicles that are zero emission vehicles are now moved to class 54, and its maximum reported initial value for tax purposes is raised to $34,000.  The capital cost allowance rate remains at 30%.

At the same time, class 16 vehicles that are zero emission vehicles are now moved to class 55, with a maximum reported initial value for tax purposes of $59,000. The capital cost allowance rate is 40%.

Additionally, class 56 has been created for zero emission automotive equipment that are not road licensed motor vehicles (aircraft, watercraft, rail craft, etc). The capital cost allowance rate is 30%.

And yes, there are other changes, but these are the exciting ones so you can only imagine the others that weren’t mentioned!

 

TAX:  Alternative Minimum Tax

Alternative minimum tax (AMT) is a separate method of tax calculation made by Canada Revenue Agency (CRA) that runs in parallel with a taxpayer’s regular income tax calculation.

The application by CRA of the AMT method ensures that a taxpayer who is able to take advantage of various preferential tax policies, pays at least a minimum level of tax. This is accomplished by the AMT method removing the preferential deductions and tax rates that a taxpayer is eligible to use that enables their taxable income to be lowered. After the AMT method has adjusted taxable income back up to a more regular level, it then applies a special federal tax rate to calculate and arrive at the AMT minimum tax amount.

The taxpayer then pays the greater of the calculated regular tax amount given the application of all the preferential tax policies, or the AMT amount, and since the preferential tax policies often lower taxes to next to nothing, the AMT amount is what is usually paid to CRA.

Common triggers of the AMT method include:  a taxable capital gain or a loss created by the share sale of a Canadian Controlled Private Corporation, the sale of qualified farm and fishing property, the share of a partnership loss resulting from or increased by claiming capital cost allowance on rental properties; a loss from a limited partnership; carrying charges on certain investments; a loss from resource properties resulting from or increased by claiming a depletion allowance, exploration expenses, development expenses or Canadian oil and gas property expenses; a deduction for an employee home relocation loan; a deduction for security options; a federal political contribution tax credit; an investment tax credit; a labour-sponsored funds tax credit; a federal dividend tax credit; or, an overseas employment tax credit.

Given AMT’s recognition of exceptionally high income from particular sources and the calculation and identification of tax associated with that particular source of income, the AMT amount paid may become applicable to the taxpayer’s future tax reporting.

To this point, if a taxpayer must remit AMT in one year but nothing triggers the AMT method in the following year or years, the taxpayer is able to claim a tax credit for that prior AMT payment against future taxes payable. An AMT amount paid can be carried forward and credited up to seven years, but it cannot be carried back.

Why have the AMT method in the first place if it’s just going to be refunded in the future?

Remembering that the AMT method is in place to ensure that a taxpayer who has extraordinary income and/or preferential deductions pays some sort of minimum tax, the availability of the AMT tax credit, or “refunding” of taxes paid if you will, is the recognition by CRA that a taxpayer who experiences a one-off year of unusually sourced high income and/or use of preferential  deductions should not necessarily be treated the same as the taxpayer who annually has extraordinary income and/or has eligibility to use preferential tax policies.

 

TAX: Attendant Care, Nursing Home, and the Disability Tax Credit

If you have ever completed a medical claim on your personal tax return you likely know that it’s not a straightforward process. The claim involves many rules, and many variations on those rules. This leads to one of the top reasons for Canada Revenue Agency (CRA) to review tax returns so misinterpreting or ignoring the rules is not a good idea.

Two of the more complex medical claims are for attendant care expense and nursing home expense.

Fees paid to a person or business to provide professional caregiving in-home or at a residential facility may be considered attendant care expense if a person can provide a doctor’s letter stating the person requires “long-term full-time care”. The practical interpretation means the need for prolonged regular care that includes meal preparation, house cleaning, and transportation in addition to typical day to day caregiving services.

Further, a person approved for the Disability Tax Credit (DTC) by default qualifies for an attendant care claim with no doctor’s letter required.

To add some detail regarding the DTC, it is a non-refundable tax credit of about $8,700 used to offset the extraordinary costs that surround a life debilitating issue. CRA approves a DTC when a doctor provides detail of a medically diagnosed physical or mental condition that markedly restricts a person’s ability to perform basic activities of daily life.

As straightforward as the preceding description may appear, if a person has an approved DTC and also has attendant care costs, there are rules that add flexibility on how to make a claim. Here are some of the most typical scenarios.

Scenario one – for someone living at home and with a DTC, they can claim the $8,700 DTC and a maximum of $10,000 of in-home attendant care costs, or if the attendant care costs are greater than $18,700 they can claim the full attendant care expense and not claim the DTC in this case.

Scenario two – for someone living at home without an approved DTC but having a doctor’s letter as described above, they can claim the full attendant care expense.

Scenario three – for someone living in a retirement home or other assisted living facility and with a DTC, they can claim the DTC or the attendant care expense but not both.

Scenario four – for someone living in a full care nursing home and with a DTC, they can claim the $8,700 DTC and a maximum of $10,000 of attendant care expense.

Regarding full care nursing home expenses, for someone living in a full care nursing home with or without an approved DTC, they can claim key components of the total nursing home expense beyond the attendant care expense, but no DTC can be claimed if this is the case.

Noteworthy, for a person having an approved DTC, if the DTC is claimed with or without a claim for attendant care expense or other medical expenses, it may be possible to transfer any balance over what the person needs to make their situation non-taxable, to an in-home supporting person. In fact, in the case of a totally disabled person, a transfer to an out-of-home supporting person may be possible.

Finally, to be successful with any medical claim, receipts are critical. The paper trail must be explicit in detail of services rendered and the payment of them. Also, in the case of transfer to a supporting person, proof of payment by that supporting person for medical expenses is needed.

 

TAX:  COVID-19 – A self employment option?

The number of small business start-ups that get underway every year in Canada is impressive.  In the past 10 years the number has grown from about 900,000 to over 1.2 million annually, and the numbers remained strong in 2020 and into 2021 partly due to COVID-19.

Typically, an entrepreneurial spirited person has been dabbling at something, maybe making a product or providing a service.  Their dabbling likely leads to a chat with family or friends, maybe a professional too, that fleshes out the business concept leading to their decision to take the plunge into self employment.

Of course there are also “forced” entries into the world of self employment.  Perhaps there has been an undesirable redefined job description, or uncertain continued employment, or loss of a job – certainly all realities since the onset of COVID-19.

Regardless of the reason, after the initial excitement or stark necessity, what’s next for the budding entrepreneur?

If the new business is already operating, typically there are firefighting items like registering the business, setting up a bank account and getting insurance.  If not too much time has passed, this may be relatively painless but the longer it has been operating the more problematic it may be.  Perhaps sales taxes should have been applied or other regulatory requirements are missing like payroll or Worksafe BC if labour is being used.

For a new business operating successfully this doesn’t necessarily equate to survival. Entrepreneurs succeeding at their new business are completely taken aback when their business implodes because of actually being successful.

Why does success lead to failure sometimes?

The lack of a plan.

Without a plan – without a “foundation” – success can crash down upon itself.

Over the past decade the survival rate of business start-ups has been consistent.  About 5% of new businesses fail within the first year although this number is under recorded since many new businesses never register so they don’t get factored into the stats.  Within 3 years about 15% have failed, and 30% fail within 5 years.

The budding entrepreneur needs to investigate the required steps for starting a business, a key step being the creation of a business plan. “Failing to plan is planning to fail” – a maxim for business start-up.  It’s an invaluable roadmap for launching, managing and growing the business.

In order to put a business concept on paper, research is needed.  Thoroughness will pay dividends by identifying strengths and weaknesses of the business concept and as importantly, of the entrepreneur, and also define opportunities and threats within the specific marketplace and the economy in general.

The business plan researches and develops three key strategies:  the marketing plan – product, price, promotion, unique selling proposition, competition; the operations plan – people, production, equipment, facilities; and the finance plan – a five year projection identifying assumptions about revenues, expenses, financing and cash flow. Its actual complexity is not what it might appear when the process is taken step by step.

Although the business plan is the end product, the understanding of the business planning process itself yields a skill set for the entrepreneur to make informed and wise decisions throughout the life of the business.

 

TAX: Contractor Income Reporting

A contractor self-reports income earned to CRA, just as other businesses do. However, Canada Revenue Agency (CRA) several years ago began an initiative that more closely tracks the reporting of contractor income, in that the reporting of revenue paid to a contractor is no longer solely reliant on that contractor’s own self-reporting.

To be clear, the term CRA “initiative” is not so much encouragement as it is requirement. Under specific rules, CRA now requires a company that pays a contractor, to report the year’s payments made to that contractor on one of three CRA tax slips.

“Contractor” is defined as either a freelance business service or freelance construction service, with “freelance” generally meaning a self-employed individual whether proprietorship or incorporated.

The T5018 slip, although having been around for years, until recently was used little. Referred to as the “statement of contract payments” slip, CRA now requires a company that derives at least 50% of its income from within the construction industry to submit to CRA a T5018 slip for payments made to any contractor such as a plumber, painter, roofer, etc, who is paid $500 or more in its fiscal year. If payments to the contractor include GST, the amount reported on the T5018 will include the GST paid to the contractor. Amounts paid to the contractor for clearly identifiable goods supplied are not included on the T5018 slip.

A copy of the T5018 must be submitted to CRA within 6 months of a company’s year-end, with a penalty applied by CRA for late filing. A copy of the T5018 does not have to be given to the contractor.

The T4a slip, although a well-known tax slip, quietly had Box 48 added to it in 2010. This box, although used little until recently, was established for inputting payments made to contractors who provide services such as engineering, accounting, training, cleaning, etc, of $500 or more in the year. If payments to the contractor include GST, the amount on the T4a does not include the GST paid to the contractor. Likewise amounts paid for clearly identifiable goods supplied are not included on the T4a slip.

A copy of the T4a goes to both CRA and must go to the contractor. The deadline is Feb 28. To date, CRA has not been applying a penalty for late filing.

The T1204 slip, is issued by a government when any contractor is paid $500 or more in a year. Because the government is GST exempt, the amount reported on this slip will have no GST included. Amounts paid to the contractor for any goods supplied are included on the T1204 slip.

A copy of the T1204 goes to CRA no later than Mar 31. A copy of the T4a does not have to be given to the contractor.

How does a contractor report the revenue reported on these slips on their tax return?

The T5018 detail is reported as revenue directly onto the personal tax T1 Schedule 2125 or the corporate tax T2 Schedule 125, remembering that any GST included in the amount must first be deducted and accounted for separately from the revenue. Also, as per CRA rules, a T5018 does not have to be given to the contractor, only to CRA. Of course, with or without a T5018, the contractor must report the revenue.

The T4a detail is reported just as any other T4a. For a proprietor, it’s reported in the T1 tax return’s T4a input form which flows through as self-employed revenue onto the T1 Schedule 2125. For an incorporated contractor, it’s reported directly onto T2 Schedule 125.

The T1204 detail is reported as revenue directly onto the T1 Schedule 2125 or the T2 Schedule 125.

Given the newness of these slips in the bookkeeping process, it’s particularly important for a contractor receiving these slips to not input the revenue twice – once as regular revenue and once via the T slip provided to them. The classic situation occurs when a contractor paid early in the year reports that revenue in the company’s books at that time, then receives a T slip at the end of the year and enters that same revenue a second time in the company’s books.

Conversely, not reporting income that needs to be reported could prove problematic to a contractor since CRA has copies of these slips yielding the ability for CRA to track and review revenues paid to contractors more easily.

 

TAX:  E-tailing Businesses

E-commerce, now coined “E-tailing”, is the selling of goods and services through electronic means, often interchangeably referred to as digital or website or on-line or internet or mobile selling. In fact, it now includes automated banking machines and credit card selling.

Ecommerce in Canada accounted for an estimated five billion dollars in sales in 2017, the vast majority coming from on-line selling. Over 85% of Canadians admit to shopping on-line, with a reported 27% of Canadians shopping on-line every month.

Is there any doubt retailing and E-tailing compete for your consumer dollar?

With this growth and numbers like these, many years ago Canada Revenue Agency (CRA) adapted its tax returns to require the specific valuation reporting of ecommerce revenue, and even requires the identification of the websites where this revenue is generated.

As with all businesses, ecommerce business owners must complete the applicable T2125 business schedules within the T1 Personal tax return, or in the case of an incorporated business, the T2 Corporate return’s schedule 88.

When completing these tax schedules, up to five websites complete with URL, must be listed. And not just any five, the top five revenue producing websites.

These include websites owned and operated by the business that accept orders.

It also includes third party marketplace websites like Amazon, Kijiji, or Facebook that “sell” the business’ services or products, and other such websites that drive buyers to the business’ website. Websites hosted outside of Canada are not excluded from making this list.

The only websites exempted from the possibility of being in the top five are telephone directories and information-only websites.

For tax return input, determine the revenue generated by each website and calculate the percentage of this sales revenue as a proportion of total revenue generated for the entire business which also includes revenue from non-website activities, if any. The percentage is reported on the tax return for each of the top five websites.

When it comes to the expense of operating an on-line business, CRA has guidelines on how particular business expenses must be expensed. Typically, computer equipment, software and website development costs are not considered “current and deductible in the year they are incurred”.  Rather they are deemed “capital and deductible under the rules for capital cost allowance”.

In other words, these costs cannot be written off as a 100% expense when they are purchased. Instead, they are treated as an asset and grouped into a class of like-items, then depreciated at a specific percentage rate each year with that proportional dollar value claimed as an expense.

A word about GST and PST regarding ecommerce new business start-ups.

The GST small supplier exemption for businesses that have sales revenues under $30,000 is available. Noteworthy to this small supplier exemption, because sales of products and services that are sold outside of Canada are not GST taxable, in the calculation of this $30,000 small supplier threshold, any foreign sales are excluded.

PST rules in BC include a $10,000 small supplier exemption on the sale of most goods, but not all. Unlike GST, sales sold outside Canada do factor into this $10,000 PST small supplier threshold.

 

TAX:  Perks from Employers

Are you an employer who bestows awards, gifts, staff parties, even cash upon your staff? Well, it’s T4 preparation time and these perks may have an impact on what you need to report on the T4 slips.

To that point, if you’re an employee, you may be surprised by the taxable income reported on your T4.

If the collective value of non-cash items in the calendar year is less than $500 for an employee, Canada Revenue Agency (CRA) doesn’t need to know about this value. If greater than that amount, the overage must be reported on the T4 as a taxable benefit.

CRA also allows service awards for 5 or more years of $500 non-cash value, also with any overage taxable.

However, CRA does not permit the two $500 amounts to be pooled for one $1,000 value. Instead, each $500 is treated separately so any unused room in one cannot offset overage in the other.

What about social events for staff that are paid by an employer? This being non-cash in nature, it’s not taxable to the employee unless the value is greater than $150 per employee including spouse, then the overage is a taxable benefit. Only six such events per year can be paid by the employer and the attendee list for each event must involve an all-inclusive invite to staff.

Not factored into this $150 is employer supplied safe transportation or overnight accommodation. However, if the value is over the $150 then the whole event is a taxable benefit, and this now includes the cost of the transportation or accommodation if supplied to the employee.

What about cash given to staff rather than non-cash items? The tax story is different. CRA requires any cash given to an employee to be reported as taxable income. And this includes near-cash items such as gift cards and certificates since CRA for tax purpose, defines this type of perk the same as cash. So perhaps it is better to give or get an actual turkey rather than a grocery store gift card.

What about loyalty points, such as air miles? CRA for years has had the tax system in place for this ever-expanding array of programs and the values involved. However, from where the points are accumulated is key for tax reporting.

Accumulated loyalty points on a business owned card that are given to an employee are considered a near-cash gift and the full amount is subject tax. If, however an employee earns loyalty points on a personal card for the purchase of employment expenses, whether these expenses are reimbursed or not by the employer, these loyalty points do not need to be reported to CRA as income, unless the points are cashed out.

What about random give-a-ways, contests and draws?  As random as this may be for the winner, if its cash or near-cash it is a taxable benefit.  Similarly, non-cash prizes factor into the $500 maximum.

Then there is the situation with non-arms length employees, in other words, family members who work for the business. In this case, all awards and gifts are fully taxable at their full value, including the full value of non-cash gifts and personal loyalty points. Having said this, there is no definitive rule regarding taxable benefits for employed family members who participate in a staff social event provided by the employer.

Finally, and likely the most pressing question, what about swag given to staff? Those promotional items given away by businesses – logoed mugs, shirts, hats, flashlights, posters, pens, and the like. CRA allows these to be tax free benefits to employees, and even family members get them without tax consequence! Although the item must be of nominal value, so a gifted car with the company name detailed on the doors doesn’t qualify as tax free swag.

 

TAX: Pension Splitting is 15 Years of Age

It was the 2007 tax year when the government allowed couples to split pension income. This was not only an attractive tax policy, but a fair policy given Canada’s progressive tax rate system.

Pension splitting allows one spouse with a hefty pension to share the income with the other spouse who has little or no income, lowering the overall tax burden to the household

However, despite this favourable tax break, there are credits and payments that can be negatively impacted by a pension split so some arithmetic is necessary to ensure that the split doesn’t actually cost more than if it were not split.

A pension split can prevent the old age security “claw-back” that occurs when a person has income greater than the threshold amount.  However, in some cases the amount of income needed to be transferred to lower one spouse’s income to eliminate the claw-back can, in actual fact, increase the other spouse’s income to the point where the claw back now applies to them.  The appropriate split to avoid this must be calculated.

A similar issue arises with the federal age tax credit.  The transfer of income between spouses can directly affect the size of the tax credit for both spouses so it’s important that the gain in tax credit for one spouse is not offset by a greater loss in the credit for the other spouse.

Then again, in its totality, sometimes the complete lose of a credit is outweighed by the aggregate reduction in taxes created by the split.  Mathematically this is possible.

A pension split may also lead to double dipping when it comes to the pension credit.  That is, if the receiving spouse has no eligible pension income, once having pension income due to the pension split, that spouse can qualify for up to $2,000 of the pension credit, in effect doubling the pension credit for the couple. For this double dip, each spouse has to be 65 or older.

To be eligible for pension splitting, the transferring spouse has to be receiving eligible pension income such as superannuation or a private pension fund or plan or be over 65 to then include annuities and RIF payments.  Up to 50% of the eligible pension can be split with the spouse of any age but if under 65, there is a restriction on types of eligible pension.  Only registered pension plan income or pension income received because of the death of the spouse can be split.

With regards to the government’s various pension incomes, these cannot be split.  However, spouses can elect to pool this pension income and receive a shared amount of this total income, in effect splitting income and reducing overall taxes. This election is made directly to the Canada Pension Plan and not through CRA.

The process of optimizing a pension split is not simple, and if doing it by hand use a calculator, pencil and paper, and have an eraser handy!  Or consider software.

On this point a word of caution, after your returns are prepared, be sure your final tax prep step is to optimize the pension split to ensure any late changes you may have made to your two tax returns is taken into account by the software.  The smallest change can totally change the pension split.

 

TAX:  Spousal Support Payments

A common topic questioned and explained each tax season surrounds spousal support.

First and very clearly, the former spouses or partners must be “living separate and apart” for any payment between them to be considered for qualifying as spousal support by Canada Revenue Agency (CRA).

Formal signed documentation, often but not always a court order, requiring “regular periodic basis payments” that permits the recipient the “discretion as to the use of the amount”, must exist for CRA to allow the payer to deduct the spousal support payments as a dollar-for-dollar expense from income and CRA requires the recipient to report the spousal support payments received as income.

However, the term “regular” cannot be ignored. The agreement should be indefinite in longevity with descriptions of material lifestyle changes for either person that will provide grounds for altering or terminating the agreement. Typically, if the agreement has an unqualified sunset clause CRA will deny the spousal support.

Likewise, the term “periodic” cannot be ignored. Spousal support that is paid in a lump sum cannot be reported as spousal support. This includes any and all lump sum payments that release the payer from any future support obligations to the recipient.

Having said this, a lump sum arrears payment, excluding interest paid, catching up on missed regular payments, or an accelerated payment of a set of future regular payments that has been agreed upon for a reasonable purpose will be accepted by CRA as spousal support expense for the payer and income for the recipient.

Noteworthy, until an agreement is in place, any payments made cannot be considered spousal support and are not reported to CRA by either the payer or recipient. If a court order is involved, and if it states a retroactive reporting requirement, a lump sum catch-up payment, excluding interest paid, is reported by both the payer and recipient, but only for the time period stated in the court order.

Another exception that identifies spousal support occurs when an agreement specifies payment for identified expenses like rent, mortgage, medical, tuition, and the like. CRA will waive the “regular periodic” and “discretion” requirements and treat this spousal support as a deductible expense for the payer and reportable income for the recipient.

If child support and spousal support are both involved in the separation, any shortfall on the total support paid is assumed by CRA to be a shortfall of spousal support – the kids’ cash comes first – is CRA’s approach. The shortfall becomes spousal support in arrears, not child support in arrears. The amount of spousal support reported on the tax returns is only the amount paid above the required child support amount.

Further, if the two amounts are not separately stated within an agreement, the entire amount of support paid is assumed to all be child support and therefore nothing is reported to CRA on the tax returns as spousal support.

To state the obvious then, the final separation agreement should follow CRA rules and present little opportunity for misinterpretation by either party, or CRA. To this end, the use of a law office and the court system is often the course of action, but it’s not always the route undertaken. For those separated partners who draft their own agreement, it may be wise to get legal advice before putting signatures on their self-crafted agreement. As a footnote, CRA’s review of spousal support, and by default child support, is quite common.

Separation can involve difficult conversations sometimes, but once past the emotion, having unambiguous paperwork does move the process forward relatively simply not only in the beginning, but also down the road.

 

TAX:  Credits and Deductions

Generally, a tax credit is a deduction a taxpayer may be able to claim when preparing their personal tax return to lower tax liability with Canada Revenue Agency (CRA). Sometimes tax credits create benefit beyond tax reduction.

Some credits are used to help offset just federal tax and others only provincial tax, but for the most part, federal and provincial credits recognize common taxpayer expenses such as the Age Amount for those over 65, Pension Amount for those receiving a pension, or medical claims for those who are ill and have incurred medical expenses.

Other credits, often referred to as deductions, reward employment and economic investment. Such is the case for the Canada employment amount, tuition expense, RRSP contributions, and donations.

Tax credits are typically non-refundable, meaning they reduce tax owing to zero, with any amount of the credit not required usually lost. In other words, the government does not refund you the remainder. This is the case for medical and childcare expenses.

However, in some cases the balance of the non-refundable credit is an allowable carry forward for application to tax liability in future years, examples being tuition expense and donation amounts. Some credits can have their balance transferred to others, such the Disability Tax Credit.

The taxation impact of a tax credit is not always 100% of its reported value, but a percentage of that amount. In other words, a dollar is not always worth a dollar.

Typically, the universal deductions are subject to a 15% inclusion rate. For example, the standard federal personal exemption of about $13,200 really translates into approximately a $2,000 deduction against income, likewise for the $3,600 Age Amount it’s a $540 deduction and the $1,245 Canada Employment Amount it’s a $186 deduction

Donations have an inclusion rate of 15% on the first $200 and 29% above that amount. Interestingly, political contributions, money donated to a registered political party, have a 75% inclusion rate.

There are some deductions that are dollar for dollar credit. For example, every dollar of RRSP contribution nets directly against income, as are tuition expense, union dues, professional fees, childcare costs, and moving expenses incurred for relocating to a new job. Some of these are subject to a limit, and if the limit is exceeded the balance is not refunded such as childcare costs. Others have their balance carried forward to future years, such as tuition expense.

It is necessary to point out that this dollar-for-dollar deduction is against income and not against taxes due. This means the inclusion rate of these deductions against your tax liability is in fact your marginal tax rate. For example, if you make a $5,000 RRSP contribution, it reduces your income by $5,000. The tax on that $5,000 would have been say 30%, so the $5,000 RRSP deduction to income is a reduction of $1,500 in tax, which of course translates into a 30% inclusion rate.

Finally, not all tax credits are created equally. The majority are “non-refundable”, but some are “refundable”.

A refundable tax credit is paid to you if your income level qualifies you. The tax credit comes to you either by way of a tax refund such as the Canada Working Benefit and the BC PST Credit, or in some cases it is paid directly to you like the GST Rebate and the Canada Child Benefit. Refundable tax credits are tax free.

It may feel there are as many variations of outcomes as there are credits and deductions themselves. With that said, this brief overview cannot give justice to the multitude of tax credits and their workings. Be wise so you aren’t surprised.

 

TAX:  Transferring Assets to a Relative

You likely have heard the term “non-arms length” person. You may even be confident that you know the definition of “non-arm’s length.” However, what you may not appreciate is this, depending on who is defining that term, the inclusion or exclusion of certain people as “non-arms length” person may vary.

Generally speaking, non-arms length includes any person that is related to you.

When it comes to the Canada Revenue Agency (CRA), this includes blood, marriage/common-law and adopted relationships. Your children, grandchildren, parents, grandparents, siblings are the first grouping, then add your spouse and your spouse’s same group of people just listed. Finally, add the spouses of your siblings and of your spouse’s siblings.

Noteworthy, your and your spouse’s aunts, uncles, nieces, and nephews are not considered non-arm’s length relationships by CRA. Instead CRA considers them independent third parties.

Then there is the CRA definition of non-arms length relationships for corporations. Suffice it to say for the purpose of this column, a corporation is considered an “individual entity” by CRA so any corporation that you are a shareholder with 51% ownership or greater are considered operating at a “non-arms length” relationship.

So, how does all this come into play when transferring property? Here are three of the most common asset transactions between non-arms length relationships.

If you sell an asset to a non-arms length person for less than its fair market value (FMV), the asset is considered to have been sold at FMV so your taxation is based on the gain from the FMV to the price you had originally paid for it.  At the same time, the person who bought it will not be able to use the FMV as their cost of the asset. Instead, the actual cost they paid you for it will be the value used in the tax calculations at the time of their disposing of the asset in the future.

If you gift an asset to a non-arms length person, or even a non-arms length person for that matter, for taxation purposes the asset will be deemed “sold” and establishing the value of the asset for tax purposes is based on the FMV at the time the asset was gifted. At the same time, the person who received the gifted asset will have that FMV as their cost of the asset, and this will be the value used in the tax calculations at the time of their disposing of the asset in the future.

As usual with CRA rules, there are exceptions. If you transfer an asset to your spouse or common law partner, none of the above typically applies. This selling or gifting is determined to be a tax free “rollover” by CRA.

As much as the rollover appears to be a no-brainer, there are a few tax situations that make sense for a person to choose to elect out of this tax free opportunity. However, one of those situations when it does not make sense to elect out of the rollover is when a person attempts to take advantage of a loss on an asset by selling the asset to their significant other and claiming that loss on their tax return. If reviewed, CRA often determines this loss to be a superficial loss and it will be denied.

 

 

JBS Columns for the Trail Times – January to April 2021

Capital Gains & Losses

It’s tough not to pay attention to the stock market given the COVID-19 economic opportunities and threats that seem to present themselves on a weekly basis.

With that in mind, let’s say you dabble in the stock market and sell some shares for $10,000 more than what you had paid for those same shares.  What portion of the $10,000 is included in your income for taxation purposes?

If you said $10,000, you are incorrect.

If you said $5,000, you are correct.  Only 50% of capital gains are included in income and then taxed at the marginal tax rate applicable to your total taxable income that year.

A common misunderstanding is that capital gains are taxed at 50%.  The implication being a fixed rate of 50% applies to capital gains.  But the truth can’t be further from the truth.

In actual fact, because only 50% of the gain is included as income and then taxed at your applicable marginal tax rate, in reality your effective capital gain tax rate is half of your applicable tax rate because only 50% of the gain is included as income.

Don’t you love math.

Okay, what if you sell shares at $10,000 less than what you had paid for them? What is reported on your tax return?

It depends.  But to begin the process, as with capital gains, the 50% inclusion rule applies so only half of the capital loss is used.  So the capital loss for tax purposes is $5,000 and can only be netted against capital gains.

But what if you don’t have capital gains at the time?

Fortunately, Canada Revenue Agency (CRA) gives you a choice not only to use a capital loss in the current year against capital gains, but also carry the capital loss back three years against prior capital gains, or carry it forward indefinitely to net against future capital gains.

The key being, a capital loss can only net against capital gains, except in the year of death, but that’s a story for another day.

Tax pros will also identify the fact that any direct costs associated with the purchase or sale of a capital asset, such as commissions, affect the capital gain or loss accordingly.

So the favorable tax treatment of capital gains seems like a panacea for investors.  Well, a word to the wise.

If CRA reviews your investment activities and determines that you are actually in the “business” of buying and selling shares because you do so much stock market trading, CRA has the authority to disqualify you from the 50% inclusion rule.  Consequently 100% of any capital gain will be taxable.

And this isn’t limited to stock market trading.  Frequent buying and selling of any asset that normally qualifies for the capital gains exemption, for example real estate, can have its capital gains 50% inclusion rule disqualified by CRA.

So … has COVID-19 driven you to armchair day trading of stocks, bonds or real estate?  Well if it is determined that you are in the business of buying and selling assets and you are disqualified from using the capital 50% exemption, if it helps, by default then this means 100%, not 50%, of any loss will be claimable against any income.  Yes, any income not just capital gains.

Feeling any better?

 

Why should I file?

The April 30^th tax deadline is looming, and in case you didn’t hear, there’s no extension this year.

Are you expecting a refund?  There is reportedly over $750,000,000 of unclaimed refunds sitting in Canada Revenue Agency’s (CRA) bank account.  Do you want to add to CRA’s bank account, or your own bank account?

And whether you have a refund coming or not, if you want to receive any refundable tax credits such as the PST credit or the GST rebate, or if you receive benefits such as the Canada Child Benefit or the Guaranteed Income Supplement you have to file your tax return. Likewise any premium assistance for things like the BC medical services plan, requires you to file your tax return.

Bottom line, not being current with your tax filing puts government credits and benefits at risk.

Being a recipient or not of credits and benefits, if you owe taxes and if you haven’t at least filed your return, procrastinating will likely cost you money.  The day after April 30, the tax owed may have a 5% penalty tacked on, so a $1,000 tax bill is now $1,050.  Plus a1% penalty is added for each month thereafter.

Now if 5% seems like no big deal, you might want to know that CRA has the discretion to make that 5% penalty as high as 50% of taxes payable.  This means a $1,000 tax bill could jump to as high as $1,500 on May 1.

Noteworthy for this year, those who received COVID-19 benefits and owe tax for 2020 will not have any penalty or interest charged if they file their 2020 tax return on time, the key words being “file on time”.  Interest will begin to be charged next year starting May 1, 2022 on any tax balance still owing from 2020 at that time – between now and then, no interest charges.

Another incentive for filing on time is to keep you off CRA’s radar as a non-compliant taxpayer.  For those chronically late in filing, a demand to file request is generated by CRA and with only 30 days to respond, this could prove to be more than an annoyance.

Staying off CRA’s radar also includes reporting self identified mistakes within previously filed tax returns. If you discover an error or omission after filing your tax return, initiating your own request to CRA is the best policy.

It’s better to self-identify the issue rather than have CRA find it first. If an adjustment is initiated by you, it is much more likely that CRA will only assess interest and not a penalty on any tax due.

And if you don’t think CRA will identify the mistake, rest assured that the CRA super computers work hard to match data from slips reported on a tax return, with copies of slips CRA receives from employers, banks and other sources and if there is a discrepancy, CRA will contact you.

A final word, if CRA does contact you requesting action on your part, it is best not to delay in dealing with the request, even if it’s a call to CRA stating, “I am working on it”.  Ignoring a CRA request may not only cost you more money than it would have, but you may be on CRA’s radar longer than you normally would have been.

 

COVID-19:  How do you spell retirement?

With the arrival of a new year, many people make resolutions of health and prosperity.

Here’s a resolution some business owners may have made a few weeks ago, “I aspire to retire”.  A rather poignant idea when considering the changes, in some cases ravishes, to Canada’s economy being caused by COVID-19.

There is an abundance of information available to an entrepreneur to aid in the start-up and operation of a business, but how does one “get out” of business?

Pick a price and sell it.

Give it to a family member.

Just shut it down.

All are options, but recognizing the opportunities the decision to sell presents, then “getting-out” of business becomes a “planning process” and not the managing of a “one-time event”.  This often is referred to as succession planning, and approaching the sale of one’s business in this fashion should result in a more seamless and perhaps more profitable outcome because the bigger picture is under consideration rather than the sale simply viewed in isolation.

Identifying and evaluating the selling options is the first step in succession planning. Will it be a family transition, an employee buy-in, a third party buy-out?  Is it only selling the assets, or will future profitability be considered?

Look at the pros and cons of each of these remembering there are “what if” scenarios to consider such as, “What if I sell to family and it bombs – what’s the fall-out?”  This is all about the intangibles to the process.

Once the choice in approach is made, then it’s time to apply business valuation techniques – a topic deserving its own attention.  Suffice it to say that this is the quantitative side of the process.

The simplest method of valuation is to establish the fair market value of the assets of the business, and being able to prove such values.  Add them up and there’s the so called “asset” sticker price.

The more complex method of valuation includes consideration of past financial outcomes and identifying historical trends over the past three to five years, then forecasting these trends out five years and establishing a present value of those future outcomes back to today’s dollars.

This latter technique smooths out any temporary good or bad effects on the business, for example COVID-19, such that the current profitability is not the only factor in determining what is typically referred to as the “goodwill” of the business.  Simply stated, goodwill is the amount paid above the fair market value of the assets.

After this, there are sales, legal and tax considerations. This part of the process might best be handled by professionals or at least consultation with them prior to making firm decisions.

Then it’s a matter of implementing the mechanics of the sale through negotiations and agreements, all with an eye to due diligence.  And don’t assume a family sale is exempt from due diligence. The implications associated with skipping it can be devastating to family dynamics.

And don’t forget that there will be aspects of the sale that have to be reported to Canada Revenue Agency.

Finally, it’s not just a matter of “getting out” but sometimes it’s also a matter of “staying out”.  The business owner may have to commit to the new owner of the business to remain connected during a transition period, and if so, this transition period should have a specified time frame.  In the case of a family transfer of the business, ties may be strong for continued involvement.  Be prepared to face this situation and articulate an exit strategy if so wished.

 

Working & Living Abroad

How about thinking beyond COVID-19?  Let’s say you have lived and worked all your life in Canada and have an adventure presented to you.

What if you were to be offered a 12 month contract in the United States that requires you to move and live in the US while the project is underway, post COVID-19 of course?  Your spouse and kids will continue to live in Canada in your family home while you are in the US.

While living and working in the US you will be paid there and have US tax withheld.

Will you have to file a tax return in Canada and report your US earnings?  And what about tax paid to the US?

Normally the requirement to file a tax return in Canada is based on residency.  Simply put, regardless of citizenship, if you live in Canada you typically have to file a tax return in Canada.

But when a person moves out of Canada to live abroad, that person may still be considered a “resident” of Canada for tax purposes and be required to file a tax return in Canada.

This tax policy is based on what Canada Revenue Agency (CRA) refers to as “residential ties” to Canada.  Things such as still having immediate family living in Canada,  owning a home in Canada, having a Canadian postal address, bank account, service club affiliation, etc, may identify a person as a “resident” of Canada.

The basis for this rests within the tax treaty Canada has with the US and 90+ other countries, which defines the reciprocal agreements regarding where a person reports income and how taxation works.  The goal being to report fairly the economic activity within a country’s borders while preventing “double taxing” of individuals.

So to the question, will you have to file a tax return in Canada?

Given your residential ties to Canada, the answer is yes.  And you must also report your US income, in fact all your worldwide income from all sources must be reported to CRA since your residential ties identify you as a “resident” of Canada.

Fortunately if you pay tax to the US, you are able to claim the US federal tax paid as a foreign tax credit toward your Canadian tax payable.  However this is not necessarily a dollar for dollar credit since there is a maximum to the foreign tax credit.

Additionally, if you paid more tax in the US than is actually due in Canada, CRA does not refund you for any US tax over payment.  And as a final note, tax paid to US states does not qualify as a CRA foreign tax credit.

Would anything change if your contract were 24 months or 48 months, rather than the 12 months? Assuming all your residential ties to Canada remain fully intact, likely not.

Having said this, arguably the longer a person lives away from “home”, the greater the likelihood residential ties weaken which may lead to re-classification of “residency” and the person would no longer be considered a resident of Canada.

To bring the story full circle, choosing to live in Canada right now may not be such a bad choice.

 

Investment interest as a personal tax expense

At the risk of entering the world of investment advice, and please do not take anything within as such advice, from a tax perspective there may be better methods of acquiring investments than others.

Here is the basic premise.  Interest expense associated with loans used for personal or operating purposes is not a tax deductable expense, while interest expense associated with loans used for generating taxable earnings generally is.

To offer detail, in addition to the investment having to generate taxable earnings, or have the propensity to do so, qualifying interest to be an allowable expense is subject to having a clear and direct connection between the loan and the investment the loan purportedly acquired, a legal obligation to pay interest although this does not have to be in writing, and the rate of interest being reasonable.

Interest that qualifies as a tax deductable expense is classified as a carrying cost by Canada Revenue Agency (CRA) and is claimed on schedule T1-INV on your tax return.

With the RRSP investment deadline approaching given the looming tax season, I can anticipate your thinking.  But wait, before you commit to a loan to invest in your RRSP, as always with CRA there are exceptions.  In this case, the interest paid on a loan used to invest in an RRSP is not tax deductable despite RRSP growth eventually taxed when it’s cashed out.

Additionally, and understandably since the growth within a TFSA is not taxed, the interest paid on a loan for investing within a TFSA is not tax deductable.

This detail aside, there is credibility in the premise previously stated.

If you find yourself in a position of having personal loans and also possessing taxable income generating investments then perhaps following the “interest expense shuffle” may be of interest to you for tax purposes.

Cash out investments.  Pay capital gains tax if applicable.  Pay off debt.  Take out a loan.  Acquire taxable income generating investments.  Claim investment loan interest expense as a carrying cost.

Of course if the investment involves large capital gains, serious consideration has to be given to the tax consequence upon disposal. There may clearly be no tax advantage in doing this shuffle.

Noteworthy, if there is a capital loss involved in disposal of the investment, CRA will not allow the loss to be claimed if the same investment is purchased within 30 days prior to the disposal or re-purchased within 31 days after the date of disposal.  The special CRA “superficial loss” rule applies during this 61 day period that denies a claim for a capital loss on the investment disposal.

Realizing that there can be viable strategic reasons for re-investing in a losing investment, in general the typical course of action would be to dispose of the losing investment, use the freed up cash to pay off debt, and then take out a new loan to invest in something different.  This would yield the ability to claim the capital loss and also expense the new investment loan’s interest.

A final word, before undertaking investment actions, seek advice from a licensed financial advisor.

 

Tax free income, or not?

Believe it or not, there are sources of income that escape the taxman.  And surprisingly, many people are unaware of some of these.

Starting with the fun ones – the ones that US citizens envy – in Canada if you win game show prizes, lotteries and at the gambling table, there is no taxation on these types of income.  Caveat though, if CRA determines that you are highly organized and regularly gamble you will have to report gambling income on your tax return because you will be considered to be in the “business” of gambling.

Another envied tax policy. There is no taxation in Canada on inheritance you receive, even if the inheritance comes from a deceased person living abroad.  This doesn’t mean the home country of the deceased person won’t tax it before it leaves the home country, but when it arrives here, it’s not taxed by Canada.

Principal residence capital gains are not taxed in Canada, again envy south of the border.  There are many rules surrounding this income exclusion from taxation and these are closely monitored by Canada Revenue Agency (CRA), as evidenced by the recent requirement to complete Schedule T2091 that reports the sale of your principal residence on your tax return.

If you receive court ordered compensation for personal injury including class action settlements, this is tax free.

Workers’ Compensation and Social Assistance payments are tax free but must be reported on your tax return with an offsetting deduction for the same amount also reported on the tax return, the net effect being tax free income.

Government payments received for providing foster care is tax free and does not have to be reported on your tax return.

Cash gifts are tax free, assuming the gift isn’t hiding employment income.

On the employment front, there are many sources of tax free income including reimbursement of expenses, provision of uniforms and safety equipment, transportation and accommodation for special or remote worksites, contributions to a registered pension plan or private health plan, non-cash gifts totaling no more than $500 per year, strike pay, damages for breach of employment contract, compensation for workplace harassment and human rights violations.

Government grants for the myriad of programs that it operates for people and for businesses typically are taxable income.  Having said this, some are not taxable, for example payments for disaster relief are tax free.

On this point, as much as one may argue that COVID-19 is a disaster, almost all federal COVID-19 benefit payments are taxable.  Having said this, the top ups for the GST rebate and Canada Child Benefit are not taxable income and neither are  benefits based solely for the disabled.

At the same time, BC government COVID-19 benefits will not be included as taxable income.  Give credit to the BC government for income testing some of the benefits it has offered rather than simply granting the benefit to everyone only to clawback the benefit at tax time.

Sticking with COVID-19, on the business front, benefits are all taxable income to the proprietorship or corporation. Importantly, this benefit is considered revenue for the benefit period it is applicable too.  In other words, the rent or wage subsidy for the December benefit period and received in January is 2020, not 2021 revenue to report.

The take-away?  Investigate any extraordinary sources of income received before filing your personal or business tax return, especially for 2020.

 

Tax aids & benefits for persons with disabilities

For residents of Canada with disabilities there is a multitude of specific government benefits, credits and plans, or enhancements to regular benefits, credits and plans.  In order to qualify and receive these, most require a Canada Revenue Agency (CRA) approved Disability Tax Credit (DTC).

The DTC is a detailed application made on the T2201 CRA form requiring a medical doctor’s input.  To quote CRA, the person must have a “severe and prolonged impairment” affecting “activities of daily living” as compared to the average person.  And this form has to be signed by the doctor.

In certain cases, detailed letters from various health professionals may suffice for some of the tax aids available to persons with disabilities. Having said this, it is best to pursue a DTC.

With an approved DTC,  available for tax return filings is a $8,576 non-refundable credit to the disabled person, or if not needed, the credit can be transferred to a spouse or in some cases a caregiver.  For a person under 18, the DTC is increased $5,003.

In the case of a disabled child, the parent or caregiver is able to claim the DTC for the child plus claim the child’s associated qualified medical expenses.  Also, enhanced child care expenses can be claimed, and the Canada Child Benefit is topped up.

Some other tax return aids include the ability to claim expenses incurred to make a home accessible to the disabled person, both from the federal and the BC governments.  Or in the case of purchasing a home, there is a Disability Home Purchase Credit and if an RRSP is used to set up a Home Buyer’s Plan, the use of that plan is enhanced.

Regarding a tax return medical claim, attendant care expenses can be claimed whether living at home or in an accredited nursing home, and for living in a nursing home, the associated expenses for living there can be claimed as a medical expense.

Depending on level of earned income, the Canada Workers Benefit is enhanced for a disabled person. And on the employment front, there are non-taxable benefits paid by an employer such as transportation and parking.

CRA allows deductions for needed supports that enable a disabled person to work or study.  Further, the government offers an enhancement to a Registered Education Savings Plan, and for a Life Long Learning Plan set up within an RRSP Plan, there are exceptions to the rules to aid a disabled person.

Additionally, there are plans exclusive to a disabled person including the Registered Disability Savings Plan, and the Canada Disability Savings Grant and Savings Bond Plans.

An option also exists to establish a Qualified Disability Trust for those with severe disability, yielding accountable control of income and expenses.  CRA taxes this trust at lower rates than other personal trusts.

Speaking of taxation, topical for this tax season in particular, any COVID payment received that is specific to a disability is tax free.

 

Principal Residence Exemption: Use and Abuse

Likely the biggest investment most Canadians have is their home.  The term investment to describe a person’s home is not used casually since Canadians enjoy tax free gains upon the sale of their home, so the original value of the home plus any gain could significantly contribute to total net worth.

Of course where there is an attractive investment opportunity, rules and regulations tend to follow.

Simply stated, a person may claim their home as their “principal residence” and take advantage of the capital gains tax exemption when certain conditions are met.

First, a principal residence must be an “owned” house, duplex or similar, condo, co-op unit, trailer, or houseboat.  Second, a principal residence designation can only be made if a person “ordinarily inhabits” the home.  Third, the primary residence designation is only available to a Canadian resident person, not a corporation.  Fourth, a person or legal couple can designate only one principal residence at any one time.

And of course where rules and regulations exist, exceptions tend to exist.

The “ordinarily inhabits” rule.  Despite the term “ordinarily” implying normally, regularly, and that kind of occurrence, the Tax Court of Canada has sided with taxpayers who have argued that “ordinarily inhabits” includes living in a “home” at the lake for just several weeks in the summer, providing they don’t have another “owned” home in Canada.  Lots of other details have to be met, but this is the gist.

The “resident of Canada” rule.  If someone owns a home outside of Canada but is determined to be a “deemed” resident of Canada by Canada Revenue Agency (CRA) usually for employment reasons, that person can designate their foreign located home as their principal residence, provided they don’t have another “owned” home in Canada.

CRA also has rules to shut down abuse of the principal residence exemption.

For those who buy or build a home, live in it, sell shortly afterward, and repeat this process regularly, CRA may determine that their “owned” home is actually not capital property but rather “inventory” for resale and as such the capital gains exemption is not allowed.  In fact, the profit on the sale of the property is not even considered as typical capital gains that requires just 50% included as taxable income.  Instead CRA defines the gain as business profit that requires 100% of the gain to be included as taxable income.

To aid CRA in identifying these so called “house flippers”, CRA recently began requiring the submission of Schedule T2091 within a T1 tax return for anyone selling what is claimed to be a principal residence.

A more sophisticated house flipping tactic involves a person buying a home before it’s actually constructed.  After the protracted construction period, the person lives in it briefly and then sells it.  The hope being that since their name has been “on title” as owner during the construction phase, sometimes as long as 5 years, this long time frame will negate CRA’s attention and investigation when they claim it as a “principal residence” on Schedule T2091.  The really brave players at this game concurrently own several pre-construction properties and roll through them claiming each as a “principal residence” as each is completed.

Who says tax planning is borrowing?

 

Employment Expenses

Here is another typical tax planning and preparation situation to test your knowledge.

You are an employee and receive a T4 at year-end.  During the course of the year, you incur costs directly related to doing your job. Can you claim these as an expense against your T4 income?

Yes, but maybe not.

There are items an employer may require employees to supply or pay for themselves that Canada Revenue Agency (CRA) may consider a necessity to earn income and therefore allow as a deduction against T4 earnings.

But, don’t make an expense claim yet.

An employment expense claim made by an employee must be supported by a Declaration of Conditions of Employment Schedule T2200 completed and signed by the employer that details what must be provided by the employee at the employee’s expense.

The T2200 does not have to be filed with the tax return but must be available to CRA at their request. By the way, just because an employer has provided a T2200 to an employee does not mean CRA will allow the expense claim if the claim is reviewed.

Some examples of expenses include business travel, meals and entertainment, office supplies, cell phone and even wages for an assistant.

Trades people, including apprentices, who are required to supply their own tools at their own cost are eligible to claim this expense against their income earned from their trade.  This includes forestry workers.

Sometimes an employer’s place of business is not reasonably convenient for the employee to use as a regular base location.  In this case, the employee may be eligible to claim business use of home, often referred to as home office expenses.

On the topic of home office expenses, in recognition of people having to work from home in 2020 due to COVID-19, CRA has designed a special claim this year. It is a flat rate of $2/day for each day worked at home, up to a $400 claim conditional on having worked from home for a period of at least 4 continuous weeks and having spent a minimum of 50% of your normal work hours doing work related tasks during that 4 week period. Once this qualifier is satisfied, any and all days count toward the $2/day expense, up to the 200 day limit.

To make this flat rate claim, nothing is needed from your employer and you don’t have to have saved the paid receipts for the expenses. And in fact, even if your employer reimbursed you for some, not all, of your expenses, you can still make the claim.

If you wish to make a higher value home office expense claim, or include costs incurred outside of your home such as vehicle expenses or meals and entertainment, the normal routine for making the claim must be followed.  This involves a signed tax form from your employer and the provision by you of paid expense receipts.

If the employer reimburses any amount to you for any of these expenses, the allowable claim is reduced, and may even eliminate it, remembering that CRA is guided by the principle of “reasonableness”.

The use of a personal vehicle can also be an eligible expense if an employee is required to use their own vehicle for business.  This does not include travel to and from work.  If an employer reimburses an employee for all or part of their actual expenses or by the CRA prescribed flat mileage rate, the vehicle expenses are not deductible.

Can you claim employment expenses if you are the shareholder of a small corporation, in other words “the owner”, and you are on payroll as an employee?

The short answer is yes, but two conditions must be met. The first is that the expenses must be typical to what other businesses in your same industry would incur, and the second, the expenses must be typical to what other employees within your company incur.  In other words, the expenses must be reasonably similar to what an employee experiences in the industry and in the company.

 

COVID-19:  How do you spell retirement?

With the arrival of a new year, many people make resolutions of health and prosperity.

Here’s a resolution some business owners may have made a few weeks ago, “I aspire to retire”.  A rather poignant idea when considering the changes, in some cases ravishes, to Canada’s economy being caused by COVID-19.

There is an abundance of information available to an entrepreneur to aid in the start-up and operation of a business, but how does one “get out” of business?

Pick a price and sell it.

Give it to a family member.

Just shut it down.

All are options, but recognizing the opportunities the decision to sell presents, then “getting-out” of business becomes a “planning process” and not the managing of a “one-time event”.  This often is referred to as succession planning, and approaching the sale of one’s business in this fashion should result in a more seamless and perhaps more profitable outcome because the bigger picture is under consideration rather than the sale simply viewed in isolation.

Identifying and evaluating the selling options is the first step in succession planning. Will it be a family transition, an employee buy-in, a third party buy-out?  Is it only selling the assets, or will future profitability be considered?

Look at the pros and cons of each of these remembering there are “what if” scenarios to consider such as, “What if I sell to family and it bombs – what’s the fall-out?”  This is all about the intangibles to the process.

Once the choice in approach is made, then it’s time to apply business valuation techniques – a topic deserving its own attention.  Suffice it to say that this is the quantitative side of the process.

The simplest method of valuation is to establish the fair market value of the assets of the business, and being able to prove such values.  Add them up and there’s the so called “asset” sticker price.

The more complex method of valuation includes consideration of past financial outcomes and identifying historical trends over the past three to five years, then forecasting these trends out five years and establishing a present value of those future outcomes back to today’s dollars.

This latter technique smoothes out any temporary good or bad effects on the business, for example COVID-19, such that the current profitability is not the only factor in determining what is typically referred to as the “goodwill” of the business.  Simply stated, goodwill is the amount paid above the fair market value of the assets.

After this, there are sales, legal and tax considerations. This part of the process might best be handled by professionals or at least consultation with them prior to making firm decisions.

Then it’s a matter of implementing the mechanics of the sale through negotiations and agreements, all with an eye to due diligence.  And don’t assume a family sale is exempt from due diligence. The implications associated with skipping it can be devastating to family dynamics.

And don’t forget that there will be aspects of the sale that have to be reported to Canada Revenue Agency.

Finally, it’s not just a matter of “getting out” but sometimes it’s also a matter of “staying out”.  The business owner may have to commit to the new owner of the business to remain connected during a transition period, and if so, this transition period should have a specified time frame.  In the case of a family transfer of the business, ties may be strong for continued involvement.  Be prepared to face this situation and articulate an exit strategy if so wished.

 

From the Trail Times – April 2020

COVID-19 BUSINESS SUPPORT Wage Subsidy: A Dual System

Being a provider of accounting and tax prep services these days provides no shortage of announcements, changes and of course, questions. Here are some answers as of “press time”, but a disclaimer, “in this fluid situation we’re living in, things will likely change, and may have already changed”.

And last week proved this disclaimer valid since the federal government clarified details regarding the wage subsidy programs a few days after press time, which was about a week after the initial announcement.

Before describing the mechanics of the wage subsidy programs, a word to the unincorporated proprietor, these programs are not designed to support you. Instead there is the Canada Emergency Response Benefit (CERB), and to the government’s credit, CERB’s rollout has been relatively smooth other than jammed on-line portals.

Now to the latest detail regarding the wage subsidy programs, and to be clear, this is not about employees making direct application for financial support. This is about big and small Canadian corporations, and registered charities and not-for-profits, being supported to aid in retaining their employees.

The wage subsidy programs are operating as a dual system, and given the diverse magnitude of businesses, the dual system is not a bad idea. Unfortunately the introduction of the “two prongs” was made in an apparent afterthought manner. That is to say, first it was a 10% subsidy. Then it was a 75% subsidy. And as it goes now, it’s actually both subsidy rates working in parallel. As an FYI, any subsidy received will be taxable income to the business.

Claiming the 75% Canada Emergency Wage Subsidy, to qualify there must be proof that revenue has dropped by at least 30% for the month as compared to the same month in 2019, with a special process used for brand new businesses.

If revenue has dropped at least 30%, calculating the Canada Emergency Subsidy is based on 75% of each employee’s weekly gross pay. The subsidy for each employee is based on the lesser of their pre-crisis remuneration or current remuneration, up to a maximum of $847/wk per employee. An exception to this is for non-arms length employees on payroll such as the owner of the corporation who must use their pre-crisis remuneration to a max of $847/wk.

Adding the subsidy for each employee arrives at the total eligible subsidy amount the business claims for that month. The claim is made on-line, but payments won’t begin to flow until mid May. The program period for eligible employee remuneration runs March 15 to June 6.

If the 30% reduction in revenue cannot be proven, it may be possible to claim the 10% Temporary Wage Subsidy Program.

The Temporary Wage Subsidy is based on 10% of each employee’s monthly gross pay, although it’s still unclear how non-arms length employees are included, if at all.

The subsidy is subject to a maximum of $1375 per employee for the program period, to a total maximum of $25,000 for the business.

Adding the subsidy for each employee arrives at the total eligible subsidy for that month. The subsidy is claimed when paying source deductions for the month by subtracting the eligible subsidy from the “tax withheld” amount. CPP and EI remittance amounts remain untouched. It appears the system is operating so a claim can be made for March and future months.

And if the subsidy happens to exceed the “tax withheld” amount, that balance is carried forward and claimed against future Source Deduction Remittances, including months after the end of the program. The program period for eligible employee remuneration runs March 18 to June 20. Yes, these are slightly different dates than those dates for the 75% wage subsidy. Why? … who knows.

Regarding source deduction remittance payment, although the government has deferred business payments for tax and GST, the payment of source deduction remittances is not deferred.

Additional to the two wage subsidy programs, the government has created the Canada Emergency Business Account for businesses with payrolls of $50,000 to $1 million. These businesses can access up to a $40,000 loan interest free for one year, repayable by December 2022, and if repaid on time, 25% of the loan will be forgiven by the government. Application and administration is through the financial institutions.

Finally, on the personal front, delaying the filing of your tax return may not be wise since the government has stated to “file by June 1 to make sure your benefits and credits are not interrupted.”

 

From the Trail Times – April 2020

Canada Emergency Response Benefit (CERB)

For proprietors and individuals and by tax code a proprietor is an individual, there is the Canada Emergency Response Benefit (CERB).

Application for the CERB benefit begins this Monday on-line and by phone. The start date of CERB is at your choosing when making application, but benefit payments will end by Oct 3.

CERB is a $2,000/m flat rate federal government taxable benefit payment available for four months. BTW, be mindful that no money will be withheld as a source deduction.

It is available to those not eligible for EI. These are people who are wage earners, contract workers and self employed proprietors, and have lost their job or still have their job but are experiencing disrupted work, or these are people who are sick, quarantined or are taking care of someone who is sick, or are working parents having to be at home to take care of kids. The only qualification is that the person must have earned $5,000 or received $5,000 maternity or parental EI in the 12 months prior to your date of application.

If one of the above noted situations still exists for the person at the end of the four month CERB benefit period, application can be made to EI at that time.

For those with an application currently being evaluated by EI, your file will automatically be evaluated as a CERB benefit application and may be shifted to the CERB benefit if you qualify.

Those currently receiving EI may qualify for the CERB benefit when their EI period ends.

As a top up to this federal CERB benefit and all other federal emergency benefit programs including those people qualifying for EI, the BC government is offering a onetime $1,000 tax free benefit to be paid in May. Application for this provincial benefit is on-line and by phone in April.

A final note, be mindful of your choice whether or not to delay filing your tax return since the government has stated to “file by June 1 to make sure your benefits and credits are not interrupted.” Besides, if there’s a refund owing to you, why not file now? And remember, if you owe, it is not payable until August 31.

 

From the Trail Times – April 2020

TAX QUIZ: Principal residence or rental unit

The final in the series of tax planning and preparation situations presented to challenge your knowledge on personal tax.

Let’s say in 2019, an aging family member needed you to live with them for the foreseeable future. Or maybe in 2019, you decided to test the waters for living somewhere you have always thought you wanted to settle.

Bottom line, you moved out of your home but did not sell it in order to keep the option to move back to it. To cover expenses, you have rented it out.

Is your original home your principal residence or a rental property?

Not a minor point when you consider taxation rules in Canada since the sale of a principal residence is exempt from capital gains taxation.

Typically, this scenario deems the original property as sold once you have moved out, even though you have not sold it. Any gain to that point in time is tax free. Then in the future when that property is sold, the fair market value at the time of moving out is the deemed value and that value is subtracted from the selling price, with the difference then factoring into capital gains taxation.

But, this doesn’t have to be the case. If you moved and did not buy a home in your new location, you have the option to make application to Canada Revenue Agency (CRA) to keep the principal residence designation for your original home for four years from the time of moving out.

In fact, if your move was a result of employment relocation, the four year period can be extended. There are conditions surrounding this extension.

The application must be made within the year of moving out of your home. Having said this, CRA may approve a late application upon payment of a hefty penalty.

Another scenario, let’s assume you don’t own a home but you decide to buy a house, rent it out at first, and then move into it and make it your principal residence. In this case, you can apply to have the four year exemption provision approved by CRA from the original date of purchase. In essence this is buying your principal residence today, in anticipation of it one day actually being the home you live in, and avoid capital gains tax implications from time of purchase through the rental to the time of move in.

Key to these options, you can only have one principal residence designation at any one time so if you own two homes simultaneously, whether you are living in one of them or not, one will have to be classified as an investment property and subject to the associated tax rules for investment properties.

Finally, as much as this a technical point, typically when you rent a property, whether designated as your principal residence or not, the T776 rental schedule must be filed with your tax return to declare the income and expenses for that home. But don’t claim any capital cost allowance on the property. Doing so will likely complicate any principal residence designation.

 

From the Trail Times – April 2020

TAX QUIZ: Capital Gains & Losses

Here is another in a series of typical tax planning and preparation situations to test you this tax season.

Let’s say you dabble in the stock market and sell some shares for $10,000 more than what you had paid for those same shares. What portion of the $10,000 is included in your income for taxation purposes?

If you said $10,000, you’re incorrect.

If you said $5,000, you’re correct. Only 50% of capital gains are included in income and then taxed at the marginal tax rate applicable to your total taxable income that year.

A common misunderstanding is that capital gains are taxed at 50%. The implication being a fixed rate of 50% applies to capital gains. But the truth can’t be further from the truth.

In actual fact, because only 50% of the gain is included as income and then taxed at your applicable rate, in reality then, your effective capital gain tax rate is half of your applicable tax rate because only 50% of the gain is included as income.

Okay, what if you sell shares at $10,000 less than what you had paid for them? What is reported on your tax return?

It depends. But to begin the process, as with capital gains, the 50% inclusion rule applies so only half of the capital loss is used. So the capital loss for tax purposes is $5,000. However, the $5,000 capital loss can only be netted again capital gains.

Fortunately, Canada Revenue Agency (CRA) gives you a choice to carry this capital loss back three years against prior capital gains, use it in the current year against capital gains, or carry it forward indefinitely to net against future capital gains.

The key being, a capital loss can only net against capital gains, except in the year of death, but that’s another whole story.

Tax experts will also identify the fact that any direct costs associated with the sale, or disposal, of a capital asset, such as commissions, can be subtracted from the capital gain or added to the capital loss, effectively lowering the gain or increasing the loss.

In fact, the direct costs associated with the original purchase of a capital asset become a component of the cost of that asset, effectively increasing the cost that will be used in calculating the capital gain or capital loss upon disposal of that capital asset.

So the favorable tax treatment of capital gains seems like a panacea for investors. Well a word to the wise. If CRA reviews your investment activities and determines that you are actually in the business of buying and selling shares because you do so much stock market trading, CRA will disqualify you from the 50% inclusion rule. Consequently 100% of any capital gain will be taxable. If it’s of any consequence, this also means 100% of any capital loss will be claimable against capital gains.

 

From the Trail Times – March 2020

CRA: What’s New for 2019 tax prep?

There are earth shattering new items for this tax season. Hold on tightly.

CRA has changed its line numbering throughout the T1 Tax Return.

For example, line 236, “net income” as it has been known for decades, well it’s now line 23600. On the surface this may not appear to be of any consequence but considering the depth and breadth of how this line number, along with many others, are entrenched in requests by banks, insurers, etc, the impact of the numbering change may become a hassle to you.

In fairness, CRA explains that the new numbering will permit more data input and in a more organized fashion, and in general, better align its computers for various government purposes.

Of course with this efficiency, CRA gains more oversight that will allow more enforcement of Canada’s tax policy. With this fact in mind, what perhaps appears as an administrative revision really provides a major advancement for CRA’s service. Big brother is watching!

On the lighter side, the T1 Tax Return jacket has grown from 4 pages to 8 pages, and not because of all the new line numbering. CRA has now embedded Schedule 1 with its tax calculations into the jacket, plus enlarged the font and left white space for your notes.

Signature pages have changed. For the 5^th year in row, CRA has again changed the signature line location on the e-file authorization form T183. As well, CRA has renamed the T1013 Representative Request form to the “AUTH” form, but apparently if it’s being paper filed, it’s called “AUT-1”.

And how about this one, the tuition T2202a slip is now called T2202.

Direct deposit for refunds can still be completed with the e-filing of your T1 Tax Return, but cannot be set-up with a paper filed return. If direct deposit is to be set up at any time other than at e-file time, you are on your own.

Making a payment to CRA got easier, and maybe more dangerous? You can now pay by credit card, e-transfer and even through third parties like Pay Pal. Not much detail on this yet.

Ok, so what about actual tax changes for 2019 you ask?

The Working Income Tax Credit is now called the Canada Workers Benefit. This is a refundable tax credit for low income earners and the credit has been increased by $170 but more significantly the credit will now grind down to zero at a “higher” low income.

Moving into 2020, the government has introduced the Canada Training Credit (CTC). It will work in the background accumulating by $250 in credit per year to a lifetime maximum of $5,000 that you can use toward fees for skills training. Who and how you qualify for this CTC has not been announced in any detail. The CTC will be shown on your Notice of Assessment like your RRSP and TFSA contribution room.

Finally, and perhaps as no surprise, medical cannabis with a doctor prescription is now a legit medical claim.

So exciting tax changes for 2019, right?

 

From the Trail Times – March 2020

TAX QUIZ: Gifted shares

This tax season, here’s a challenge to your knowledge of personal tax. This is another in a series of typical tax planning and preparation situations to test you.

When you graduated, your favourite grandma gave you $10,000 worth of publicly traded shares.

She only paid $1,000 for them about 20 years ago. Despite the gain, she wanted to give them to you rather than sell them and take the profit herself.

It’s been a couple of years since you graduated and … you’re still looking for work, but that favourite grandma of yours, well she just became the most favourite grandma in the world because you just sold those shares she gave you for $25,000.

But, do you report this on your tax return? If so, how much? That’s a $24,000 capital gain. Or is it?

To figure out your capital gain, the average cost base (ACB) is what those shares were deemed to have been worth the day they were gifted to you, so $10,000. Not the $1,000 grandma paid for them years before that.

Your capital gain is then calculated by subtracting the ACB from the proceeds of the sale of the shares, and then subtracting the commission, say $500, and any other direct fees associated with the sale of the shares.

This leaves you with a capital gain of $14,500, and as per Canada Revenue Agency (CRA) rules, only half of that gain has to be reported as income on your tax return, so $7,250 is your taxable capital gain that will be taxed at your marginal tax rate.

But back the bus up! Doesn’t the $10,000 gift itself have to be reported as income on your tax return? And what happened to the apparent $9,000 gain that existed at the time of the gift?

First, there is no “gift tax” in Canada. Having said this, in the case of capital property such as land, buildings and shares, CRA assumes a gifted asset is deemed to have been sold by the owner on the date of the gifting and any gain or loss is reported by that person on their tax return at that time.

So back to the second question, grandma reported the capital gain the year she gifted the shares to you. Since the deemed value on that date was $10,000, on that year’s tax return she would have reported a $9,000 capital gain, or more accurately, a $4,500 taxable capital gain since only half the gain has to be included as income.

‘tis better to give than receive?

 

From the Trail Times – March 2020

TAX QUIZ: US income

This tax season, challenge your knowledge on personal tax … fun? Here is another in a series of typical tax planning and preparation situations to test you.

In 2019 you earned $5,000 of US dividends inside your Canadian brokerage account. You also paid $750, or 15%, tax to the US. These are US dollar amounts. The amounts have been converted to Canadian funds by the brokerage firm so the total revenue is $6,500 and the tax paid is $975. You actually received $5525 deposited into your account.

Do you report the full revenue amount and tax paid, or do you just report the net amount of $5525 you actually received?

You report the full revenue of $6,500 Canadian dollars on your tax return. You also claim the $975 Canadian dollars of tax paid to the US.

Because of the Canada-US Tax Treaty, Canada and the US recognize tax paid to their country by someone not living in their country. In that way, a person is not double taxed.

Claiming the US tax paid on your tax return is using the foreign tax credit (FTC). The FTC rules are complex. A key criterion is that you would have paid as much tax in Canada on those earnings as you actually did pay to the US.

In this case then, the tax on $6,500 of dividend income from Canadian sources would warrant about $1,300 in taxes to Canada. You paid $975 to the US. So, recognizing the $975 of tax paid to the US, Canada Revenue Agency (CRA) will require you to pay another $325 in tax to Canada on that $6,500 of revenue.

However, if those tax amounts were reversed and you were required to pay $975 to Canada and you had paid $1,300 to the US, CRA will not refund the extra $325 you paid to the US, nor will CRA apply that $325 toward any other tax you owe in Canada.

Your brokerage firm did not convert the US dollars to Canadian dollars. What do you do?

You do not report US, or any other foreign currency, on your Canadian tax return.

Typically you use the average annual Canada-US exchange rate as published by CRA. However, if you know the precise timing of a financial transaction, the exchange rate for that month, or even day, should be used. If any foreign currency conversion is reviewed by CRA, a different applicable exchange rate may be determined by CRA and your return reassessed.

 

From the Trail Times – March 2020

TAX QUIZ: Charitable Giving

This tax season, let’s challenge your knowledge on personal tax. Here is another in a series of typical tax planning and preparation situations to test you.

You are a typical Canadian. You have a big heart. You are a charitable giver.

For whatever reason, this year is special. You want to give a big sum to your favourite registered charity and have three choices on how to do it.

Dear to your heart is a piece of art you bought for $3,000 two years ago. You were pretty sure it had increased in value so you wanted it insured and recently you got a professional appraisal that was signed off at $5,000.

A wise person told you to buy some publicly traded shares a few years back. You are happy you did because the $3,000 you invested has grown to a $5,000 value if you were to sell them today.

You are willing to give your artwork or your shares, or you could simply cut a cheque for $5,000. It likely means all the same to the charity, but is there a better method for you, given Canada Revenue Agency (CRA) tax policies.

You bet there is a difference to you!

The clear winner for you is the gifting of the $5,000 of publicly traded shares.

Normally, if you sell shares, you pay tax on the capital gain. Or if you gift shares but not to a registered charity, you pay tax on the capital gain deemed to have been earned given the current value of the shares at the time of gifting.

However, if publicly traded shares are directly gifted to a registered charity, CRA does not require you to report the capital gain, plus you get the applicable percentage of the charitable gift deduction to reduce your taxes.

In this case, the tax savings created by not having to report the $2,000 capital gain is about a $500 tax savings, plus having the charitable gift deduction of the $5,000 gift of shares, about a $1,400 tax savings, means about $1,900 in total tax savings.

Cutting a $5,000 cheque will only give you the charitable gift deduction, about $1,400 in tax savings to you

Gifting the personal artwork will only allow the original cost of $3,000 as the charitable gift amount, despite the $5,000 valuation, so about an $850 tax savings. As set out by CRA, personal property assets must but owned for three years before their current value is the allowable charitable gift amount. You have only owned it for two years.

If you had owned the artwork for more than three years, the charitable gift deduction would be based on the $5,000 appraised value and would yield about $1,400 in tax savings, the equivalent to cutting a cheque for $5,000.

‘tis better to give than receive, maybe just do it wisely…

 

From the Trail Times – February 2020

TAX QUIZ: RRSP contribution room

This tax season, would you like to challenge your tax knowledge? Here is another in a series of typical tax planning and preparation situations to test you.

You just landed your first serious job in 2019. You have made $55,000 in 2019. Your employer does not offer a pension plan. You want to contribute to your Registered Retirement Savings Plan (RRSP) and take advantage of some tax savings. What is the maximum you can contribute to your RRSP?

If you said 18% of your earned income, you are correct. So $9,900 is the contribution room created and the maximum you can contribute.

What if you made triple that at $165,000?

Must be $29,700 according to the math, right? Wrong. Canada Revenue Agency (CRA) limits the allowable contribution room. For 2019 it’s $26,500. In other words, you max out RRSP contribution room at an income of $147,222.

And what if in past years you have earned income but not paid attention to making RRSP contributions. What happened to that contribution room? Have you lost that opportunity?

No. Unused RRSP contribution room accumulates and carries forward to the year you turn 71.

Assuming you have unused contribution room carried forward from prior years, adding the $9,900 of new contribution room, how much can you contribute to your RRSP in 2019?

In any given year, assuming you have the contribution room, you can contribute up to the point of becoming non-taxable.

Oh no! You discover you’ve actually contributed more to your RRSP than your total available contribution room? What do you do?

CRA allows a contribution overage to a maximum of $2,000 at any given time without requiring you to remove the funds.

If your over contribution is greater than $2,000, the amount in excess of $2,000 must be removed and if not, CRA will apply a penalty and interest.

What if your employer offers a private pension plan and contributions are made to it? How much contribution room is created with your $55,000 income?

It depends. A pension adjustment is made and that amount is shown on your T4. This reduces the 18% contribution room amount. Reliance on tax planning and CRA assessments is the key to knowing your contribution room when a pension adjustment is involved.

Regarding tax planning for your 2019 tax filing, what is the last day you can make an RRSP contribution?

If you said March 1, you’re wrong, for 2020 anyway. The cut off is 60 days after January 1 but being a leap year, it’s February 29 rather than March 1 this year. Oops, that’s wrong too. This year it’s March 2 since February 29 is on a Saturday.

 

From the Trail Times – February 2020

TAX QUIZ: Childcare expense

This tax season, challenging your knowledge on personal tax might be enlightening. Here is another in a series of typical tax planning and preparation situations to test you.

You and your spouse both work, you make $50,000 and your spouse makes $20,000. You have a 3 year old child and childcare costs are $1,000 per month so $12,000 annually. Can you deduct the childcare cost as the higher income earner?

No you can’t. But your spouse can.

The lower income earner is allowed to make the claim, but only to a maximum of $8,000 as per Canada Revenue Agency (CRA) rules.

Noteworthy, if the child were 7 to 15 years of age, the maximum claim for that child would be $5,000. A disabled child qualifies for an $11,000 claim, regardless of age.

Having said this, there is a maximum claim threshold defined by two-thirds of the lower income earner’s income, so in this case the maximum allowable claim would be $13,333, therefore the $8,000 maximum would still apply.

Variation on the above scenario. Let’s add a second child to the family who is 14 years of age and doesn’t require any childcare. The rest of the family situation is as described before. What is the maximum allowable childcare expense claim?

As before, any claim must be applied to the lower income earner. However, the maximum claim for the household is now the younger child’s $8,000 plus the older child’s $5,000 for a total of $13,000 maximum.

Given the $13,000 maximum, the full $12,000 childcare expense can be claimed even though there is no childcare expense directly associated with the 14 year old child.

In other words, the calculation of the total childcare expense claim includes the addition of all allowable maximums for all children aged 15 and under. Of course the maximum allowable claim amount is subject to the two thirds lower income earner rule.

Okay, a third scenario. Only one parent works in the house. What is the maximum allowable childcare expense claim?

If you said zero, you are correct. Both parents must be working to make a childcare expense claim.

Or, do they really both have to be working? Here’s scenario four, one parent is working and the other is enrolled in school. Or both parents are in school.

The childcare expense claim can be made with parents in school, but only if the parent or parents are enrolled in full-time studies. Part-time enrollment disqualifies a childcare expense claim.

Scenario five. In the case of a single parent who is working or is a full-time student, the childcare expense is allowable to the maximum described previously.

And the final scenario. A parent earning income with a home based business. This does meet the definition of a working parent so the childcare expense claim will qualify subject to the CRA rules previously described.

 

From the Trail Times – February 2020

TAX QUIZ: Medical, dental and vision claim

This tax season, challenging your knowledge on personal tax is nothing but fun. Here is another in a series of typical tax planning and preparation situations to test you.

You want to make a medical expense claim and here’s your pile of slips sitting on your kitchen table. What receipts can you include?

1. Crutches for your daughter for soccer injury – yes, as medical equipment
2. Tylenol as prescribed by your doctor – no, regardless of doctor prescription because over the counter items are not allowable
3. Vitamins as prescribed by your naturopath – no, regardless of who prescribes them
4. Gluten free food for your son – yes, but only the incremental expense above the normal cost for that type of food
5. Medical pot obtained with a Cannabis Regulations document – yes, only with this official document
6. Eye examination for the family – yes, but only the portion not covered by the government
7. Prescription sunglasses – yes, but must be a corrective prescription
8. Contacts – yes, but must be corrective prescription
9. Travel insurance including trip cancellation coverage – yes, but only the health insurance portion of the premium
10. Extended health plan premiums shown on your T4 – yes, but the input of this value is with the T4 schedule and transfers to the medical schedule
11. Private extended health plan and private dental health plan premiums – yes, but any portion paid by an employer is not allowable
12. Medical Services Plan (MSP) premiums – no
13. Tutor fees for your certified disabled child – yes, but must be paid to government registered educators
14. Fitness club membership & aquatic center pass – no, neither are allowable even if prescribed by a medical professional
15. Travel from Trail to Nelson for medical referral – yes, if the service is not available in Trail and since the distance is greater than 40km from home
16. Travel from Trail to Castlegar for medical referral – no, since less than 40km from home, regardless of the fact that the service is only available in Castlegar
17. Taxi ride from park to hospital 5km away when you twisted your ankle – no, since less than 40km drive
18. Ambulance fee for transfer of child from home to hospital – yes, for the portion not paid by government and is to or from a public or licensed facility, regardless of distance travelled

So you have the allowable expenses identified. It’s a collective household claim so add them all up for everybody in the house.

So you have them added up. The total of the allowable expenses must surpass 3% of net income so it makes sense to claim them on the lower income earner’s return. And only the portion over the 3% is that effective tax deduction.

It is a non-refundable credit so only the amount needed to reduce tax liability to zero is used. The balance is not refunded.

 

From the Trail Times – February 2020

TAX QUIZ: Business losses

This tax season, let’s challenge your knowledge on personal tax.

Really?

Well here is one in a series of typical tax planning and preparation situations to test you.

Ok, let’s say you have a regular full time job and you also operate a farm that grows some cash crops plus you raise chickens. You also happen to live on the farm property.

In 2019 you turned another loss. This year it was $50,000. You have had losses almost every year for the better part of a decade.

Is the $30,000 farming loss a deduction that can be netted against your other income?

It depends.

Given the continuous annual losses, Canada Revenue Agency (CRA) would likely review the farm operation and determine this farm is a hobby, and not a business. In other words, it’s not likely this farm will turn a profit, and in fact CRA would argue that the owner has no profit motive, especially considering the owner works full time at a regular job.

However, in the case of a farm determined to be a business operation, the allowable loss that can be claimed on a tax return is calculated by taking only $2,500 of the first $10,000 of loss and adding 50% of the remaining balance of the loss. In this case, it would be 50% of $40,000, so $20,000 plus the $2,500 for a total loss of $22,500. This is referred to as a “restricted farm loss”. This reduced loss calculation is used because of the favorable tax regime CRA affords farming businesses in general.

Now let’s say you don’t live on the farm property. Is the farm operation then automatically considered a business operation?

No. Where you live is not relevant.

A scenario that doesn’t involve a farm. Let’s say you have a regular full time job and you also run a computer repair business out of your home. You have a loss almost every year, or at best you breakeven. Can you use the business loss against your other income?

Just like the farm, it depends. As each successive year goes by that you claim the business loss on your tax return, the odds increase for a CRA review. At that time, CRA will likely determine your operation is a hobby and not a for-profit business operation, and the loss will be denied. In fact, CRA could deny losses claimed in past years and re-assess those tax returns and require tax, penalties and interest be remitted to CRA.

On that note, in 2017 CRA announced that taxpayers reporting a “prolonged period of business losses” may be subject to review. Reading further, “prolonged period of business losses” is defined as business losses reported for two consecutive years. Yes, two years. New business start-ups not exempted.

 

From the Trail Times – January 2020

SMALL BUSINESS CORPORATIONS

If a corporation meets all of the following criteria, then it typically qualifies by Canada Revenue Agency (CRA) as a Canadian Controlled Private Corporation (CCPC).

The corporation must be resident in Canada and not controlled by a non-resident, a publicly traded company or a Canadian company that lists its shares on a foreign exchange. And it must not have any class of its shares traded on any stock exchange.

If a corporation qualifies as a CCPC, CRA allows a small business limit of $500,000 of after expense active income. “Active” meaning, income generated through active business operations.

The tax rate levied on this first $500,000 of active income is reduced to 12% in BC from the normal 27%, an incentive by federal and provincial governments to encourage business development. Active income over $500,000 is taxed at regular corporate rates.

Realizing that this favourable tax rate applies to active income earned by the CCPC, what about “passive” income earned from an investment portfolio held by a CCPC?

Given the fact that the CCPC designation itself exists because government chooses to stimulate the economy, then it’s apparent that a CCPC engaged in producing significant passive income rather than focused on producing products and services isn’t necessarily aligned with the government’s intention.

In addition, if CCPC passive income were taxed at the 12% active income rate, it’s obvious that a CCPC shareholder, in other words the owner, would have a tax advantage over a sole individual investor who would be subject to personal tax rates of up to 50%.

As such, the taxes paid by a CCPC are adjusted due to passive income earned, but only on the incremental amount of passive income over $50,000.

Often referred to as a “grind-down” tax policy, for every dollar of CCPC passive income earned that exceeds the $50,000 threshold, there is a $5 lowering of the $500,000 CCPC small business income limit.

For example, if a CCPC earns $90,000 of passive income in a fiscal year, the CCPC’s small business income limit lowers to $300,000. The math is $90,000 less the $50,000 allowable threshold x $5, so this means $40,000 x $5 equalling $200,000 deducted from the normal $500,000 CCPC small business income limit.

To the extreme, once passive income earned reaches $150,000, the CCPC small business income limit is zeroed, eliminating the lower CCPC tax rate advantage.

The reduced income limit is applied the following fiscal year.

Why is there a $50,000 passive income threshold? CRA permits a CCPC to hold wealth and earn this amount of investment income annually to acknowledge financial needs required for business expansion, and planning for the unexpected.

 

From the Trail Times – January 2020

SHADY SUPPLIERS

You own and operate a business. You purchase goods and services from other businesses so that you can do what you do in your business that makes you money.

You pay your suppliers. You pay them GST if their goods and services are GSTable and if they are registered.

Sounds like the normal course of business, among businesses. No risk to you as a business owner, right?

What if a supplier is not registered for GST and should be? This business has not been charging you GST and it should have been. When this is discovered by Canada Revenue Agency (CRA), who has to pay the GST?

Well if there is a retroactive GST registration for that business, then you will likely be asked to pay all the back-tax of GST that should have been charged to you. However, you then claim that GST as an input tax credit (ITC). The ITC amount is subtracted from the GST you have collected on your sales, effectively lowering the GST you remit to CRA such that the GST you paid does not impact your expenses.

What if a supplier is registered with GST, charges and collects GST on the sales it makes to your business, but then does not remit the GST it has collected to CRA?

Worse, let’s say this shady supplier vanishes. In effect stealing the GST it’s suppose to remit to the government.

You’re safe, right? After all, your business paid the GST charged on the shady supplier’s invoices.

Unfortunately your business may not be in the clear.

As it goes, in the normal course of business your business has been including the GST paid on the goods sold to you by the shady supplier as ITC. This amount has been reducing the GST your business has been remitting to CRA.

This means CRA has been ripped off the GST owed by the shady supplier, and at the same time, CRA has allowed your business to claim that GST as an ITC.

This is a double hit to CRA, and CRA has recourse, and that recourse may involve your business.

Assuming the vanished business can’t be found by CRA and the shady supplier made to pay-up the GST, then CRA pursues the blameless businesses that have purchased from the vanished business. CRA reverses the ITCs claimed and forces the blameless businesses to pay back the ITC amounts to CRA.

How can this be possible?

CRA argues, and the Tax Court of Canada has agreed, that when a business purchases a good or service, the payment for that good or service must be paid to the “real supplier” in order to be entitled to claim the ITC on that good or service.

To this end, it is up to the purchasing business to prove to CRA that the business named on a paid invoice is the same legal entity that supplied the good or service. This involves logging into the government’s GST Registry and matching the business name with the GST number, and confirming both appear on the invoice. In fact, CRA recommends getting a copy of the driver’s license of the proprietor, or of the shareholder in the case of a corporation.

Is it worth the effort? What is the value of your ITC with each supplier?

 

From the Trail Times – January 2020

EMPLOYEE BENEFITS

Is your T4 showing more income than you know you were paid?

People are aware of their net pay deposited each pay day and of course we know the T4 indicates total, or gross earnings. But what makes up this gross amount?

In all likelihood there is more in that amount than your wages. This is due to taxable benefits your employer is providing you. But not all employer provided benefits are taxable.

Group insurance premiums, excluding extended health insurance, paid by your employer on your behalf are considered income and included in your gross earnings. If you co-pay some of these premiums, a box on your T4 will indicate this amount and when input during tax prep, this amount contributes toward your medical expense deduction if you meet the necessary threshold amount.

The types of group insurances that are considered a taxable benefit include personal life, dependant life, accident and critical illness. Short or long term disability insurance premiums are not a taxable benefit if paid by the employer.

However, when an employer pays disability insurance premiums for you, if there ever is a payout of disability benefits to you, this benefit is considered taxable income. Since the benefit payout amount is designed to reflect your typical net take home pay, having the benefit taxed may create a financial burden. To avoid this risk, it may be better for you to pay your own disability insurance premiums. Then any disability benefit payout is not considered taxable income and the full benefit ends up in your hands.

Sometimes employers and employees agree to non-group insurance coverage. The premium for these individual plans if paid by an employer, is a taxable benefit just as with group insurance plans. However, unlike a group plan, if disability insurance is included in an individual plan it is a taxable benefit.

The contribution to a registered pension plan by your employer on your behalf is not a taxable benefit. At the same time, there is a pension adjustment input on your tax return that lowers the calculated RRSP contribution room.

In the case when an employer offers a matching program with direct deposits into your personal RRSP investment portfolio, the employer’s contribution is considered a taxable benefit to you. However, there is no effect on the calculation of RRSP contribution room.

Tuition reimbursement from your employer is not a taxable benefit, and neither is a bursary or scholarship given to you or a dependant of yours.

A company provided cell phone is not a taxable benefit other than overage charges for any personal use such as long distance. Likewise, equipment purchased by your employer so that you can work at home is not a taxable benefit. On the flip side, a parking pass paid by the employer is a taxable benefit.

Finally, non-cash awards and gifts to employees are non taxable benefits if the value is less than $500 but as a word of caution, this category of employee benefits is extensive in rules and regulations.

Taxable benefits can add up considerably and this additional “income” reported on your T4 does affect your tax outcome, albeit behind the scene.

 

From the Trail Times – April 2019

CRA PENALTIES & INTEREST RATES

CRA raised its prescribed interest rates, on April 1^st of 2018, the first time in 5 years and the second time since 2009.

A T1 tax return filed after the deadline of April 30 that has taxes due is assessed a penalty calculated on the tax owing. This was 5%, but is now 6%. The interest charged on the balance was 1% per month, but is now 2%, and since it’s compounded daily, that’s an effective rate of about 27% annually.

And if a taxpayer files late twice within a four year period, the late penalty is doubled to 12% and the monthly interest charge also doubles to 4%. That’s scary math.

The late filing infractions are not applicable to those taxpayers who file on time, have taxes payable but don’t pay them. As much as there is a balance due, because the taxpayer filed on time, CRA only charges the 6% annual interest rate.

So as a tip, regardless of the ability, or inability, to pay taxes due, file your tax return by April 30.

On the flip side, the Tax Court of Canada has been siding with taxpayers over the past few years resulting in some softened penalties by CRA, most notably the penalty charged against the “under filer”.

This is the taxpayer who repeatedly files incomplete returns in terms of income earned. When CRA matches missing slips to the taxpayer’s return, an automatic reassessment is completed by CRA and in turn, CRA applies the “failure to report income” penalty to get this taxpayer’s attention.

If a taxpayer accidentally fails to report on their tax return a source of income greater than $500 twice in a four year period, CRA assesses the lesser of 10% of the income not reported and 50% of the shortfall of the taxes that should have been paid less what was paid. The penalty is calculated using the last revenue that was not reported. The math aside, the old penalty regime applicable to this taxpayer effectively gave CRA arbitrary penalizing power.

So as much as the reduced penalty is good news, it’s wise to file a complete return and if some form of revenue is missed, inform CRA. Typically CRA will not assess the penalty if the taxpayer self-identifies an error.

Then there is the filing of false statements and deliberate omissions. If proven, in these cases the CRA penalty applied is the greater of $100 and 50% of the wrongful tax savings. Don’t be lulled by the $100. Note that it’s the greater of these two amounts, not the lesser of the two amounts. If however, there is a change of heart by the taxpayer and a voluntary correction is made, the CRA penalty may be avoided.

The take away from this discussion, is for a taxpayer to put forth the diligence to rectify and prevent future occurrences. The Tax Court of Canada has established that a taxpayer who makes the effort to correct a T1 tax return filing and who also makes the effort to prevent such a situation in the future may be exempted from a penalty.

To this point, a T1 adjustment to correct a tax filing for any of your last 7 tax years could prove to be a relatively cheap fix for what could otherwise be something very costly.

 

From the Trail Times – April 2019

HAPPY RETIREMENT HERE WE COME

Several pay cheques into 2019 now and have you noticed anything different to your net take-home pay?

Likely not, so don’t panic.

Then again, it may be important to know that starting this year and over the next 5 years, Canada Pension Plan (CPP) premium contributions deducted from your pay cheque and remitted to CPP on your behalf by your employer will rise.

The current contribution rate is 4.95% of your pay and this will increase by a total of 1% to 5.95% in 2023.

Speaking of employers, their matching contribution to each employee will also increase by the 1%.

This is part of the government’s announced enhancement to the CPP.

Currently the program is designed to self sustain itself with employee and matching employer contributions such that at age 65 the CPP paid benefit to you should reflect about one quarter of your life time average weekly earnings, assuming you worked and paid into it for about 40 years.

The government’s goal is to increase the one quarter of your weekly average working income, to one third of your weekly average working income. May not sound like much, but that is a 33% increase in the CPP benefit pay upon retirement.

To be clear, this will not all be accomplished simply by increasing the contribution rate by 1%. The maximum CPP pensionable earnings will be aggressively increased over the next seven years from the current $56,000 to $70,000, a $14,000 increase.

To put this in perspective, it has taken about 15 years to achieve the last $14,000 increase in the maximum pensionable earnings from $42,000 to $56,000.

This means that when the changes are fully in place in 2025, 5.95% of up to a maximum of $70,000 in annual earnings will be subject to CPP premium contribution. That’s about $4,000 deducted and remitted annually.

For those earning less than $70,000, the 5.95% will be applied to the lower earnings.

And of course, the employer will be matching the amount. And yes, the self-employed person pays both portions, because after all, you are both employee and employer.

The full impact of this change won’t be felt for about 40 years, when the newly entering workforce of young Canadians retires in about 2060.

Nonetheless, those who still have 20 plus years left of paying into CPP, will see some significant benefit for sure.

Finally, since it’s tax season, a reminder that for employees, the CPP premium contributions deducted from your pay are reported on your T4 and provide a 15% deduction from personal taxes payable.

For employers, the matching CPP premium contributions you make on behalf of your employees, is a payroll expense deduction that reduces business income, therefore reducing business tax.

And if you are self-employed, you guessed it, you get to use both as deductions.

 

From the Trail Times – April 2019

DEPENDANT TAX CREDITS

Canada Revenue Agency (CRA) recognizes that in certain circumstances, a person may financially and otherwise, support another person. To this end, there are several non-refundable tax credits available.

Before describing these support credits, it’s important to define a non-refundable tax credit. This type of credit has its effective credit amount limited to the amount needed to reduce a person’s tax liability to zero. If any amount of the tax credit is “left over”, that amount is not refunded to the person. It simply evaporates.

The “spousal credit” is likely the best known of these support tax credits. When one spouse is not earning any income, their standard “personal credit” amount – the deduction that all tax filers are eligible for – is not needed and can be transferred to the spouse earning income.

This is an $11,000 tax credit for 2018 tax prep.

However, the amount available for transfer is reduced by any earnings made by the lower income spouse so it doesn’t take much to reduce this $11,000 tax credit to zero available for transfer to the higher income spouse.

As is sometimes the case when there is a spousal credit, the dependant spouse has a mental or physical infirmity. In these cases, there is a $2,000 top-up to the spousal credit. A Disability Tax Credit (DTC) certificate does not necessarily have to be approved by CRA for this top-up to apply. However CRA may request proof of the medical infirmity from a doctor.

An extension to the spousal credit is the “eligible dependant credit”. For years it was referred to as the “equivalent to spouse credit”.

This support credit is available to a person who does not have a spouse but supports another family member, much like in the same way one spouse may support the other spouse, thus the original term that described this credit – equivalent to spouse.

The dependant must live with the person making the claim. Typically this claim is made by a single parent with a child under the age of 18. However this credit also includes the support of an infirm adult child, parent, grandparent or other such family member. Again a DTC is typically not necessary. A doctor’s note should suffice if requested by CRA.

In 2017 a new support credit was introduced called the “Canada caregiver credit” that in effect combined and simplified three existing convoluted medical credits. However, this new credit no longer permits a claim by a person who is supporting a healthy parent or grandparent over 65.

If a relative who is 18 or older is dependent on a person because of a mental or physical infirmity, that person can claim a $7000 credit. The amount of the credit is reduced as the earnings of the infirm relative increases above $16,000.

The infirm relative does not have to live with the person claiming the credit but if this is the case, CRA may request proof of the dependency.

Finally, in those situations when several of these support credits apply, CRA allows a multiple credit claim, however the spousal and eligible dependant credits must be claimed before the Canada caregiver credit can be claimed.

 

From the Trail Times – April 2019

ADOPTION TAX CREDIT

Bringing a child into your life is a wonderful experience, and introduces a whirlwind of expense. Just as a natural child, this also applies in the case of adoption – both the wonderment and the expense.

In fact, adopting a child often involves a set of expenses not borne by those having a baby. And Canada’s tax policy acknowledges this reality. If you adopt a child, defined as a person under the age of 18, you will likely qualify for the Canada Revenue Agency’s (CRA) adoption tax credit.

Allowable expenses are quite broad and include fees paid to a licensed agency, legal fees and court costs attributable to an adoption order, necessary travel and accommodation expenses for a parent and the child if the child is visited during the adoption process. In the case of a foreign adoption, allowable expenses include mandatory fees paid to Canada and to a foreign country for the immigration of the child, along with translation fees.

Timing is important to making the claim. For an expense to be eligible for inclusion in the claim, the expense must have been incurred after the adoption process has officially begun and before it is completed. This is referred to as the adoption period, and regardless of the length of time of the adoption period, the claim on your tax return must be made in the year of the completion of the adoption.

For 2018 tax prep, the federal adoption tax credit is a maximum $13,810 non-refundable tax credit with a matching credit offered by the BC Government.

As further explanation to this credit, although the credit can include up to $13,810 of expenses, the actual credit value used to reduce your actual tax liability is 15% of your expenses, so a max of $2,072.

Note that it is a non-refundable credit, meaning only the amount of the credit needed to reduce your taxes to zero qualifies, and any balance remaining is not refunded to you.

To this end, it’s important to know that for couples adopting a child, CRA permits the adoption credit to be claimed entirely by either spouse, or split between them as they so choose, so be sure to calculate and claim this credit to take full advantage of it for you and your spouse.

Finally, an adopted child is considered the same as a natural child for tax purposes making eligible to an adoptive parent, all the various child tax credits and benefits.

 

From the Trail Times – March 2019

HOT TICKETS FOR CRA REVIEWS

So what happened after April 30 in 2018 that sheds insight into what may be sage advice for 2018 tax prep in terms of CRA reviews?

Well not much changed. The typical CRA hot tickets for review, remained hot tickets for review, albeit with some shifting around of top priority items perhaps.

Action plan for 2018 tax prep should likely include being mindful to your reporting of the following if a one or more of them were involved your life in 2018

A medical expense claim tops the list, like most years. This is such a wide ranging, all encompassing, emotionally draining claim, not to mention expensive. The detail and nuance around this claim just makes it more complex each year, and therefore remains under scrutiny by CRA.

There was an upsurge in reviews of the Volunteer Firefighter and Search & Rescue claim. When it was introduced a few years back it was monitored by CRA so to speak, but this past year CRA put it under the microscope again. Be sure the $1,000 income exemption and the $3,000 expense deduction are both not claimed – only one or the other.

CRA eliminated the education amount as part of the tuition claim for 2017 tax prep so CRA was checking in to make sure it was not being claimed, among the other standard reasons for reviewing this claim such as making sure the claim is supported with a T2202a slip.

Donations, likely due to fraudulent claims by organizations claiming to be registered and issuing bogus tax receipts, plus the fact people claim donations that are not actually supported by proper documents.

Union dues, likely due to the often duplicated claim created because the dues are sometimes reported on a T4 and also on an official slip from the union.

Because governments worldwide are ferreting out tax dollars wherever possible and CRA is no exception, foreign income reporting and claims for the foreign tax credit has become a regular review item.

Finally, some honorable mentions of the other perennially reviewed items that didn’t rise to the top last year, but may once again for 2018 tax prep.

Any income or deduction with the term “other” used. CRA likes proof of what this “other” is, and if legit, that it’s being reported in the appropriate place.

There are various claims for dependants and if this involves separated parents CRA wants to make sure the correct person is making the claim and for the right amount.

There’s no trick to avoid a review. Take tax prep seriously, then if a review comes your way, what could have been painful may likely just be annoying. Be sure to resolve it within the 30 day limit or CRA will re-assess automatically. It will take a T1 adjustment to change it back.

If you used a professional tax preparer, maybe they will handle the review or at least offer you some guidance, although not all firms do this free of charge.

 

From the Trail Times – March 2019

DEVIL’S IN THE DETAILS

It’s a New Year! Feeling optimistic, charitable?

How about this, are you involved with a registered charity?

If you have given to worthy causes during 2018 and have some charitable tax receipts in-hand or some on their way to you, check them carefully before simply claiming them on your tax return or they may be rejected by Canada Revenue Agency (CRA).

To this end, if you are involved with the creation of charitable tax receipts for distribution by a charity, take your efforts seriously and be sure detail is accurate and complete.

The Tax Court of Canada is respecting the technical details required for the receipting of charitable gifts as set out by CRA. The result of several recent cases has seen the Court uphold the CRA rules on what must appear on a charitable tax receipt by denying charitable tax deduction claims that used non-compliant slips.

Why all the attention? Why the close scrutiny?

Because of scam organizations acting as “registered charities”, soliciting and receiving donations, and then issuing bogus slips to those who give.

Not to mention scamming taxpayers acting on their own and making non-legit charitable tax deduction claims.

With this realization, comes the need to enforce compliance. And with enforcement comes hassles based on seemingly silly minute detail for legitimate organizations and lawful taxpayers.

Here’s a brief description of the detail that charitable tax receipts must include to be legit.

The name and address of the charity as recorded with the government. If the charity moves, it’s not good enough to change only the slip or change only the address with the government. Both must be changed and match.

The registration number of the organization, a serial number of the slip, where the slip was issued, the year the slip was issued, the year the gift was made, the date the receipt was issued, the name and address of the donor including first and last name, and even the middle initial of the donor.

If a portion of the gift was cash, that cash amount has to be identified. Likewise the gift of property has to have its fair market value at the time of the gifting identified. If there was any advantage to the donor upon making the gift, for example a game of golf worth $100 was included in the $2,000 donation, than the gifted amount of $1,900 has to be identified.

The signature of an authorized person with the charity must be present.

And finally, Canada Revenue Agency must be named on the slip and have its website identified, which by the way has changed and charities have until March 31, 2019 to update their slips.

 

From the Trail Times – March 2019

DISPOSING OF PROPERTY

Canada’s tax policy does not require the periodic reporting of gains or losses on property throughout the continuous ownership by a person. It is not until the property is sold or the owner passes away, that the gain or loss is reported for tax purposes.

Upon death, particular tax rules apply to the estate of the deceased regarding property that are not applicable to a property owner who sells.

To be clear, this discussion does not concern a principal residence. The disposition of this type of property does not trigger any tax consequence as a matter of tax policy for a living or deceased person.

Upon death, a capital gain or loss is reported regardless of the fact that a property has not actually been sold.

The property of a deceased is deemed to have been disposed the day before a person’s passing for an amount equivalent to the fair market value (FMV), triggering a capital gain or loss, one half of which is included in the estate’s tax return.

A simplified calculation of a capital gain or loss involves subtracting the original cost of the property from the FMV. Having said this, sometimes events occur over time that add or subtract value to or from the original cost. This is referred to as the adjusted cost base (ACB). If this is the case, then the ACB is deducted from the FMV to determine the capital gain or loss.

Take note of the 50% inclusion rule for capital gains. In the world of taxation, this is good news since other types of income are included at 100%. Canada’s tax policy requiring only 50% of the gain to be included is arguably incentive for people to invest. At the same time, a capital loss also has an inclusion rate of 50%.

So once the estate is settled, the new “cost” of a property or its funds are transferred to a beneficiary at the prescribed FMV amount.   This amount is now referred to as the original cost for that beneficiary.

However there is an exception to this when a deceased spouse directly transfers or “rolls over” a property to the surviving spouse. In this case, there is no capital gain or loss reported by the estate, and the original cost remains the historical amount paid at the time of the original acquisition of the property – in essence a deferral of reporting the capital gain or loss.

Having said this, an executor is allowed to exempt a property from a rollover. This can be advantageous. For example if the property has a capital loss, this loss could be used immediately to reduce current taxes. Conversely if the estate itself already has a capital loss carry forward, then triggering a capital gain will use this available loss. Or there may be the availability of the lifetime capital gains exemption.

As final comment, generously Canada’s tax policy allows capital losses from the year of death plus any carry forward capital losses to be netted against not only capital gains but against any form of income in the year of death, and also for the year immediately preceding death – important tax planning tools for an executor.

Death and taxes, as they say.

 

From the Trail Times – February 2019

LEGITIMATE LOSS

Sounds like an oxymoron.

Well, when it comes to taxes, it’s an accurate term. Canada Revenue Agency (CRA) defines several types of losses available to offset income. Here is a simple presentation of several common ones.

An “allowable business investment loss” (ABIL) occurs with non-recoverable debt or loss on shares of qualified small business corporations that you loaned money to or invested in, and now all or at least a portion of it has no value.

An ABIL can be used to offset any form of income and can be carried back 3 years or forward 10. If carried forward and not used within 10 years, the ABIL is then treated as a capital loss and can be carried forward indefinitely.

A loss from the disposal of capital assets such as stocks and recreational property is called a “capital loss”. This type of loss is used to offset any capital gains in the current year. If a net capital loss remains it can be carried back 3 years or forward indefinitely to offset capital gains in those other years.

Because CRA generously only requires 50% of a capital gain to be reported as income, then CRA only allows 50% of a capital loss to be used.

An interesting fact, at least to collectors of prized items, is that capital losses can also occur on “personal use property” – sports cards, coins, artwork, jewelry – if a taxpayer makes a declaration with CRA identifying the valuables along with their current market value. However if there ever is a capital gain on your collection of pennies – remember those – a capital gain will have to be reported.

Any capital loss existing in the year of death can be used to offset any type of income, not just capital gains.

For owners of proprietorships, rental properties and farms, if business doesn’t treat you well and you suffer a business loss at the end of the year, CRA considers this a “non-capital loss”. In calculating the business loss, any wages taken by the owner cannot be included as an expense against the revenue.

A non-capital loss can be carried back 3 years to off-set business profits, or carried forward 20.

A final note, if after the application of a current year loss to any applicable current year income a net loss remains, it is usually best to apply that loss to the oldest available year first and move forward in time from there.

 

From the Trail Times – February 2019

INSURANCE AS AN EXPENSE

Can’t live with it? Can’t live without it?

Do you own a business and pay for life insurance policies applicable to the business? You should know that in two particular situations the premium paid for these policies is a deductible expense for tax purposes according to Canada Revenue Agency (CRA).

If you have employees and offer life insurance as a benefit, and if the life insurance payout is an unencumbered benefit to the employee and his or her family, and if your business pays the life insurance premium, then you can use the premium paid as a business expense.

In essence, the life insurance policy is treated just as an extended health and dental policy would be. The key being, the insurance is for the benefit of the employee.

The second situation is when a life insurance policy has to be assigned as collateral for a business loan. Whether a new policy is established or an existing one has its beneficiary re-assigned, the premium, or a portion of it, is deductible if the lender is the named beneficiary and the purpose of the loan is to earn income from a business or a property.

However, CRA has rules surrounding the allowable amount of the premium that can be expensed. CRA can require only the inclusion of the net cost of insurance based on mortality assumptions for the given year of coverage. In other words, it is a calculation using the probable risk of the person insured actually passing away during the given tax year. Not a simple calculation. Not always required by CRA, but can be required in cases where the loan amount is large with requisite insurance coverage and consequent premium of significant value, and given a situation with a very young insurance policy owner.

There is no cheating by the business owner being assumed by CRA. The amount of insurance may very well be required by the lender. What this calculation attempts to allocate is a realistic value of the premium expense in terms of its current necessity.

A less complicated and more common adjustment to a life insurance premium for a business loan occurs when the death benefit out measures the amount of loan payout required itself. For example if a million dollar benefit covers a half million dollar outstanding loan balance. Fortunately this calculation is typically easy. CRA applies the ratio of payout to benefit against the total premium amount. In this case, only 50% of the premium would be an allowable expense.

Remember, life insurance is not always a personal expense.

 

 

From the Trail Times – January 2019

IDEA 2019: START A BUSINESS?

Thinking of dabbling in a new business venture in 2019? One that can be operated out of your home?

To keep it simple, best to keep it a proprietorship at first. Incorporation adds complexity to the set-up, administration and expense of your business. Then investigate the benefits of incorporating once your proprietorship is operating successfully.

There is no legal requirement to register your proprietorship if you identify your business simply as your personal name, with perhaps a general term following your name. However, the purchase of a business license from your local municipality is typically needed to operate. And speaking of the local front, if you want signage outside your home, check with municipal regulations before posting one. Also, inform your home insurance provider that you are operating a business in your home. A rider is more than likely needed.

If you want a unique business name, registration of the business with the BC Government must be completed, along with a name search. Once this step is done, a business bank account should be set up under the business name and business number.  A separate bank account to deposit sales and pay expenses is always “taxman wise”.

Whether the business is registered or not, by default your business will at least be “recognized” as a business upon the filing with Canada Revenue Agency (CRA) of your first T1 personal tax return and completion of the T2125 Business Activity Schedules.

To this point, regardless of how profitable, or not, your venture is, your business activity must be reported to CRA. The business reporting cycle is based on the calendar year with your business revenue and expenses reported on your tax return and any tax payable from your business operation paid by April 30. On this note, although CRA allows a proprietor’s T1 tax return to be filed as late as June 15, if taxes are due they must have been paid by April 30 or penalties and interest will be levied by CRA.

Regarding expenses, among the obvious expenses to claim like advertising, supplies and the like, vehicle expenses may be claimed for business mileage if a log book has been maintained. And a business use of home expense may be possible to claim for a portion of typical household expense for a reasonable amount of space needed to operate the business.

Then there are the sales tax rules and registrations.

The federal government allows a small supplier GST exemption for businesses that have sales under $30,000 as calculated using a rolling four quarter basis. Under most circumstances, the suggestion is not to register for GST until the threshold is attained. Once registered, even if sales are under $30,000 you must begin to charge GST and remit it, net of any GST you have paid on expenses incurred.

On the PST front, registration may be needed from the first dollar of sales, or you may qualify for a $10,000 exemption, or you may be in an exempted industry altogether – best to contact BC’s PST people on this one.

Still interested in going into business?

 

From the Trail Times – January 2019

DIRECTORSHIP: LITTLE KNOWN RISK

Are you currently or are you thinking about becoming a director of a corporation, charity or not-for-profit? It’s important to know there are risks associated with being a director on these types of organizations. To be clear, these are organizations registered and listed with the provincial or federal governments.

The often touted risk is that of liability. Fortunately many if not all the typical libelous risks can be mitigated if not eliminated for directors through insurance the organization engages. As a director, ask about the coverage.

At the same time, debt is a risk that can’t typically be eliminated by an insurance policy. Monies owed to lenders will be recoverable through the preauthorized assignment of assets of the organization itself or by guarantees from other organizations or persons. As a director, don’t sign personal guarantees.

What about monies owed to government?

It is within the authority of Canada Revenue Agency (CRA) to pursue the assets of directors of organizations for the payment of delinquent amounts owing for corporate taxes, payroll source deductions, GST, BC PST, and any interest and penalties levied on these amounts.

In order for CRA to be able to pursue directors’ assets, a director must have received a benefit from the organization, for example dividends paid to the director. Further, CRA has the right to choose which director or directors to assess the amount owing.

Historically, CRA chooses the wealthiest director or directors to assess for payment. Typically then, other directors contribute funds to the director being assessed, but in some cases, the paying director ends up having to sue the other directors to receive a contribution from them for the amount assessed.

Feeling safe from risk because you are not a registered director?

Interestingly, a person not officially registered as a director can still be considered a director in a court of law. Depending on the level of involvement in running the organization, it may be determined that a person is by definition, a de facto director and in such a case, is as equally liable as a registered director.

If you are not a director but you are in a key management operations role, be sure CRA payments are remitted and if they can’t be, make the directors aware of that fact. Keep an electronic and paper trail.

If you are a director, do your best to be informed of the financial position of the organization, and in particular the status of government accounts. Speak up and ask questions. Keep notes.

If you are not sure if you are a director, check the organization’s minute book or check the Public Register of Companies.

If you personally receive a Notice of Assessment for the organization, file a Notice of Objection with CRA within 90 days. After that you may lose your right to appeal.

And remember, this isn’t just the corporate world. This includes directors on registered charities and not-for-profits.

 

From the Trail Times – April, 2018

AUDIT: A FRIGHTENING WORD?

Question: how far can the arm of Canada Revenue Agency (CRA) actually reach?

Answer: far!

Once a taxpayer is under a CRA audit, CRA can demand of the taxpayer all kinds of records including accounting records, financial statements, bank, credit card and investment statements, supplier and customer lists. The list is long.

And CRA can ask for information not just from the taxpayer, but also of the taxpayer’s employer, banker, credit providers, accountant, investment advisor, insurer, and yes even casinos.

When it comes to an audit, the Income Tax Act specifically states that those who surround a taxpayer must comply with a CRA request to supply information about that taxpayer. Non-compliance can lead to a charge of contempt of court and jail time, although it is a long and winding road to get to that point.

Nonetheless, history has not been kind to those people not complying with a CRA audit. The Supreme Court of Canada supports the CRA demand and delivery of requested information as long as it can be shown that the information being requested is relevant to the audit.

The one exception to this court support is information held with a lawyer under solicitor-client privilege. Although this fact may not be too surprising, what might be is the court’s expanded view of solicitor-client privilege such that any information held within a law office is included, not just that information private to a taxpayer’s lawyer.

However, this wider interpretation of protection ends when the information leaves the law office. For example privilege will be assumed waived when documents pass to the taxpayer’s banker’s office.

It is noteworthy that a court order must be established when CRA requests information from a third party without providing the taxpayer’s name. This procedure is used by CRA when CRA suspects commonality among a certain group of taxpayers, for example clients of a specific financial advisor, real estate broker or accountant.

Fortunately there are preliminary stages available to CRA before the full-on audit kicks in, the main one being a CRA review. At this stage, life can remain quite uncomplicated if one chooses to cooperate.

Having said this, cooperate or not, just about all sources of information are available to CRA so it is becoming more and more likely that cheaters will be called on their actions more and more often.

 

From the Trail Times – April, 2018

WORLD REPORTING COOPERATION

Without much fan fare during the summer of 2017, the Organization of Economic Cooperation and Development (OECD) developed and ratified the Common Reporting Standard (CRS) rules.

At first read of that statement it is understandable why there was no media hype.

So why should Canadians pay attention?

The OECD is a world organization founded in 1961, currently with 35 member countries. It’s an inter-governmental economic organization with a mission to stimulate economic progress and world trade.

The CRS rules agreed upon by the OECD last July is no less than an “unprecedented level of cooperation among tax administrations worldwide”, so says the OECD.

Why?

Well, it’s an agreed upon obligatory reporting system among member countries to reduce tax evasion. And it’s about to kick in.

How?

Financial institutions must collect information about accounts owned by any resident of another country and must report this information to the tax authority of that person’s residency. This information must be routinely gathered and then automatically exchanged with other OECD member countries. In other words, this information gathering system is not request driven from an outside country. It is participation driven – it is a free flowing two way street of personal financial information among foreign countries.

As a resident of Canada, if you have a bank or brokerage account in a country outside of Canada, that OECD foreign country is obligated to pass that detail to Canada Revenue Agency (CRA).

This includes immigrants to Canada. Once recognized as a resident of Canada, their information about any financial accounts that remain open in their homeland will be shared with CRA.

CRA will do its matching magic with its super computers, and if any income from these accounts hasn’t been reported, CRA may be asking questions of that resident of Canada in the not too distant future.

In fact, a few years back CRA began requiring taxpayers to answer the question “do you own any foreign assets of $100,000 or greater” when filing their T1 tax return.   If this fact wasn’t a shot-over-the-bow for people to voluntarily identify and report assets owned off-shore, this new CSR set of rules will likely force the issue – sort of like bringing a canon to someone’s front door.

Besides answering “yes” to the question on the T1 tax return this year and completing the detail needed, if this disclosure should have been given years ago, making a “Voluntary Disclosure” to CRA as soon as possible may be wise when considering the possible punishment upon CRA’s discovery of non-disclosure.

If voluntarily disclosed, CRA will not impose the 50% penalty of taxes owed nor pursue criminal charges. This being said, the taxes applicable to the unreported income do have to be paid immediately or will be subject to other penalties and interest charges.

When it comes to tax dollars, the old adage that it’s easier to ask for forgiveness than for permission may not hold.

 

 

From the Trail Times – March, 2018

TAX TIME IS UPON US

Taxes due? Refund owing? Either way, it’s time.

Some people feel overwhelmed when it comes to tax preparation. If Canada Revenue Agency (CRA) tax rules and its perennial changes aren’t intimidating enough, there are all those convoluted tax slips, forms and schedules.

Here’s a simple plan for tackling tax preparation.

Step 1. Find a copy of last year’s tax return and follow it. It’s your road map.

Step 2. Make a scratch sheet of notes and questions that have to be investigated or found. Personal memory for such detail may not be reliable and it could be costly to miss something.

Step 3. Enter all your personal information. Be accurate and complete. It appears CRA is asking more and more personal detail each year.

Step 4. Fully open and lay all your slips flat. Check the name and set aside slips that aren’t yours. Then set aside information clearly not needed for input. Organize your slips into a pile of incomes and a pile of expenses. Then gather like items such as T4 income, T5 interest, etc, and all medical expenses, donations, etc.

Step 5. If there is a spouse or dependant also being prepared, complete step 4 for each person. In fact, preparing them at the same time, or “coupling”, is best so that full advantage of the transfer of incomes, expenses and credits can take place. Also, joint slips with two names can be input on either person’s return but all information on that slip has to be put on that one person’s return.

Step 6. Enter the information, ticking as you input. When math is required, use a calculator. Enter what you easily can identify. Surprisingly those items you aren’t sure about or aren’t sure where to enter, often become apparent moving through the input of familiar items, just like doing a test in high school.

Step 7. For those items still without a home, read carefully because there may be instructions, including direction not to enter. Another option is to visit the CRA website or even Google it.

Step 8. When you think you’re done, double check to make sure everything has been answered and input. If using do-it-yourself software, this is the time to use optimization options if it has such a feature. Then check the diagnostics and investigate. On this point, some software programs accept overrides and then permit e-filing, only to be rejected by CRA or end up as a CRA review. Further, personal changes and reporting of certain assets, incomes and expenses may require separate e-filing of schedules or even paper filing of your return.

A special note for proprietors – while it’s true that your tax return doesn’t have to be filed until June 15, if taxes are payable, those taxes have to be paid by April 30 so it may be wise to jump on that year-end bookkeeping now.

There you go. Tax prep done.

 

From the Trail Times – February, 2018

‘TIS TIME TO PREP OR NOT PREP?

Is it too soon to prepare your personal tax return?

Despite the tax filing deadline being about 60 days away, it’s likely unwise for most people to prepare and file their tax return just yet.

Canada Revenue Agency (CRA), although requiring a February 28 distribution date for most tax information slips such as T4 slips from employers and T5 slips from investment firms, does extend to March 31 the distribution of some tax slips to taxpayers.

In particular the providers of T3 and T5013 slips, both reporting investment activity, are given an extra month to the end of March to arrive in the taxpayer’s hand. Also, if you have made an RRSP contribution near the March 1 deadline you will have to await the tax slip’s arrival, something easily forgotten by those who make regular RRSP auto deposits throughout the year.

This year CRA is allowing the electronic distribution of T4 employment tax slips to employees whether or not consent is given to the employer. However, only employers with secure internal email service may use this distribution system.

A word to the wise, distribution of tax slips via email may be missed since people won’t necessarily be looking for them. Not to mention the tendency to delete emails because of the caution associated with spam and scam emails. It may be best for employers to communicate with employees before emailing T4 slips.

While waiting for all your tax slips to be in hand, there are some things you should do before tax preparation whether using a professional tax preparation service or do-it-yourself software or even paper forms. And yes, the federal government is still permitting paper filed tax returns.

A visit to the CRA website is time well spent. Review CRA’s tax tips and changes so you don’t mess up or miss new opportunities. If you are self preparing, become familiar with this year’s tax schedules because chances are they have changed, and new ones added.

Once all tax information is gathered, and this may include more than T slips, sorting through everything not only reduces the chance of errors and omissions, but presenting organized and complete information when using a tax prep service may actually lower your preparation fee.

Speaking of fees, when using a tax prep service it’s fair to ask how the fee structure works. What constitutes “extras”? What happens with a CRA review, and how will the preparer help you, and at what cost? Is the preparer available year-round?

The last filing date is Monday, April 30. Filing late with taxes payable creates an immediate interest charge. Additionally, CRA has the authority to impose a penalty of up to 50% of taxes payable.

Refund coming? It’s your money so be sure to file. Last count, there is over $700,000,000 of unclaimed refunds sitting with CRA. And yes, that’s almost a trillion dollars.

 

From the Trail Times – February, 2018

EXPENSING CONVENTIONS CRA STYLE

Business owners often assume if they attend a convention, all the costs are deductible as a business expense, and at 100% no less. However, it’s not that simple. Canada Revenue Agency (CRA) has set specific conditions.

The convention must be hosted by a recognized professional organization. In other words, it is not a group of like minded business owners holding a meeting. True that some of those costs can be expensed, but that is not a convention.

The business owner does not have to be a member of the hosting organization, but the organization’s purpose must compliment the owner’s line of business.

The convention must be hosted the same year the expenses are being claimed. This means the expenses must be actually paid out the year of the convention, not accrued as a payable.

The location of the convention must be reasonable to the trading area of the businesses involved. Typically this means hosted within Canada, and in fact if it’s the BC Association of Whatever, then the location has to be within the Province of BC. And if it’s the Trail & District Chamber of Commerce, then the host location must be Greater Trail.

For some fortunate businesses that have the world beyond the Canadian border as their trading territory, a convention in Vegas, Europe or Asia could fit within CRA’s required location definition. And to be complete in this description, the Canada-US Tax Treaty may qualify a professional organization based in one country to host its convention in the other … so maybe Vegas is still in play!

The convention fee, travel to and from the convention, and accommodation can be expensed at 100% of the cost. However, meals and entertainment can only be 50% expensed, and if the convention fee includes meals and entertainment without specifying their specific value, a maximum of $50 per day is set by CRA and only 50% of this can be claimed.

For an employee attending a convention, typically the expense reimbursement by the business owner is not a taxable benefit to the employee except for any portion that is of clear personal benefit. For example, extending the trip to “visit” around the area adds a personal vacation component.

As well, the expense reimbursement associated with an employee’s spouse accompanying the employee is considered a personal benefit and therefore a taxable benefit to the employee. However, if the employer requires the employee to take the spouse for the purpose of going “to assist in the attaining the business objectives of the trip”, then the expense reimbursement for the spouse is not a taxable benefit.

Interestingly, no mention of the expenses associated with a business owner’s spouse. Perhaps it goes without saying, CRA believes the spouse is integral “to assist in the attaining the business objectives of the trip”. Although the vacation time before or after the actual convention will not be a business expense.

Finally, CRA permits two conventions per year. However, the Tax Court of Canada has ignored this limit when it is shown the outcome of attending conventions actually produces income and not just provides professional development.

 

From the Trail Times – February, 2018

E-COMMERCE AND THE TAXMAN

Virtual business is the selling of goods and services through electronic means, often referred to interchangeably as website or on-line or internet selling. However, e-commerce also encompasses selling through television, phone, fax and automated banking machines and credit cards.

E-commerce in Canada accounted for an estimated 5 billion dollars in sales in 2017, the vast majority coming from on-line selling. Over 85% of Canadians admit to shopping on-line, with a reported 27% of Canadians shopping on-line every month.

With numbers like these it’s no wonder Canada Revenue Agency (CRA) has adapted its tax returns to require the specific valuation reporting of e-commerce revenue, and even requires the identification of the websites where this revenue is being generated.

As with all businesses, virtual business owners must complete the applicable T2125 business schedules within the T1 personal tax return, or in the case of an incorporated business, the T2 return’s schedule 88.

As part of the completion of these schedules, up to five websites, complete with URL, must be listed on the tax return, and not just any five, the top five revenue producing websites. These include websites owned and operated by the business that accept orders, third party marketplace websites like Amazon or E-bay that “sell” the business’ services or products, and other such websites that drive buyers to the business’ website. And websites hosted outside of Canada are not excluded from making this list.

Telephone directories and information-only websites do not need to be listed.

Determine the revenue generated by each website and calculate the percentage of this sales revenue as a proportion of total revenue generated for the entire business which also includes revenue from non-website activities, if any. The percentage is reported on the tax return for each website.

When it comes to the costs of operating an on-line business, CRA has well established guidelines on how particular business costs must be expensed. Typically computer equipment, software and website development costs are not considered “current and deductible in the year they are incurred”. Rather they are deemed “capital and deductible under the rules for capital cost allowance”.

In plain language this means these costs cannot be written off as a 100% expense when they are purchased. Instead they are treated as an asset and grouped into a class of like-items, then depreciated at a specific percentage rate each year with that proportional dollar value claimed as an expense. Over time an asset class can be added to and subtracted from.

A word about GST and PST, although as always recommended, speak with the GST and PST people.

The GST small supplier exemption for businesses that have sales revenues under $30,000 is available to on-line businesses. Noteworthy to this, sales of products and services that are sold outside of Canada do not enter the calculation of this $30,000 threshold.

PST rules in BC include a $10,000 small supplier exemption on the sale of most goods, but not all. Unlike GST, sales sold outside Canada factor into this $10,000 PST threshold.

 

From the Trail Times – January 30, 2018

TAX RULES ALREADY EXIST FOR ASSOCIATED COMPANIES

Small business tax policy is under scrutiny. This is tax policy regulating Canadian Controlled Private Corporations (CCPC), not proprietorships. Some “loopholes” do exist, others may be perceived.

With this introduction in mind, a key component of CCPC tax policy is the lower tax rate applicable to the first $500,000 of income earned by a CCPC. This income is taxed at 12% in BC rather than the standard corporate rate of 27% on amounts over $500,000.

For the ever creative entrepreneur with CCPC income exceeding $500,000, it may make sense to split the business into separate components each operated by a separate CCPC so that each CCPC could take advantage of the $500,000 exemption.

Or there’s the option to start a completely unrelated business as a separate CCPC?

Sounds like a $500,000 exemption for each CCPC owned by the entrepreneur.

Sounds like a plan!

No can do.

Canada Revenue Agency (CRA) defines these businesses related through common ownership as “associated companies” and only permits one cumulative $500,000 income exemption.

So this is not a loophole.

The rule is quite complex. However, here are the three most common relationships that define associated companies.

The first: CCPC “A” controls CCPC “B”, or vice versa.

The second: A and B are owned by the same person or group of people.

And the third: A and B are each owned by separate people, but the people are related and one of them owns 25% or more of the other company.

By definition then, with this third example a couple could each solely own their own CCPC and each be allowed the $500,000 exemption, as long as neither of them owns more than 25% of the other’s company.

Sounds like a loophole.

Not really if CRA does it job.

CRA has the authority to look beyond technical ownership. CRA can investigate how these businesses are actually being operated. If CRA concludes that the corporations are designed simply for tax avoidance, the CCPCs will be deemed “associated” and only one $500,000 exemption permitted.

How is this determination made?

Often this comes down to the control of the companies. Control in its truest sense refers to legal control. However, control can be “de facto”. That is, control by influence and not by technical ownership of the majority of shares of the CCPC – a measured definition by the Tax Court of Canada. A key component to this determination is the identification of who actually is the decision maker of any particular corporation and the relatedness of the people through blood or marriage who own the corporations in question.

Rules are in place. Some latitude is available. CRA enforcement is key.

 

From the Trail Times – January 16, 2018

CRA’s SMALL BUSINESS TAX TWEAKS NOW IN EFFECT

It’s 2018 and the Government of Canada’s tax reforms are now in effect, including business tax changes, in particular “small business”.   To be clear, when the government says small business it’s referring to the Canadian Controlled Private Corporation (CCPC). It’s not referring to proprietorships since they aren’t incorporated.

If a corporation meets all of the following criteria, then it typically qualifies by Canada Revenue Agency (CRA) as a CCPC. The corporation must be resident in Canada and not controlled, directly or indirectly, by a non-resident, a publicly traded company or a Canadian company that lists its shares on a foreign exchange. And it must not have any class of its own shares traded on any stock exchange.

The tax policy discussion during 2017 has resulted in the government creating clearer definitions and shrinking the grey area in CCPC tax rules. Also, the government has committed a lot of cash for enforcement. This fact alone will likely be the key to successfully and rightfully assessing business tax.

As a qualified CCPC, CRA allows a small business deduction applicable to the first $500,000 of gross (after expenses) active income – “active” meaning revenues generated by conducting business activities.

Active income is different than rental or investment income the business may be paid or earn, often referred to as passive income that is taxed at 50.7% in BC.

The regular 27% combined federal and BC provincial tax rate levied on active income is reduced to 12% for a CCPC’s first 500k.

That is, without this small business tax break a small business owner would remit 27% tax on the net profits of the company. Instead, that amount is basically cut in half. This bottom line difference yields cash for reinvestment in and expansion of the business. And at other times simply makes the difference between survival and closure.

On the surface there appears to be a clear tax advantage to a CCPC owner versus an unincorporated proprietor faced with the personal tax rate on net earnings of up to 47.7% in BC. But remember, monies paid out from the CCPC to the CCPC owner is taxed at the personal tax rate just like the proprietor. In fact, if all the “profits” of a CCPC have to be paid out to the owner to meet personal living obligations, then the CCPC tax rate is effectively meaningless.

There are other tax advantages for a CCPC. It can pay dividends to the owner that are more favourably taxed than wages paid to the owner, although CRA has closed this measurably over the past decade.

In addition, dividends can be paid to other CCPC shareholders including family, although with new tax policy in place, CRA is now scrutinizing the use of this method of sharing profits among next of kin, referred to as “income sprinkling”. Also on CRA’s radar is the need to justify wages paid to next of kin for actual work completed.

Finally, the sale of CCPC shares qualifies under the lifetime capital gains exemption so when the CCPC owner sells the CCPC shares, up to about $425,000 of capital gain is not included in income, often justified as the CCPC owner’s “pension” in lieu of an employment pension fund.

 

From the Trail Times – December 6, 2017

ENTERTAINMENT AS A BUSINESS EXPENSE

‘Tis the season to entertain, even at work.

Many business owners take the opportunity to entertain customers, clients, suppliers, associates and staff. But, how does a business owner account for this business expense? And what qualifies?

Entertainment is a broad term. For tax purposes, Canada Revenue Agency (CRA) allows the entrance cost for activities, events and clubs, the rental fee for rooms and boxes to host, and food and beverage costs, although alcohol in moderation is best practice. Service charges, taxes and gratuities included.

CRA does not allow longer term purchases such as annual memberships or seasons tickets, nor the rental fee of recreational facilities.

When it comes to the accounting of entertainment expenses, CRA distinguishes between informal type activities with a select person or two, from organized business oriented events with an inclusive group of people. CRA defines the former situation as providing a personal value to the business owner, while the latter does not.

For example, in the case of a dinner and hockey game with one client, CRA assumes there is personal benefit to the business owner so only 50% of the cost is an allowable expense.

To be clear on this 50%, if four people go to the game making the business owner one quarter of the group, 75% isn’t the allowable expense (recognizing the fact that there are three clients). Only 50% of the total cost can be expensed. And the same math applies for a group of 10, only 50% is expensed not 90%.

To state the obvious then, it’s wise to entertain one person at a time when it comes to this type of non-business activity.

Then there are events that CRA permits as a 100% allowable expense. In these cases the event itself has to be deemed to be a “business input”. For example, a business presentation, workshop, training session or product launch for a broad group of people would qualify and the entertainment provided would be totally expensed.

The key is to conduct business with what would be considered necessary entertainment expenses, such as food and beverages or a rented hotel suite.

Given the business input requirement, a “festive open house”, although typically seen as a social activity, could arguably be a business input since its broad invite to people with general business discussion typically permits the full expensing of the costs. Remember to make the invite inclusive and ensure there is some business banter around the room.

Just to be safe, if a business event also supports a registered charity, CRA allows 100% expensing of entertainment costs. So be sure to remind the invitees to bring items for a local food bank.

Regarding staff in particular, CRA extends the perk to business owners to expense all the costs for the hosting of purely social type events and activities such as a company Christmas party … or say, a post-tax-season-celebration, as long as it’s a general invite to all staff. And CRA allows a half dozen of these events a year. Party on staff …

 

From the Trail Times – February 2017

SEPARATED PARENTS

Due to popular demand by Canada Revenue Agency (CRA), here’s detail on one of the most popular tax reviews conducted by CRA, and some tips to help get the ducks in a row before tax preparation.

Tax policy surrounding separated parents with minor children, is one of the most contentious topics when it comes to helping people prepare their tax return. And considering the frequency of relationships ending in separation, this issue arises frequently.

Tip #1, calmness between former partners is helpful.

If reviewed by CRA, things get off to a good start if CRA can be offered court registered documents.

A child support agreement, sometimes embedded in a separation document, identifying what is paid to whom is key. Failing such an official document, an agreement signed by both parents stating custody arrangements and following the regulated child support guidelines may suffice, but not always.

Likewise, if there is a spousal support agreement, this document will likely be reviewed by CRA too.

From this documentation naturally flows the application of the tax rules. Things like which parent can and cannot claim what child tax credit, and can and cannot deduct what child expense.  Also what constitutes reportable income and what payment is an allowable deduction.

Unfortunately the use of the term “naturally flows” does not mean straight forward. The best suggestion is to look at each child tax credit and expense deduction individually and determine how each has to be applied. Do not assume all child credits and expense deductions are applied the same because they aren’t.

Then there is child support itself. According to tax policy, child support is suppose to be reported on both parents’ returns but does not factor into either parents’ tax calculation. Child support is neither a deduction for the payer, nor income for the payee.

However, spousal support is treated differently. It is reported as a deduction for the payer and as income for the payee.

Consequently, there can be confusion when it comes to reporting child and spousal support. A typical error is the misreporting of child support as a deduction or as income.

Finally, if both child support payments and spousal support payments are in the mix, if reviewed by CRA it must be proven to CRA that the full amount of child support has been actually paid before any amount is assumed to be spousal support, and claimed as such. In other words, the kids come first.

In general, a comprehensive set of docs with a clear paper trail of payments goes a long way with a CRA review.

 

From the Trail Times – February 2017

REAL ESTATE AS INCOME

Income or capital gain: a determination not of minor significance when it comes to taxation.

Income, after netted against allowable expenses and deductions, is fully included by Canada Revenue Agency (CRA) to calculate taxes payable.

On the other hand, only 50% of capital gains and losses are included in tax calculations.

What’s a capital gain? The common belief is that if a revenue source is not earned income or interest, then by default it’s a capital gain.

Not true. Not all gains are capital gains.

The question becomes one of defining inventory.

If you buy goods – inventory – and sell them, the gain is your income, like a retail store. Or if you provide a service – your available time is your inventory – and you sell your time, the gain is your income. CRA defines these types of gains as personal income and after expenses, is taxed fully.

At the same time, a capital gain tends to be identified by the taxpayer as an asset that passively produces a gain or loss over time that is realized at the time of sale, like real estate for example. As such, only 50% will factor into taxes.

However, depending on circumstance, a gain on an asset could be considered by CRA as income and not capital gain if that asset is determined to be inventory.

If CRA considers your financial activity is an “adventure in the nature of trade”, then by definition you’re in business and any gain from that business is not a capital gain but rather it’s business income and fully included in the tax calculation. In other words, the asset is not a passive investment.  It’s active inventory, and as inventory, the gain is income and fully taxed.

The most contentious of all assets for determining how the gain is taxed is real estate.

CRA considers 12 factors relevant to the taxpayer’s “intention of the purchase and ownership” of any particular piece of real estate.

If CRA determines the intention of the taxpayer is to resell property, the property is not a capital asset eligible for capital gains taxation but rather the property is considered inventory and the entire gain is considered income and fully taxed as business income.

For example, buying vacant land with the intention to sell it to a developer – real estate speculation – could define that land as inventory resulting in the gain being classified as income and not capital gain.

The owning of rental properties is not only a rental income business, but if rental properties are bought with the intention of being re-sold, CRA could determine that there is also the business of buying and selling properties. This means the properties are inventory and the gains on any sales would be included as income and not treated as capital gains.

And this applies to the flipping of one’s house by building or buying and renovating, living in it, and then selling. This is especially attractive because of the principal residence exemption in Canada where no gain has to be reported from the sale of your house.

However, if CRA determines that you are in the business of flipping houses, the principal residence exemption will be denied and the gain will not be taxed as a capital gain, but will be taxed as income.

To this point, CRA is in pursuit of house flippers. New for 2016, CRA is requiring the filing of little known schedule T2091 used to report the sale of a person’s principal residence. It doesn’t affect tax calculations, unless of course red flags pop up during cross referencing by CRA’s super computer.

 

From the Trail Times – January 2017

GST: SMALL SUPPLIER EXEMPTION

If you run a business you likely are aware of the small supplier GST exemption that exists for businesses that have gross sales under $30,000. These businesses can choose not to charge GST assuming they remain unregistered.

This is a very gracious gesture from GST, but beware business owner. Although you may think you are operating under the exemption, you may not be.

It is amazing how many business owners discover down the road, usually via a nasty letter, that they are actually registered for GST.

Some owners register by accident when going through the process to register their business.

Some knowingly register because they believe they don’t have to collect GST until they achieve $30,000 in sales so what’s the big deal about registering.

Wrong. Once registered, the business must begin to charge GST on all sales as of the actual date of registration.

The business owner is responsible to remit the GST on the retroactive sales back to the date of registration. This either means going back to customers and asking them to pay the 5%, or eating that cost and remitting the GST.

Remember though, it won’t necessarily be the full 5% GST remitted because the business owner is permitted to deduct the GST paid to operate the business. Only the net amount is remitted.

If registered and the owner knows that sales will not achieve $30,000, contact GST and request the account be closed. Likewise, if business has changed and sales will never again achieve $30,000, call to have it closed.

On the other end of the spectrum are those business owners who do not register for GST and should. Here are some typical scenarios.

First, the exemption is based on gross sales and not net sales so watch that figure.

Second, achieving $30,000 in sales is not based on the calendar year but rather achieving that amount within any four consecutive quarters so don’t wait until December 31 to register.

Third, the need to register does not arise on the date that $30,000 in sales is achieved, but rather the requirement to register occurs when a business owner ought to realize that $30,000 in sales will be achieved. The typical scenario is a business that gets a contract that will pay out over many months but itself is worth over $30,000, or in combination with other sales, the contract will clearly take total sales over $30,000 sometime within a calendar quarter. In this case, all sales, even those prior to achieving $30,000, must have GST applied to them so the owner will be responsible for the retroactive GST on these sales if the owner fails to register.

Fourth, the $30,000 threshold exemption amount is based on all sales revenue from all businesses owned by a person. In other words, whether businesses are related in purpose or not, because the businesses are associated through a common owner, the sales are combined to test the eligibility of the $30,000 sales threshold. If the exemption is not met, all business operations of that owner must be registered for GST and have GST applied to all sales of all businesses.  If the owner fails to register any or all of the businesses, GST may make this a retroactive requirement for collection and remittance.  A matter GST has been taking seriously over the past several years.

Finally, GST registration will likely automatically happen if at personal tax time, the reporting of business sales exceeds $30,000. This is usually communicated on a timely basis directly to the business owner so that the owner can immediately begin to apply GST and not have a retroactive GST issue develop. However, if GST believes there was blatant disregard for registration, GST may retroactively register the business for a time period prior to the current date.

 

 

From the Trail Times – April 2016

COURTS DON’T JOKE AROUND

So how does a tax preparer spend his or her free time? Reading court rulings, of course.

April Fool’s Day aside, no joke, reading court rulings can be entertaining.

That being said, in no way am I downplaying the significance and seriousness of anyone’s health and medical issues they may be enduring, but here is a legal challenge that might make you smile … and then say … if only.

To set the stage, and keeping things simple, for medical services that require travel out of one’s local area, Canada Revenue Agency (CRA) permits travel costs as an allowable medical expense. The needed medical service must not be available locally as defined by having to travel more than 40 kilometers to another location to receive that medical service.

In a 2015 court case that worked its way to the Federal level, this travel out of the local area for a necessary medical service was put to the test.

A taxpayer with an undisputed diagnosed debilitating medical condition that had led to the replacement of joints with prosthetic devices was seeking warmer conditions to alleviate the personal suffering caused by Canada’s winter climate caused by the prosthetics.

To provide the relief needed for this medical condition, the taxpayer traveled to Thailand and Indonesia and claimed the travel cost as medically necessary expenses on the T1 personal tax return.

The claim was denied by CRA.

The tax payer appealed to the Tax Court of Canada where the claim was reinstated by that Court.

CRA appealed the Tax Court’s decision to the Federal Court of Appeal where that Court ruled in favour of CRA stating that a more favourable climate cannot be defined as a “medical service”.

The taxpayer’s medical claim for travel expenses was denied.

Not passing judgement on the Appeal Court’s decision, but it’s interesting to ponder the number of new medical claims that may have resulted if the Court had sided with the taxpayer and allowed the travel claim to a warmer climate, given the annual migration of Canadian snowbirds.

 

From the Trail Times – March 2016

FORM T1135: OWNING UP TO THE TAXMAN

“Did you own or hold foreign property at any time in the year with a total cost of more than CAN $100,000?”

CRA would like to know.

This question has been on the T1 tax return since 1997 but until recently, didn’t appear important. About three years ago the government began to pay attention to taxpayers’ answers in order to ferret out tax revenue that perhaps it’s missing.

It’s the aggregate value of all the qualifying foreign assets that determines whether or not the $100,000 threshold is exceeded, and if exceeded, the answer is “yes” to the question.

This is not the reporting of income made outside of Canada. Rather, form T1135 requires the disclosure of foreign owned assets, assets that may or may not be earning income.

Such things as funds deposited in foreign bank accounts, shares in foreign companies, interests in foreign trusts, foreign bonds, units in offshore mutual funds, real estate, including vacant land, and in some cases even artwork, jewelry and vehicles.

For cash type investments, the value is determined by the highest value anytime during the year, not on the last day of the year, so moving or removing funds prior to year end cannot be used to prevent the reporting.

For capital assets, the value is based on its original purchase cost plus improvements over time. The inclusion on the T1135 is not determined by the current market value.

Exceptions?

Yes.

Assets to operate a foreign business are exempt, as are personal property type assets strictly used for personal use.

Having said this, if vacation property purchased for more than $100,000 is rented, the Canadian owner must not have an expectation of profit. Rental revenue must only offset expenses associated with that property.  Otherwise, the property has to be declared on the T1135.

When it comes to joint ownership of an asset, the value is divided according to each person’s original investment. So if an asset purchase was $250,000 with equal investment from both purchasers, both would report their $125,000 share on form T1135.  However, if one person had invested $200,000 that person would report $200,000 on form T1135 while the other person wouldn’t have to report their $50,000 investment since it’s under the $100,000.

And being married or living common-law doesn’t automatically split things 50/50. If both partners aren’t listed as owners, the value remains 100% with the listed partner. For example, if a $150,000 condo is purchased and only one partner is listed as the owner, the condo is reported by that partner.  But if both partners are listed as owners, then at $75,000 each, neither partner has to report the condo.

But remember, it’s the total value of all foreign assets.

And if the total value is over $100,000 but less than $250,000, a simplified method of reporting is offered on form T1135 … thankfully.

Finally, form T1135 foreign investment reporting is required not only of individuals, but also corporations.

 

From the Trail Times – February 2016

PUSHIN’ PAPER: CRA “My Account”

In search for excitement, if you happened to have read a recent Notice of Assessment from the Canada Revenue Agency (CRA), you may have noticed a paragraph dedicated to CRA’s offer to communicate with you via email.

The CRA paperless push is ramping up in 2016.

Last year at this time, CRA began inviting taxpayers to its website to set-up their “My Account”. If set-up, a taxpayer is able to view and in some cases change assessed tax returns, make requests of CRA, and access personal information. The taxpayer will also be asked to choose paperless communications with CRA.

On the latter point, when filing your tax return there is now a question asking for your consent for email communications to replace CRA letters arriving via Canada Post. If you agree, you have to give CRA your email address and have a CRA “My Account”.

It’s a bit of a process to set up “My Account”. Allow about two weeks from start to finish since CRA mails you a passcode. Once you receive it, that’s when you actually log into “My Account” for the first time, and of course change the passcode.

If you choose paperless communications, when CRA has correspondence for you, CRA will send to your email address an email telling you there is correspondence from CRA in your “My Account” in-box and to log-in and read it. In other words, the CRA correspondence itself will not be sent directly to your personal email.  You have to go on-line to retrieve it from CRA.

This means a CRA email will not contain detail, not ask for a direct reply, not have an attachment, and not have a link to “My Account”, a document, or a website. If a CRA email does include any of these items, it’s likely a scam.  The CRA email will simply direct the taxpayer to log into their CRA “My Account” in order to read CRA’s correspondence.

Now it should be noted that despite the apparent all inclusive paperless push, at this time only a few types of correspondence are actually included in this plan. The rest still come via Canada Post.  Having said this, CRA promises that almost all communication with taxpayers will become paperless, and this includes payments to and from CRA.

For years CRA has been encouraging taxpayers to set-up direct deposit for tax refunds from CRA, and now the government wants to directly deposit all CPP payments and the like.

In recent years CRA has been asking taxpayers to make payments to CRA electronically through on-line banking or using CRA’s relatively new on-line “My Payment”.

Now if you’re one who takes pleasure in paper, be aware that CRA’s current paperless requests may very well become requirements in the not too distant future. Having your “My Account” ahead of time may be wise.

 

From the Trail Times – February 2016

BEDROOMS & TAXES: MARITAL STATUS MADE DIFFICULT

It’s Valentine’s Day and you may be thinking no one is interested in your relationship … or lack of. Not so, the taxman is. Close your curtains!

As government benefits and tax credits expand and new ones are added, the more Canada Revenue Agency (CRA) is insisting you report your marital status using CRA definitions.

If you claim it incorrectly, you may be losing out on some benefit or credit. Or, you may be gaining right now but will be asked to pay the government back if one day your status is corrected.

CRA’s rules surrounding marital status are unmistakably defined, and at the risk of creating confusion, here is an abridged version.

The options for reporting your status include married, common law, divorced, separated, widowed, and single.

Married: Defined as the legal union of a couple, referred to as spouses.

Divorced: Defined as the legal break-up of a married couple. You report this status until you enter another relationship – once divorced you are not single by CRA definition.

Widowed: Having been married but having lost your spouse. You report this status until you enter another relationship – again, you are not single.

Common-law: Defined as living together in a conjugal relationship for 12 continuous months, referred to as partners. However, having or adopting a child or becoming a custodial parent to your partner’s child, the 12 month rule no longer applies.

Separated: Whether married or common-law, a period of 90 days must pass before this status can be reported. This means a married or common-law relationship that breaks down after October 1 in a given year, on December 31 of that year that relationship is still considered married or common-law for tax purposes because the 90 day separation rule will not be met until into the New Year.

In the case of establishing the status of a new common-law relationship, if temporary separation(s) of fewer than 90 days occur(s) within the 12 month continuous period, the 12 month timeframe is not lengthened by the days of separation, nor is the 12 month period restarted. So technically, a couple could live an “on-again-off-again relationship” over the course of 12 months whereby they may actually have lived apart more than together but still find themselves classified as common-law for tax purposes.

Single: As the adage goes, you’re only single once. Once married and if that relationship is no more, the claim is either separated, divorced or widowed. Similarly for common-law, if it’s no more, the claim is either separated or widowed. This is your status until you enter another relationship. In other words, you aren’t to revert back to single as your status with CRA.

And what should one do if one’s marital status changes? CRA tells us that we must report the change by the end of the month following the change (use form RC65) … I would suggest you certainly change it on your next tax return.