April Tax Solutions Addresses Some Frequently Asked Tax Questions
Does my business’s corporate year end (T2) tax return need to be filled out and submitted by a Chartered Accountant?
No. Anyone can fill out your tax returns. BUT, not everyone can fill out tax returns properly, which is one of the reasons that we usually find an average of $3,000 per client when we go back and look at their 3 previous year’s filings.
I keep my receipts and bring them to my Accountant at year end….is this bad?
The importance of bookkeeping is crucial to your business success…and it doesn’t need to cost much, either. If you don’t look at your profit and loss until the end of the year, then you may have been losing money for the past 12 months and the “bleeding” may now have turned into “hemorrhaging”. Trades especially are vulnerable in this area as they perceive great compensation for the project but underestimate the true value of labor and materials required. Find a bookkeeper that will accept your receipts every two months and keep you profitable.
When should I hire a bookkeeper?
It’s highly recommended that you hire a bookkeeper as soon as you start your business. That way you’ll avoid all the mistakes that novices make. Our bookkeepers can cost as little as 3 hours per year, dependent on your activity. It’s not worth your time to learn it.
I have $100,000 worth of equipment. Do I have to depreciate it?
Yes. The amount of depreciation depends on the type of equipment, and their CRA assigned depreciation rate.
I had a Sole-proprietorship and Incorporated part way through the year. How does this affect my bookkeeping?
The bookkeeping needs to be two distinct bookkeeping records as they are two separate businesses. It is very important that each business has its own Business # and GST # as well. The business numbers cannot be shared, and each business requires its own unique bank account.
When should I apply for a GST / HST account?
If you will have sales of $30,000 in fiscal year, you must obtain a GST number. If you exceed sales, but fail to obtain a GST number, CRA will create and backdate your GST owed to the date 60 days after your $30,000 was exceeded.
Is there any advantage to applying for a GST account early?
No. It’s just more paperwork. The exception is if you will be purchasing many items in advance of your first sale – where this will allow you to recover the GST on items purchased (called ITC’s) as Input Tax Credits.
I already have a GST account. Do I need another one?
Chances are that you received a GST number operating personally (as Sole-Proprietor or Partnership). If you start a separate business or start an Incorporated company, you’ll need to apply for a NEW GST number. Each business (exceeding $30,000 in sales/revenue) must each have a GST number. This is due to the income of your new company being distinct in its recording of ssIf you will have sales of $30,000 in fiscal year, you must obtain a GST number. As part of our services, we review your businesses for correctness and will contact CRA for you to correct so you stay in compliance.
Beware of the “tax preparer”
Many people post signs up claiming that they can prepare and file your taxes – for a fee. What is their experience in this field? Do they feel that because they’ve done their own taxes for the past 10 years that they are now experts? Our office routinely sees past tax returns which were filed having errors and missed opportunities. This usually accounts for a few thousand dollars of tax paid unnecessarily; and in one case we were able to recover a $24,000 error for a client. I cannot stress the importance of getting the right accounting support for your business.
I have a corporation – should I declare Dividends (T5) or take a Salary (T4)?
My view centered around this topic is what is important to you. Are you in favor of topping up your RRSP, maximizing your CPP, or do you have child daycare expenses? – If yes, then take a monthly salary or end-of-year management fee. You’ll need a T4 to show the business expense and there will be a source deduction remittance required by CRA payable to your Payroll Account (RP Account) within 15 days of payment to yourself. I usually prefer Dividends as this is a “sharing” of business profits, after tax, which in a corporate setting (in Alberta) is currently taxed at 14% (3% Provincial and 11% Federal) below $500,000. This also allows dividend “sprinkling” amongst shareholders, such as a husband and wife (as long as the correct corporate structuring has occurred).
I pay a lot of tax every year – what can I do?
Our view is that it is imperative that we review both the business operations as well as your personal tax situation simultaneously to properly balance the amount of tax you pay in both areas with the focus on… Never Pay Tax Unnecessarily. Some of the options we may explore are paying your spouse and paying your kids. Often times they provide infrequent support to your business with no compensation. They should be paid for their “part-time” assistance, and if their tax base is low – they may get all their tax back and if under age 16, they won’t pay CPP.
Now that I’ve started a business, I don’t have any medical/dental benefit coverage.
This doesn’t have to be expensive – in fact, as a corporation – it’s an advantage. This opens the door for you to setup a PHSP (Personal Health Spending Account) which will allow you to deduct 100% of the medical/dental/vision expenses allowed by the Tax Act as a business expense. This means that you are not out-of-pocket (after tax dollars) and can recoup these costs. Although you cannot pay the expense directly to your provider with company funds, through a provider it will only cost (your business) 5 or 10% in admin fees to process…and that’s a good thing.
Should I remain a Sole-Proprietor? Or should I Incorporate?
There are two reasons to incorporate. One is liability – the other is tax advantage. Regarding liability, if your business puts you at risk that your actions may cause damage to property or injury to a person – then there may be a chance that you could be sued for damages; and as a sole-proprietor your personal assets, cash, home and vehicle would be at risk. With respect to tax advantage, if your business is achieving sales/revenues above $50,000 yearly then, our view is that you’re no longer operating a “casual” or “hobby” business and need to elevate your business posture. For example, in Alberta, you would only be taxed on the corporate business’ gross profits at the 14% tax rate (which is far better than being taxed at the personal tax rate of 15% or 22%)..
I buy the “Tax-in-a Box” package and do my taxes every year. Is this okay?
We can appreciate the convenience factor that these packages present – but your business deserves a higher respect. Although many of these wizards prompt you – there is no connection between what you do in your business and what you have happening in your personal life. These two areas NEED to be connected and assessed so that you NEVER PAY TAX UNNECESSARILY. In our approach to our clients taxes, we leverage our tax experts’ knowledge to ensure that our approach assesses the many variables that can play a factor in reducing your taxes.
I have Incorporated my business. Do I need a business bank account?
This is a must. Any income NOT deposited to your business bank account could be perceived as your personal income and would then be taxed at your personal tax rate. A business bank account and its fees are an expense to your business and can be deducted within your business taxes.
I just received more Tax slips and my taxes have already been filed. What should I do?
The onus is on you, the taxpayer, to submit a T1-Adjustment to CRA and notify them of the missed Slip and they will re-assess your tax year. The danger here is that if you don’t report the late slip and CRA catches the Slip not reported on your taxes – they readily assume that you, the taxpayer, have tried to mislead them by NOT reporting this income and may impose a penalty of 50% of the tax due by this omission. This could be huge and a major slam to your bank account. One client this happened to was fined $4500 as the T4 issued from BC did not arrive at their home in Alberta. CRA view is that they knew of the income they received in BC and therefore had an obligation to report it (or at least an estimate of what was earned).
Should I pay my children?
Most business owners involve their children to help with different tasks that promote their business and don’t think to compensate them. It may be stuffing envelopes for marketing, routine shredding of documents, cleaning and dusting of office space, filing, running errands for business. The payment should equate to the activities performed. A 7-year old may not be able to contribute much – so a payment of under $100 per month could be acceptable. A teenager who can now effectively contribute much more in computer skills and other tasks could receive a more substantive hourly/monthly compensation. The importance here is that it is an expense to your business and is much better means to compensate your children for their efforts. The alternative would be to continue to give them your hard-earned after tax dollars as an allowance – and there’s no deduction for that.
I have sub-contractors. What Slips do I need to prepare?
If you operate in the Construction Industry, the CRA form T5018 Statement of Contract Payments, is required to be completed showing the monies disbursed to each contractor. If they are a business, the slip will need to reflect the business name, mailing address and business number. If you’ve paid an individual, then the slip will need to reflect their full name, mailing address and Social Insurance Number. If you operate outside of the construction industry, then the same information applies and needs to be reported on a T4A Slip.
I have casual employees who wish to be paid cash under-the-table. How should I deal with this?
All income you receive, less expenses are taxable profits. In order to show the cash paid as expenses, the amounts paid to others must be supported by a T4, T4A or T5018 Slip. If none of these is used –then you are responsible for paying the tax. If someone wishes to receive $15/hour and insists on Cash – then I may be inclined to pay them $12/hour as I would then be responsible for the tax; but will never agree to the full rate they demand – unless I can claim the deduction and move the payment into their hands. NOTE: If you pay the same person under $500 in that year – no slip is required.