Evolution Tax & Accounting

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When Does The Canada Revenue Agency Come Knocking?

Over my years as an accountant, I have seen a number of Canada Revenue Agency (CRA) queries to my clients and have come to the conclusion there are several factors that can cause them to come calling on businesses and people.

1. Postal Code: CRA has a program where they match an individual’s income to their postal code. If the housing in your neighbourhood is higher than the income you are reporting, they may ask to see your bank statements and request income verification to see how you manage to live in that area and what kind of toys (boats, ATV’s, vacation properties) you have.

2. If you regularly have business or investment income or expenses and then one year there are significant increases or decreases, this can cause them to ask for more information to find out why you are statistically out of the range of your usual reporting. For example, you might have large purchases and claim way more GST Input tax credits than normal so they might ask to see the largest receipts or a listing of the GST input tax credits you have claimed. It’s important to keep all your receipts and paperwork for six years after you have filed your tax returns (either personal or corporate tax returns)

3. Some people say that once you have an issue with CRA you become “flagged” then CRA constantly monitors your income or starts requesting more information on various expenses you have deducted from your income. I don’t know if that is true or not. I have some clients that seem to be selected more often than others. Whereas many others have a query once and then seem to be fine for years after that…. You can draw your own conclusion!

4. And lastly, you might have CRA come knocking because it’s Tuesday…. That’s right – there’s no telling why they selected you. Often they do random selections in certain cities for a program to review restaurant or hair salon tips, subcontractor earnings, medical deductions, professional fees paid and the list goes on.

Best advice – If CRA contacts you… Call your accountant before you respond to ensure you are providing the correct information! It’s always better to provide only the information that they are requesting and not the whole enchilada.

Can I Deduct Home Office Expenses

There is a bit of mis-information floating around about deducting home office expenses. Either people are not claiming all the eligible expenses or they are claiming expenses when they shouldn’t.

Here’s a brief outline of the requirements for deducting your home office:

Sole Proprietorships and Partnerships – Business Use of Home:

Meet ONE of the following conditions:

It is your principal place of business; or
You use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your clients, customers, or patients.
You can deduct part of your maintenance costs such as heat, home insurance, electricity, and cleaning materials. You can also deduct part of your property taxes, mortgage interest, and Capital cost allowance (CCA) (watch out for recapture rules when you sell the house – I rarely recommend deducting CCA). Use form T2125 Statement of Business or Professional Activities

If you rent your home, you can deduct the part of the rent and any expenses you incur that relate to the workspace. Business use of home expenses cannot create or increase a loss, only reduce income to zero. Any remaining expenses can be carried forward indefinitely.

Corporations – Business Use of Home:

Meet one of the above conditions AND charge the corporation rent for the exact amount of the annual expenses. The rental income and expenses are reported on your personal tax return (of the shareholder) and then the rent payment is deductible to the corporation. Use form T776 on your T1 personal tax return and enter the rental expense on schedule 125 statement of income and expense of the T2 Corporate Tax Return.

Commission employees – Work Space:

Meet ONE of the following conditions:

The work space is where you mainly (more than 50% of the time) do your work.
You use the workspace only to earn your employment income. You also have to use it on a regular and continuous basis for meeting clients, customers, or other people in the course of your employment duties.
You can deduct the part of your costs that relates to your work space, such as the cost of electricity, heating, maintenance, property taxes, and home insurance. However, you cannot deduct mortgage interest or capital cost allowance. Use form T777 Statement of Employment Expenses on your tax return. Keep with your records a copy of Form T2200, Declaration of Conditions of Employment, which has been completed and signed by your employer.

You Know What Grinds My Gears

I have seen many construction workers become so far behind in their personal taxes and GST remittances because they are self-employed and don’t understand the tax reporting requirements. Many companies ask employees to become self-employed subcontractors or incorporate a business in order to work for them. This can lead to a myriad of problems for those workers caught up in this situation. Yet very few of those companies provide information for those “new” business operators to be successful in reporting and tax compliance. And this grinds my gears!

Often these subcontractors have no idea what the Canada Revenue Agency’s (CRA) tax reporting requirements are. In the past, their income tax, EI & CPP premiums were deducted and remitted by their employers. After going solo, they generally earn more than $30,000 per year but don’t know that they need to enroll in the GST program once they hit that level of income. They soon find out when they file their personal tax returns that they are in a heap of trouble. Nothing has been remitted.

Let’s do an example of how this works:

Johnny becomes “self-employed” and earns $60,000 for the first year. Of course, he can deduct some business expenses from his income now:

Supplies and materials
Track his mileage, fuel, insurance, and repairs to his vehicle and deduct the percentage he drove for work
Cell phone
Business office expenses, business cards, marketing, travel, education
Home office expenses
But Johnny hasn’t really kept any of his gas receipts or any other receipts… he manages to dig up $500 of fuel receipts from his glove box. He got copies of his cell phone bills from Bell Mobility that total $1200 for the year, so his net income is $60,000 – $500 -$1200 = $58,300. His tax bill in 2017 will be estimated at $15,270. ($6700 federal tax, $3450 Alberta provincial tax, and $5120 for CPP).

That’s a whooping amount of unexpected money for the taxpayer to come up with by April 30th. Financial literacy is important for not only business owners but for everyone! We need to take a chance and begin to talk about our financial health.

Having trusted advisors, friends and family to support us so we can create our prosperity and live a life of our dreams. Call a CPA today if you or a family member is in this predicament!

To Incorporate or Not to Incorporate?

Sole Proprietor:

PROS:
Less cost for preparing tax returns.
Less bookkeeping requirements.
More deductions to a sole proprietor than is available to a personal service business corporation.
Business losses can be applied to other income on the personal tax return.
Unless you have excess income there is little benefit to incorporating.

CONS:
All income is taxed in the year it is earned.
Income is taxed at your personal marginal tax rate.
Personal assets could be at risk.
No life time capital gains exemption available.
Increasing risk and higher earnings are best in a corporation.
Incorporation:

PROS:
Low tax rate for small businesses and ability to defer taxes on excess income left in the corporation.
More flexibility for income planning – paying yourself dividends or wages.
Creditor protection: Corporations are separate legal entities so personal assets are less at risk.
Life time capital gains exemption of $848,252 (2018) and $835,716 (2017) is available on the sale of qualified small business shares.
Ability to transfer assets to the corporation on a tax deferred basis, but property transfer tax and / or GST may be assessable at the time of the transfer.
Income splitting with family members is available (NOTE: There are significant changes under debate right now… this is subject to change).

CONS:
More reporting requirements = higher costs to operate.
Losses in a corporation can’t be personally claimed.
Higher administrative costs.
Complicated business structure that requires expert advice to set up with correct share classes.
Each business structure has its advantages and disadvantages and it’s important to obtain professional advice when deciding what’s best for you. You can save yourself money and time setting it up effectively from the start.

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