Tax strategy

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As a small or medium business owner in Alberta, you are constantly looking for ways to maximize your savings and reduce your tax liability. One effective strategy is to take advantage of eligible business expenses that can be claimed as write-offs. At Richardson Miller LLP, we understand the importance of optimizing your tax deductions and reducing your business tax liability. In this blog, we will highlight the top 11 tax write-offs available for small and medium businesses in Alberta, helping you save money and achieve financial success.

What is a Tax Write-Off?
A tax write-off, also known as a tax deduction, is an expense that can be legally deducted from your taxable income. By strategically identifying and claiming eligible expenses, you can reduce the amount of income subject to taxation. This ultimately helps you lower your overall tax liability in that tax year and keep more money in your pocket.

Tax Write-Offs for Small Businesses

1. Office Rent and Utilities

Do your run your business in office or building? Did you know that you can deduct a portion of your office rent and utility expenses? This includes rent payments, property taxes, insurance, and utilities such as electricity and internet.

When it comes to office rent, small business owners can deduct a portion of their monthly rent payments. This applies whether you have a dedicated office space or if you work from a home office. The key is to calculate the percentage of your home or office space that is used exclusively for business purposes. This percentage will determine the portion of your rent that can be deducted.

In addition to rent, other expenses related to your office space can also be deducted. This includes property taxes and insurance premiums specifically tied to the business portion of your property.

Utility expenses such as electricity and internet are also eligible for deductions. Just like with rent, you will need to determine the percentage of these utilities that are used for business purposes. This can be done by calculating the square footage of your office space in relation to the total square footage of your home or office.

Small businesses spend an average of 11% of their total expenses on rent and utilities. Source: Statistics Canada

 2. Business Travel Expenses

If you travel for business purposes, you can deduct expenses such as airfare, hotel accommodations, meals, and transportation.

The Canada Revenue Agency (CRA) allows you to claim reasonable and necessary travel expenses incurred for business purposes. This includes travel within Canada, as well as international travel. However, it’s important to note that personal travel expenses cannot be claimed under the guise of business use.

When it comes to airfare, small business owners can deduct the cost of flights or other transportation expenses related to business travel. This includes airfare, train tickets, and rental cars. Hotel accommodations are also eligible for deductions, as long as they are reasonable and necessary for business purposes.

Meals and entertainment expenses can also be deducted, but only up to a certain percentage. Generally, the CRA allows for a 50% deduction on meals and entertainment expenses. However, it’s important to keep detailed records of these expenses, including who was present and the purpose of the meal or entertainment.

 3. Vehicle Expenses

Do you have a vehicle that you use for your business? If so, you can claim deductions for expenses such as gas, maintenance, insurance, and lease payments. These deductions can significantly reduce your taxable income and help you keep more money in your pocket. However, it’s important to keep detailed records of your business mileage to support your claims.

To claim vehicle expense deductions, it’s critical to maintain accurate records of your business mileage. This includes tracking the date, starting and ending locations, and purpose of each trip. You can use a mileage logbook or smartphone app to make this process easier. With detailed records, you can confidently claim the deductions you’re entitled to while minimizing the risk of an audit.

Benefits of Vehicle Expense Deductions

By taking advantage of vehicle expense deductions, you can:

  • Reduce Tax Liability: Lower your taxable income, resulting in decreased tax payments.
  • Increase Cash Flow: Keep more money in your business, allowing for reinvestment or growth.
  • Boost Profitability: Optimize your financial performance by minimizing unnecessary expenses.
  •  Improve Business Efficiency: Use your vehicle expenses to streamline your operations and improve productivity.

4. Home Office Expenses

If you operate your business from a home office, you may be eligible to deduct a portion of your home expenses such as rent or mortgage interest, property taxes, utilities, and maintenance costs. These deductions can significantly reduce your taxable income and help you keep more money in your pocket. However, it’s important to ensure that you meet the specific criteria set by the Canada Revenue Agency for claiming home office expenses.

For example, your home office must be your primary place of business, and it must be used exclusively for business purposes. You must also be able to demonstrate that your home office is a clearly defined workspace and that it is used regularly and continuously for business purposes.

Benefits of Home Office Expense Deductions

By taking advantage of home office expense deductions, you can:

  •  Reduce Tax Liability: Lower your taxable income, resulting in decreased tax payments.
  •  Increase Cash Flow: Keep more money in your business, allowing for reinvestment or growth.
  •  Boost Profitability: Optimize your financial performance by minimizing unnecessary expenses.
  •  Improve Work-Life Balance: Operating from a home office can provide flexibility and improve work-life balance.

 5. Professional Services

When you run a business, you will inevitably use professional services such as lawyers, accountants, and consultants. These fees can be claimed as business expenses, which can help reduce your taxable income and lower your tax liability.

Hiring professionals such as lawyers, accountants, and consultants can help ensure compliance with tax laws and provide valuable advice for your business. For example, an accountant can help you keep accurate financial records, file your taxes on time, and identify areas where you can save money on taxes. A lawyer can help you navigate legal issues related to your business, such as contracts and intellectual property. A consultant can provide specialized expertise in areas such as marketing, human resources, or operations.

It’s important to keep detailed records of the services provided and the fees charged. This will help you accurately calculate the amount that can be deducted on your tax return. In addition, it’s important to ensure that the fees paid are reasonable and necessary for your business.

Overall, hiring professionals can provide valuable support for your small business and help ensure compliance with tax laws. By claiming these fees as business expenses, you can reduce your tax liability and reinvest those savings back into your business. However, it’s important to keep accurate records and consult with a tax professional to ensure you are maximizing your eligible deductions within the guidelines set by the Canada Revenue Agency (CRA).

 6. Advertising and Marketing

Expenses related to advertising and marketing your business can include a wide range of costs. This includes the cost of online ads, such as pay-per-click campaigns or social media advertising. It also includes expenses for print ads, such as newspaper or magazine advertisements. Additionally, costs associated with website development and maintenance can be claimed, as having a strong online presence is crucial for many businesses today. Furthermore, expenses for promotional materials like business cards, brochures, and branded merchandise are also eligible for write-offs.

Small businesses spend an average of 2% of their total expenses on advertising. source: – Canadian Federation of Independent Business (CFIB). 

7. Office Supplies and Equipment

Purchases of office supplies such as stationery, printer ink, and computer software can be claimed as write-offs. These expenses are necessary for the day-to-day operations of your business and can add up quickly.

In addition to office supplies, if you buy equipment such as computers or furniture for your business, you may be eligible for capital cost allowance (CCA) deductions. This allows you to deduct a portion of the cost of the equipment each year, based on the depreciation of its value over time. This deduction can help reduce your tax liability in the year that the equipment is purchased and in subsequent years.

It’s important to keep accurate records of these expenses and equipment purchases, including receipts and invoices. This will help you accurately calculate the amount that can be deducted on your tax return. In addition, it’s important to ensure that the expenses and equipment purchases are reasonable and necessary for your business.

 8. Employee Salaries and Benefits

Salaries, wages, and bonuses paid to employees are considered necessary expenses for the operation of your business. These payments are eligible for deduction as long as they are reasonable and directly related to the services provided by the employees.

In addition to salaries and wages, contributions to employee benefit plans are also deductible expenses. This includes contributions made towards health insurance plans, retirement savings plans (such as Registered Retirement Savings Plans or RRSPs), or other employee benefit programs. These contributions not only provide valuable benefits to your employees but also offer tax advantages for your business.

It’s important to keep accurate records of these payments and contributions, including payroll records, benefit plan statements, and receipts. This will help you accurately calculate the amount that can be deducted on your tax return. Additionally, it’s crucial to ensure that the salaries, wages, bonuses, and benefits provided are reasonable and in line with industry standards.

Small businesses in Canada employ approximately 8.3 million people, accounting for 70.5% of private sector employment. Source: Canadian Federation of Independent Business (CFIB)

9. Training and Professional Development

Expenses related to training and professional development for yourself or your employees are considered necessary for the growth and improvement of your business. This includes registration fees for conferences, seminars, courses, and workshops. These events and programs provide valuable opportunities to enhance skills, gain knowledge, and stay updated with industry trends and best practices.

By claiming these expense as small business tax deductions, you can not only invest in the development of yourself or your employees but also reduce your tax liability. It’s important to keep accurate records of these expenses, including receipts, invoices, and proof of attendance.

Small business owners can foster a culture of continuous learning and development within their organizations. This can lead to improved skills, increased productivity, and ultimately, business growth. However, it’s important to keep accurate records and consult with a tax professional to ensure you are maximizing your eligible deductions within the guidelines set by the CRA.

10. Bad Debts

It has happened to so many businesses, bad debts! If you have outstanding invoices that have gone unpaid or debts that are deemed uncollectible, you may be able to claim them as write-offs, helping to reduce your taxable income and lower your overall tax liability.

When a customer or client fails to pay an invoice, it can have a negative impact on your business’s cash flow. Did you know that the Canada Revenue Agency allows you to claim these unpaid invoices or bad debts as deductions, recognizing the financial loss incurred?

To claim these write-offs, it’s important to keep documentation and evidence of the unpaid invoices or bad debts. This includes maintaining records of the original invoices, communication attempts, and any supporting documentation that demonstrates your reasonable efforts to collect the debts. These efforts may include sending reminders, making phone calls, or engaging in collection activities.

It’s crucial to note that before claiming a bad debt as a write-off, you must make reasonable efforts to collect the debt. This means demonstrating that you have taken appropriate steps to recover the amount owed. The CRA requires that you have exhausted all reasonable means of collection before claiming the debt as uncollectible.

11. Charitable Donations

When you make a donation to a registered charity, you are not only supporting a worthy cause but also receiving a financial benefit. To claim these write-offs, it’s important to keep documentation and evidence of the donations made. This includes maintaining records of the donation receipts, which should include the name and registration number of the charity, the date of the donation, and the amount donated.

It’s important to note that not all charitable donations are tax deductible. The charity must be registered as a qualified donee, and the donation must be made voluntarily, without any expectation of receiving something in return.

Under the Income Tax Act, qualified donees are organizations that can issue official donation receipts for gifts they receive from individuals and corporations. Registered charities can also make gifts to them. source: canada.ca

Supporting charitable causes not only helps the community but also provides tax benefits for your business. By claiming these donations as write-offs, small business owners can reduce their tax liability while also making a positive impact on society.

By leveraging these top 11 tax write-offs for small and medium businesses in Canada, you can reduce your tax liability and maximize your savings. However, it’s important to consult with a professional accountant like Richardson Miller LLP to ensure compliance with tax laws and optimize your deductions. Contact us today to learn more about how we can help you navigate the complex world of business deduction strategy and achieve financial success.

What is that saying? The only two things certain in life are death and taxes. I cannot say for sure if these are the only two things certain in life but they definitely are certainties.

How to navigate death and taxes

When a taxpayer dies, there is work to be on the personal tax side of things and depending on the situation, there could be a lot of work to be done. It can be quite daunting for the Executor of the estate to deal with these final taxes as often this is not their area of expertise. So where to start?

Communicate with the government and other authorities

In my experience, most funeral homes are very helpful with this step of the process. But, just in case, it is important for the Executor to communicate with the government as soon as possible. You will need to let Canada Revenue Agency (CRA) know that the taxpayer has passed away. CRA has some handy information on their website about What to do following a death.

You may also have to communicate the death with other government departments if the taxpayer was receiving benefits such as: CPP, OAS, GIS, AISH, etc. Now is also the time to communicate with the bank, investment advisors, life insurance companies and pension providers.

And don’t forget to apply for the CPP Death Benefit now.

Retain professional assistance

There are two professionals that can be imperative when dealing with wills and estates: a lawyer and a Chartered Professional Accountant (CPA). These professionals can provide great assistance to you through the process.

Since I am a CPA, not a lawyer, I will only focus on the tax side of things and will leave the legal side to the lawyers. A CPA well versed in dealing with estate files can guide you through the process and alleviate some of the stress and confusion for you.

It is ideal to talk to a CPA in advance of the infamous April 30th personal income tax deadline. (The filing deadline for a deceased taxpayer may not even be April 30th as it depends on when in the year they pass away.) Getting authorization with CRA on a deceased taxpayer’s account takes a bit of time so this is something that you would want to have done in advance. Also, now is a good time for a CPA to get to know the file and can start to guide you on what sort of paperwork they will need.

Be patient

Some final personal income tax returns can be very simple while others can be very complex so patience may often be required. The Executor may have to do a lot of digging to find past income tax returns and to determine where all the assets are even held.

So… what is simple and what is complex?

Simple

The level of complexity will depend on what they owned, their marital status and what is detailed in their will. When a taxpayer dies, they are deemed to have disposed of all capital property they owned on the date of death and some of these dispositions may have tax implications. If the deceased has a surviving spouse that is the sole beneficiary of their estate, then that personal income tax return will be less complex. The Income Tax Act has a spousal roll-over provision which allows for all the deceased taxpayer’s assets to roll-over tax free to their spouse on their death. In cases like these, there is often only a need to file that final personal income tax return.

Not so simple

When a taxpayer has no surviving spouse, this can get more complex and can take a lot longer to settle the estate. There is still the need for that final personal income tax return that may report some taxable income on certain deemed dispositions. Some of the more common items are: RRSPs, pension payouts, real estate holdings and non-registered investments, to list just a few.

Often these assets can take some time after death to be sold or converted into cash. When this happens, there is now an Estate created. An Estate essentially is the mechanism for holding those assets from the time of death until the time they can be paid out to the beneficiaries. Once this happens, there is now an annual filing obligation of a T3 Trust Return with CRA. The year-end for these returns will be the anniversary of the date of death.

Once you have received all Notices of Assessments from CRA for all the returns filed then you can apply for a Clearance Certificate. This Certificate is CRA’s stamp of approval that there are no outstanding tax issues for the taxpayer. This one little piece of paper is very important for an Executor to have before they fully distribute the estate assets to the beneficiaries.

If you do not get a clearance certificate and distribute the assets of the estate, you may be personally liable for any tax owed by the deceased, to the extent of the value of the assets distributed. An Executor may not even be a beneficiary of an estate and could still have potential liability for the deceased taxpayer’s taxes if they do not get this Clearance Certificate.

Even more complex

Sometimes terminal income tax returns can have even more levels of complexity. Here are a few other items that add extra layers to these final tax returns:

  • Taxpayer is behind on filing personal tax returns
  • Taxpayer owned farmland or fishing property
  • Taxpayer owned shares of a small business
  • Potential for optional returns
  • Capital losses incurred
  • Estate donations – those donations made by will or designated donations
  • Foreign property owned

As you can see, there can be a lot more involved in the preparation of these final income taxes. At Richardson Miller LLP, we have seen a very wide array of estate files and we would be happy to help you through this process.

To Incorporate or Not to Incorporate

Should I Incorporate my business… This is a very common question, and the answer isn’t always clear. It depends on your current situation, your future plans, and some best/worst-case scenario analysis. We’ll look at the various factors/benefits and drawbacks.

If you’re not incorporated…

If your business is not incorporated, you report your business income and expenses with a schedule on your personal tax return. The net income is included in your taxable income and you pay tax based on your marginal personal tax rates. On the flip side, if you have a net loss, that amount can be deducted from your other sources of income.

What does it mean to Incorporate?

When you Incorporate a business, you create a separate legal entity. Your business operations occur within this entity.

What are the benefits to incorporating:

  1. Separate legal entity. Corporations can own property, obtain loans, and enter into contracts. If the owner happens to die, the corporation lives on.
  2. Easier access to capital. Corporations can often borrow money at lower rates or more diverse lending options.
  3. Lower tax rates. In Alberta, the small business corporate tax rate is 11%. This rate is considerably less than the marginal personal tax rate of 25%-48% in Alberta. This personal tax rate doesn’t include the Canada Pension Plan payment requirements of up to $6,332.90 (based on 2021 rates).
  4. Limited liability. A corporation can protect you from being personally liable for certain business liabilities.

What are drawbacks of incorporating:

  1. Corporate tax filing requirements. The cost of preparation of a T2 Corporate tax return is often significantly higher than that of a business schedule on a personal tax return.
  2. Record-keeping requirements. In addition to the revenues and expenses, you’ll need to track the assets and liabilities of the corporation. This can add considerable costs in record/bookkeeping.
  3. Other costs. It costs money to incorporate: the basic costs to incorporate, a name search, maintaining your corporate Minute Book, and Annual Return filings.

Should you Incorporate your Business?

Answer: That all depends on your circumstances. The benefits must outweigh the additional costs and filing obligations. Here are some factors to consider when looking at your options:

  1. What are your earnings in your business? Do you earn at least $20,000 more than what you need to live on and would appreciate saving on personal tax? This is the point where the benefits start to make sense when considering the cost of incorporation. If you have net business losses in the start-up phase of your business, it may be beneficial to NOT incorporate and use the losses to offset your earnings from other sources. In the same way, if your business earns approximately what you require to live on, there are generally very few tax savings to warrant the costs and efforts involved in incorporating.
  2. Do you have other business partners or a need to raise money? Incorporating can add flexibility in how owners are compensated. Corporations also have more flexibility in obtaining financing from lenders or raising capital through investors.
  3. What sort of risks is inherent to your business? Can someone sue you? What is the likelihood of a lawsuit? If there is a chance that you could have uninsurable losses, you may wish to consider incorporating. The corporate entity could shield personal assets from lawsuits or unforeseen business operation losses.
  4. Do you have other needs? Do you require the appearance of being a little more established or sophisticated in the business world? Will potential customers/clients respect you more if you’re incorporated? Perhaps you simply won’t qualify to obtain a sales contract if you’re not incorporated.

Let’s take a look at some real-life examples.

Scenario 1:

Dylan is a fantastic artist and his friends have convinced him to sell his works online. He works at building this dream in his spare evenings and weekends. He’s using his savings and day job earnings to fund the start-up costs for his new business. It’ll take time to establish his brand, build his website, and perfect his product before sales start to increase.

Dylan should probably NOT incorporate. He will likely have a net loss from his first year or two of operations. These losses can be used to reduce his other forms of taxable income on his personal tax return. He’s better off avoiding the excess costs to incorporate and enjoy the personal tax savings writing off his business losses.

Scenario 2:

Casey is a real estate agent. Casey has been reporting their net business income on their personal tax returns for years. Over the last few years, Casey has found that the earnings from business activities are quite a bit more than what they require to comfortably live on.

Casey could likely benefit from incorporation. When net business income is at least $20,000 more than what is required for living, earning money through a corporation (and benefiting from small business tax rates) can be a fantastic way to defer some tax. Casey would draw from the corporation when they need to live on and report the related compensation (salary and/or dividends) on their personal taxes. Excess earnings remain in the corporation and are not taxed personally. The greater the earnings over the living requirements, the greater the tax deferral. A business owner earning a net $400,000 while only requiring $90,000 can see tremendous tax savings from incorporation making it well worth the costs to incorporate.

Scenario 3:

Ava, Marissa and Lauren are Engineers. They want to combine their efforts and offer consulting and design services. Marissa is only able to work half-time as she has demanding family obligations. They wish to take advantage of as many research grants as possible.

This Engineering company would benefit from Incorporation for a number of reasons:

  • A separate entity would allow for flexibility in allocating compensation to its various owners. All three can be equal owners of the corporation, but their wages can be determined based on their efforts.
  • Many grants require that businesses be incorporated in order to receive funds. The company may also require bank financing for projects/equipment.n incorporated company may appear more sophisticated to potential customers/clients/collaborative partners. There is a strong chance that certain contracts may require the company to be incorporated.

Scenario 4:

Martin has worked as a truck driver for years. He’s always dreamed of owning his own rig and being his own boss. He has finally saved enough for a down payment on a truck and has lined up fairly steady work allowing him to quit his day job.

Martin may wish to consider incorporating. With his line of work, there is potential for accidents. Should the unthinkable happen and insurance not fully cover the fallout, his personal assets could be exposed to this liability. The separate corporate entity would allow him to declare bankruptcy within the corporation and walk away from the liabilities.

Keep in mind that situations can always change in your business. If it doesn’t look like now is the right time to incorporate, it’s fairly simple to incorporate at a later date. Talk to your experienced, qualified Chartered Professional Accountant about the right path for you. If you don’t yet have a trusted advisor, we’d be happy to help!

When Bob’s Trucking Inc. started experiencing cash flow problems, Bob found his company was unable to pay all of its bills. He decided to use the money the company did have to pay for fuel and employees to continue operations because without fuel in the trucks or employees to drive the trucks, there was no business. At this point, he stopped paying the company’s GST and source deductions to CRA. He thought that if the trucking company ended up going bankrupt, the business debt to CRA would be taken care of through bankruptcy…WRONG!

Am I personally responsible for my business debts to Canada Revenue Agency?

When a business collects GST from customers or withholds source deductions from employees, it is acting as an agent on behalf of CRA. The company now has an obligation to remit these amounts collected to CRA. If Bob’s Trucking cannot meet this obligation in full, CRA will start arranging payment plans with the company. If this is still unsuccessful, CRA will pursue legal action against Bob’s Trucking Inc. to collect these amounts.

If CRA is still unsuccessful in collecting from the company, they can and they will go after the director of the company to try to collect these amounts. Here is where Bob’s personal bank accounts and assets are now at risk!

It is a slightly different story when Bob’s Trucking Inc. owes corporate income taxes to CRA. Since these amounts have not been collected by a third party on behalf of CRA, the company is not acting as an agent. The same collection process will be followed by CRA to try to collect these amounts from the company. But, if that is unsuccessful, Bob’s personal assets may or may not be at risk.

If Bob’s Trucking Inc. paid Bob dividends, then CRA can go after Bob personally for corporate income taxes owing up to the amount of the dividends he received. The logic behind this is if the company did not have sufficient money to meet its corporate tax obligations, how did it have sufficient money to pay dividends?

No business owner wants to find themselves getting behind with filing or payments with CRA.

When this does happen, most owners put their heads in the sand and try to avoid CRA’s phone calls and correspondence. This is a big mistake! CRA is willing to work with businesses to arrange payment plans to avoid pursuing legal action. But you MUST communicate with CRA.

This is one of the reasons it is important to have a professional accountant on your team. It is important to be proactive as a business owner so you do not find yourself in hot water with CRA. At Richardson Miller LLP, we have decades of experience working with business owners and corresponding with CRA.

Behind every small to medium enterprise is a person. Does your corporate tax strategy consider the person that is the entrepreneur?

A tax strategy should consider both the corporate tax AND personal tax implications.

What mix puts the most dollars in your jeans at the end of the day?

Open and honest communication with your accountant is critical.

Does your accountant know YOU as well as your business?

Knowing YOU is a critical factor in deciding on the best solution for owner compensation. Without a full understanding of your situation, the wrong compensation plan can cost you big bucks.

What do you have going on in your household for tax purposes?

  1. Do you have a spouse? What is their income level?
  2. Do you have other sources of income? Giant expenses to deduct this year?
  3. Significant life changes planned in the next year or two? A new house, children, a marriage, a divorce? Retirement plans?
  4. What is your five-year plan?
  5. What about children? How old are they? Plans for post-secondary education?
  6. Does anyone in your household have medical issues or disabilities?

I’ve often said that the more I know about my clients, the more opportunities for tax savings. A corporate tax strategy that fails to consider these factors isn’t much of a plan.

The corporate tax strategy should be pro-active.

  1. AVOID PERSONAL TAX SURPRISES. Based on your corporate activities, what is your personal tax bill going to be? What are some opportunities to mitigate that personal tax hit? RRSPs? Donations? (One of my favorite clients has me calculate how many charitable donations are required to eliminate his personal tax bill each year. That guy makes my heart smile.)
  2. TAKE ADVANTAGE OF LOWER TAX BRACKETS. Perhaps your personal income is low this year, but you are planning on buying a house next year. You were planning on drawing significantly more out of your corporation for the down payment. It’s likely a terrible idea to have personal income in 2020 of $20,000 and $200,000 in 2021. Smooth this out over the two years so that you’re taking full advantage of the pleasant tax brackets in 2020 and avoiding the ugly brackets in 2021. Think about bumping up your income to $120,000 in 2020 and buying an RRSP to take advantage of the Home Buyers Plan for that down payment (if you qualify).
  3. INCOME SPLITTING OPPORTUNITIES. In a family business, everyone pitches in at some point or another. Should you consider paying your spouse a wage? Can you justify putting your children on the payroll? ***NOT YOUR TODDLER*** Perhaps your older child helps clean up the shop or organize paperwork. Pay them a reasonable and justifiable wage instead of an allowance. From there, they can pay for their own expenses or college savings.
  4. DO NOT PROCRASTINATE. The longer you wait to supply your year-end to your accountant, the fewer tax planning opportunities there are. Keep on top of things and get your corporate documents to your accountant within a month or two of your year-end. I picture my October year-end guy that brings his year-end to me in April. There is very little I can recommend for him to reduce the corporate tax bill or his personal tax bill. To further rub salt in those tax bill wounds, he typically has to pay interest and penalties for late remittances.

Do you think you have a “one strategy for all” accountant? I’d be happy to provide a second opinion in a complimentary consultation. Contact Richardson Miller LLP today!

You are officially caught on CRA’s radar…

  • CRA is auditing or reviewing your information
  • Your filings have been arbitrarily re-assessed
  • The collections department is harassing you

No matter what the reason, dealing with the Canada Revenue Agency (CRA) can be extremely stressful.

Here are some tips to help ease that CRA audit pain.

What are your responsibilities?

By law, you have to keep adequate books and records to determine your tax obligations and your entitlements. Generally, books and records must be kept for a minimum of six years.

If you use a computer for your accounting records, you must keep your books and records in an electronically readable format, even if you also keep them on paper. Using the services of a tax professional does not relieve you of your responsibilities.

For an audit, you must make available to the auditor all of your relevant records (both paper and electronic) and supporting documents, and provide complete and timely explanations to the auditor’s questions. Failure to provide required books and records is an offence under the law.

Source: canada.ca

1. Do NOT Ignore them.

The problem will not go away. Keep the lines of communication open. Return phone calls even if the only thing you have to say is “I’m working on it”.

2. Deal with any requests or incorrect assessments ASAP as they are often very time-sensitive.

If you ignore requests and CRA re-assesses you, it can take several months to correct AND if you ignore them long enough, the problem may become unfixable.

CRA Audit Client Examples

a. I had a trucking company referred to me. He was behind on GST filings and CRA Factually assessed him. The client had opted to bury his head in the sand. The returns became statute-barred and CRA refused to reassess them. I luckily found a reasonable auditor to re-open the files and managed to save my (very happy) client $80,000.

CRA Factually assessed – If you don’t file your GST file on time, the CRA can arbitrarily access you and send you a bill.

b. In another case, (again, before he was my client) an automotive mechanic shop company underwent a payroll audit. The business owner and (non-CPA) accountant at the time didn’t respond properly to queries. CRA incorrectly assessed over $100,000 owing in source deductions. They were referred to me. It took over a year of fighting with CRA to have them amend their assessment to the correct balance owing of only $4,000. In the meantime, their corporate bank accounts were seized. Again, if it would have been dealt with properly in the first place, it would have never been an issue.

3. Enlist your Chartered Professional Accountant in dealing with CRA.

Generally, I’m the one who responds to my client’s CRA queries. If the client is preparing the response, I review it before it is sent in. In the case of an on-site audit, I prefer to gather the records and host the auditor in my own boardroom. This eliminates any intimidation factor.

Quite often, the accountant will know exactly what the auditor is looking for and be able to provide the facts and only the facts to get the issue resolved as efficiently as possible. The last thing you want is a simple review request for payroll to turn into a GST audit, personal benefit assessments, disallowed expenses… the list goes on.

Sometimes just a slight change in terminology can drastically change the audit outcome.

I had a trucking company client go through a review to determine whether a subcontracted driver was an employee. If the contractor was determined to be an employee, my client would have been liable for over $20K in payroll taxes. My client kept referring to the contractor in employee terms even though the nature of the arrangement was leaning toward the contractor. Had I not been able to pre-screen and rephrase his responses to the appropriate terminology, the client would have ended up with a nasty bill.

4. CRA isn’t always right.

I know…it’s shocking indeed. You want someone in your corner who understands taxes to be able to argue on your behalf.

I had a client undergo a GST audit. The auditor (who appeared somewhat inexperienced) proposed an assessment of over $20,000 owing. Upon review of his supporting paperwork, I successfully argued the GST owing down to less than $2,000.

Do you need help in dealing with a CRA issue? We’re happy to help!

 

The ongoing discussion of Salary versus Dividends has got to be one of the oldest debates since the dawn of complex taxation. Over the years, I’ve heard many people (accountants included) preach that dividends are the way to go. I cringe at these “one size fits all” solutions.

Salary versus Dividends – how to choose

The increasing Canada Pension Plan (CPP) rates make a dividend only compensation strategy tempting, but consider this:

  1. Childcare costs can only be deducted against employment (or self-employment) income. If you have dividend-only income, those daycare receipts could be worthless at personal tax time.
  2. Did you move during the year? Moving expenses can only be deducted against employment income.
  3. Do you have a health spending account in your corporation? This is only deductible in your corporation if you are an employee of your corporation. You are not an employee if you are only paid a dividend.
  4. Dividends are grossed up on your personal taxes. This means that your taxable income is essentially inflated for calculating credits and programs that are income-dependent. Dividends will mean reduced Child Tax Benefits or GST credits. For older entrepreneurs, it can mean clawed back Old Age Security benefits.

Perhaps dividends are the most cost-effective method of compensation for you. Consider taking a tiny wage from your corporation so that you are technically an employee and can access benefits and tax credits aimed at people who report T4 income.

Be aware of the consequences of dividend-only compensation.

  1. No (or reduced) CPP benefits. Think retirement plan and disability payments. Consider taking those employer and employee CPP savings and locking them into a long-term investment plan to save for the lost future benefits.
  2. No accumulation of RRSP contribution room.

The answer isn’t simple and each individual situation needs to be evaluated separately. Depending on the various taxation policies at provincial and federal levels of government, the ideal compensation strategy can flip flop annually. Make sure your accountant is aware of any changes in your household and personal plans.

Richardson Miller LLP is here to help you with all of your Accounting needs. Contact us today.

GST QUICK METHOD

If your business is operating at revenue of $400,000 or less, you need to stop what you are doing and read this!

Canada Revenue Agency (CRA) offers an elective GST filing method for small businesses who have less than $400,000 in annual revenues. It is called the Quick Method and, in my opinion, it is a highly under-utilized election.

Who should use the Quick Method?

  • Other than a few industry specific exceptions, most businesses with less than $400,000 can use this election
  • Businesses with the majority of their expenses not being subject to GST would want to utilize this method. For example, if your largest expense is payroll you would definitely want to consider this.

How does the Quick Method work?

Under this method you would still charge the applicable rate of GST/HST on your sales, but this is not the same as the amount of GST you end up remitting up to CRA. What you end up remitting is based on the quick method remittance rates which are less than the applicable rates of GST/HST you charged.

Yes, that is correct, you collect more GST from your clients than you send to CRA. You do not get to claim any GST paid under this method though because the part of the GST you collected but got to keep accounts for the ITCs you would have otherwise claimed. The intention behind this election is to streamline the GST process for small businesses, but it can end up saving your business money! Who doesn’t want to save some money?

If the majority of your expenses are not subject to GST anyways, you are going to end up ahead under the Quick Method. You can find all the specifics on CRA’s website but I’ll go through a quick example below.

A practical example

It may seem a little confusing and it does require a little bit of number crunching so I will just sum it up a little.

Let’s look at Joe’s Contracting Ltd. Joe owns this business and he provides handyman services to his customers. He has very little costs associated with supplies as the majority of the jobs require only labour so he has one employee that helps him out. His business is based in Alberta and he earns exactly $400,000 in revenue a year.

Under the regular method of GST, Joe would collect GST of $20,000 from his clients and send the whole $20,000 up to CRA.

Under the quick method, Joe would still collect GST of $20,000 from his clients, but the cheque he sends off to CRA is only $15,120.

If you can choose to send CRA $20,000 or $15,120 which one are you choosing? I would think Joe would prefer sending the smaller cheque as well.

And has an additional bonus – this savings will continue to happen every single year when he files his GST return as long as he continues to meet the criteria.

The bottom line

If you think you qualify for the Quick method but have never heard of it before, you may very well be sending too much money to CRA. Reach out to us to discuss.

  1. Jazz Hands.

    That’s right. No auto-correct here—I meant it. With many cities implementing mandatory masks in public, we are missing out on a significant portion of our non-verbal communication options. Many of us can admit to over exaggerating our squinty eyes in attempts to convey that we are in fact smiling. Since Covid-19 is apparently here for the long haul, perhaps we need to consider implementing a universal sign that we are smiling without purposefully deepening our crows-feet (which, going forward, will likely be known as smiling mask wrinkles).

  2. Extended Deadlines.

    I recently visited my dental hygienist for the first time since lock down hit. After my teeth cleaning, I re-booked the appointment for six months later. In six months, it’ll be the end of March 2021! This realization was a bit of a smack in the face. In six short months, we’ll be doing our personal taxes all over again! This point is specifically for the procrastinators out there. Be aware that it’s almost time to do your 2020 personal taxes… even though you JUST finished your 2019 taxes. Perhaps you completed them earlier but JUST paid them. That next tax bill isn’t very far away. For many individuals (corporate filers included), the deadline extension has skewed the sense of urgency/timing/responsibility. Don’t procrastinate. Get ‘er done. Be on time. Missing deadlines may result in penalties, interest, missed incentive opportunities and delayed family tax credits.

  3. Covid-19 Incentives.

    Back in March and April, many folks got caught up in the government incentives and handouts. I’d encourage everyone to re-visit the CRA website to double check those programs. Over the last few months, the criteria has evolved and the website has been updated continuously. Did you actually qualify for that incentive? Perhaps you first thought you didn’t qualify but now you do. If you didn’t actually qualify but have received money, there are options to repay that money (via My Account and My Business Account on CRA online). Rest assured that CRA will be reviewing all who have received incentives to ensure eligibility.

  4. Creativity

    I’m impressed with the resiliency of entrepreneurs in Alberta. So many businesses have taken this setback and have quickly revised processes/systems and products/services to survive and or thrive. Thankfully this pandemic has hit when we have the technology to work from home. Could you imagine if this happened in 1985? Check out my article on how home offices impact your tax return. On the other hand, there are many businesses that have become victims of the lockdowns. This is truly heartbreaking. If you fall into this category, do continue to talk to your professional accountant to determine your filing responsibilities and opportunities to claim any losses.

If you need advice on COVID-19 issues with your business, please reach out! We’re happy to help. Contact us today.

The COVID-19 pandemic and resulting lockdowns have brought on a huge shift for people to work from home. Several business leaders have determined that having employees work from home is entirely possible and a great way to reduce overhead costs. Why would you force your employees to drive across town and sit in an office when they are just as productive (if not more) in their own homes? This trend has impacted our household. My husband’s automotive expenses are a fraction of what they were a year ago. On the other hand, our utilities, unlimited highest speed internet requirements, toilet paper and coffee costs have increased substantially. How does this trend impact your tax filing obligations?

Information for Employers:

If you have required your employees to work from home at least 50% of the time, they can claim some of their home office expenses on their personal tax returns. When you hand out your employees T4s, provide a completed T2200 Declaration of Conditions of Employment form. Indicate on the appropriate sections that the employee was required to work from home.

Based on the size of their home office, your employees will be able to claim a percentage of their expenses. This percentage is calculated by dividing the workspace area by the total finished area of the home. Expenses to track include: Utilities (heat, electrical, water), and maintenance (cleaning supplies, paint, plumbing, etc.) and rents. If your employee is paid commissions, they may also claim their insurance and property taxes. If home office specific expenses are incurred (fax line, increased internet capacities, office space only maintenance), the entire expense may be deductible. For example, if your household normally spent $50 per month on internet and now you spend $150 so that your ZOOM calls don’t freeze, one could argue that the $100 extra should be deductible. Similarly, if you revamped a spare room to create an office oasis (paint, shelves) you may (within reason) claim 100% of these costs.

Ensure that your employees are aware that employment expenses are often reviewed by Canada Revenue Agency. Encourage your team to keep their receipts/invoices/statements to be able to prove their claims.

Information for Business Owners:

Whether you are incorporated or a proprietor, you may also claim some home office expenses. The portion claimable is calculated in the same manner as for employees (office space divided by total finished area of your home). In calculating this percentage, it’s tempting to say that a significant portion of the home is used for business purposes. As a general rule, it’s best to keep the percentage around 10%. Any more than that and Canada Revenue Agency can argue that your home was a revenue generating property and you put your Principal Residence Exemption at risk… meaning tax implications on any gains when you sell your house. Also note that if you rent a secure commercial space, you likely cannot claim your office as well.

Keep track of your rents, heat, electricity, insurance, mortgage interest, property taxes, security monitoring fees, and maintenance costs. You can claim the calculated portion of those expenses. Consider office specific costs: the portion of internet required for the smooth running of your business, a fax line, office décor, desk, shelves, chair, chair mat, WIFI booster, etc. These office specific costs may be considered 100% for business purposes and expensed accordingly. Larger items such as furniture, computer, printers, and other office equipment would be expensed over a period of time via Capital Cost Allowance.

Ensure that your claims are reasonable and justifiable. Would it pass the sniff test for Canada Revenue Agency? Was it an expense incurred to earn business income? I think my favorite COVID-19 home office question so far has got to be: With the shortage of toilet paper, do you think I can justify expensing the entire cost of the bidet seat for my toilet? This client won tons of points for creativity and making me laugh out loud during a particularly stressful time in the accounting world. My advice: I would stick to the 10% household repairs and maintenance write off on this one.

If you have any specific questions or concerns about home office expenses for either your employees or yourself as a business owner, I’m always happy to chat. Send me a message at angela@rmllp.ca.