Archive for the ‘tax return’ Category

The CRA’s Matching Program – Mismatch and You May be Assessed a 20% Penalty

The Matching Program

The CRA’s matching program catches the non-reporting of income every fall. Each year the CRA checks the T-slip information in its database against Canadian taxpayer’s income tax returns to ensure the T-slip income reported matches. Where the income filed by a taxpayer does not match the CRA’s database records, an income tax reassessment is mailed to the taxpayer asking for the income tax due. If the taxpayer is a first time offender, they are just assessed the actual income tax owing and possibly some interest. If this is the second occurrence in the last four years, a 20% penalty of the unreported income is assessed.

The Penalty Provision

Under Subsection 163(1) of the Income Tax Act, where a taxpayer has failed to report income twice within a four-year period, he/she will be subject to a penalty. The penalty is calculated as 10% of the amount you failed to report the second time. A corresponding provincial penalty is also applied, so the total penalty is 20% of the unreported income. 

According to an article by Tom McFeat of CBC News, the number of Canadians penalized for this repeated failure to report income totaled over 81,000 in 2011 with an income tax cost of slightly over $78,000,000.

Tax Tip for T-slips Received after You Filed Your Return?

If you received a T-slip after filing your tax return and ignored the slip since it was a small amount, dig it out tonight and file a T1 adjustment as soon as possible before the matching program gets you. Even a small $10 missed slip will start your clock ticking for a potentially larger penalty if you miss reporting income again in the subsequent three years.

http://www.thebluntbeancounter.com/2013/09/the-cras-matching-program-mismatch-and.html

 

Claiming Automobile Expenses

One of the more common expenses claimed by taxpayers are automobile expenses (applies to any motor vehicle such as a van, bus, pickup truck, station wagon, SUV, or other truck). Many individuals use their automobile for work or business and incur personal expenses in doing so. It is important to note that only expenses of a business nature are eligible as a deduction against their related income. As such, the Canada Revenue Agency (CRA) has strict requirements in ensuring that only business-related expenses are claimed. As a result, the retention of automobile tax records becomes imperative for every taxpayer that uses an automobile for work or business. Use a log book.

Maintaining Automobile Expenses
The use of an automobile log provides one of the safest ways to substantiate and keep track of all your automobile expenses incurred that are deductible for income tax purposes and the kilometres driven on income-earning activities. The type of expenses to keep track of can be broken down into two categories. They are operating and fixed expenses.

Operating Expenses
The types of operating expenses related to an automobile include gasoline, maintenance and repairs (such as oil changes and car washes), insurance, license and registration fees. Such expenses may vary in relation to the amount of kilometres driven.

Fixed Expenses
Fixed expenses differ from operating expenses in that they relate to the automobile itself as opposed to the amount of kilometres driven. When an automobile is purchased, they would relate to the capital cost allowance and interest expense when financed. In the case of a leased automobile, such expenses would include the lease payments. It is important to note that there are special rules and restrictions which limit the portion of actual costs that can be included in your total expenses. You can consult with your Padgett Business Services representative to obtain more information on what these special rules and limitations are.

Deductible Expenses
Because your automobile will most likely be utilized for both business and personal reasons, it is essential that the total automobile expenses be allocated between these two uses on a reasonable basis in order to arrive at only the deductible portion for income tax purposes. The best method to achieve this will involve the distance traveled calculated by taking total kilometres driven for business purposes divided by total kilometres driven for both business and personal purposes. Certain expenses such as parking expenses incurred while on a business trip and car repairs made as a result of an accident while on a business trip do not have to be prorated. However, such expenses incurred resulting from a personal trip made are not deductible..

SHAREHOLDER LOAN

Unless you’re on regular payroll, whenever you take out money from your company, it’s as though the company has loaned you those funds until something is done with that balance – maybe a dividend is declared, a bonus paid or the full balance is repaid.

In an ideal world, you could keep ‘borrowing money’ forever from the company and never pay any personal tax on the funds that you’ve ‘borrowed’. Unfortunately, the CRA has put rules in place to make sure you do end up paying some personal taxes on this benefit – but, with some planning, you can minimize the personal taxes that you have to pay.

Shareholder Benefit Rules

Generally, when you borrow funds from your company and don’t repay it within one year, the CRA can assess the outstanding balance as ordinary income at an income tax rate similar to that of a salary. The catch is that your corporation isn’t allowed to claim this as an expense the way they would if it was a salary – you’re effectively double taxed.

For example, if you borrow or withdraw $50,000 throughout the year, without declaring a salary or dividend, the CRA could effectively call this income meaning that you’ll pay about $9,000 in income taxes and your corporation will pay about $7,500 in taxes, roughly $6,000 more than if you declared dividend or were paid a salary.

To avoid paying more tax than you have to, let’s look at two straightforward strategies to reduce the shareholder loan balance.

Repayment of Loan

The simplest solution to avoid being taxed on the loan is to repay it within one year. If you can repay the funds that you borrow from your company within a year of borrowing them, you won’t be taxed on the funds that you borrowed.

There’s a catch – if you take out a new loan from your company to repay the original loan the CRA will see this as a continuation of the original loan.

In the example above, if you borrow $50,000 from your company and are able to repay the loan within one year from when the first instalment was borrowed, there’s no amount that needs to be included in your income and no tax to pay on the $50,000 that you borrowed.

This works really well if the funds are needed to cover short term personal cash flow needs – maybe you’ve bought a new house but your old one hasn’t closed yet and you’re stuck juggling two mortgages. You can borrow funds from your company to help you cover your short term cash flow needs until your old house sells.

Declaring a dividend

As an alternative to a salary, you may draw funds from your company to cover your day to day living expenses or to cover a major unexpected expense and have no expectation of being able to repay those funds.

If this is the case, you can declare a dividend for that amount and you’ll pay tax at the lower dividend tax rates. You’ll need to prepare some tax filings that are due at the end of February following the year that the dividend is declared and you’ll pay any personal tax on the dividend at the end of the following April.

Referring back to the above example – if you took $50,000 from your company throughout the year to pay your living expenses or a major one-time expense, you could declare a dividend to cover off that amount. Depending on your personal situation and other income, you’d pay about $3,000 of personal taxes on this dividend.

Being able to draw funds from your company as you need them is a great way to deal with short term cashflow needs. The flexibility of drawing funds as you need them is also a good alternative to the rigidity of being on a regular salary and be able to cover unexpected expenses. With proper planning, you easily minimize your personal taxes related to those drawings by repaying the loans when possible or declaring a dividend.

http://www.liveca.ca/your-shareholder-loan-balance/

 

Digital currencies

Digital currency is electronic money. It’s not available as bills or coins.

Cryptocurrencies are a type of digital currency created using computer algorithms. The most popular cryptocurrency is Bitcoin.

No single organization, such as a central bank, creates digital currencies. Digital currencies are based on a decentralized, peer-to-peer (P2P) network. The “peers” in this network are the people that take part in digital currency transactions, and their computers make up the network.

Using digital currencies

You can use digital currencies to buy goods and services on the Internet and in stores that accept digital currencies. You may also buy and sell digital currency on open exchanges, called digital currency or cryptocurrency exchanges. An open exchange is similar to a stock market. 

To use digital currencies, you need to create a digital currency wallet to store and transfer digital currencies. You can store your wallet yourself or have a wallet provider manage your digital currency for you.

You need a “public key” and a “private key” to use your wallet. Keys are made up of a random sequence of numbers and letters.

Public keys are used to identify your wallet.

Private keys are used to unlock your wallet and access your money. Private keys should be kept secret.

All transactions are recorded to a public ledger or “blockchain” that everyone can see.

How tax rules apply to digital currency

Tax rules apply to digital currency transactions, including those made with cryptocurrencies. Using digital currency does not exempt consumers from Canadian tax obligations.

This means digital currencies are subject to the Income Tax Act.

Buying goods or services using digital currency

Goods purchased using digital currency must be included in the seller’s income for tax purposes. GST/HST also applies on the fair market value of any goods or services you buy using digital currency.

Buying and selling digital currency like a commodity

When you file your taxes you must report any gains or losses from selling or buying digital currencies.

Digital currencies are considered a commodity and are subject to the barter rules of the Income Tax Act. Not reporting income from such transactions is illegal.

Tips for using digital currency

Here are a few tips to help you protect yourself when using digital currency.

Protect your wallet

Take steps to protect your wallet:

  • keep your wallet, and any backups, in a safe place
  • encrypt your wallet using encryption software
  • encrypt any copies you make or online backups
  • set a password to help prevent thieves from withdrawing your funds
  • use a strong password that contains letters, numbers and symbols

Know the merchant’s refund, return and dispute policies

Before you make a purchase, find out:

  • what the exchange rate will be
  • if refunds are available
  • if refunds will be processed in digital currency, Canadian dollars or store credit
  • how to contact someone if there’s a problem

Wait for multiple confirmations before completing a transaction

It can take 10 minutes or more for a digital currency transaction to be confirmed. Confirmation happens when users on the network verify the transaction. During that time, a transaction could be reversed and you could lose your funds to a dishonest user.

Understand what the actual costs will be

Find out if there are any mark-ups or other fees. Find out what will happen if the rate changes before the exchange is completed.

Think about the future

Consider what will happen if you fall ill or die and can no longer access your wallet.

If no one knows the locations and passwords of your wallets when you are gone, the funds can’t be recovered.

Consider having a backup plan for your peers and family.

What is the Canada caregiver credit?

Do you support a spouse or common-law partner, or a dependant with a physical or mental impairment? The Canada caregiver credit (CCC) is a non-refundable tax credit that may be available to you.

The CCC combines three previous credits: the caregiver credit, the family caregiver credit, and the credit for infirm dependants age 18 or older. If you previously claimed any or all of these credits and your situation remains the same as in 2016, then your 2017 CCC claim will stay about the same as in 2016. In some cases, your claim may increase.

However, the one exception is that the previous caregiver credit for people who support a parent or grandparent, who is 65 years of age or older, living with them, and who does not have a physical or mental impairment, is no longer available.

Just like the former family caregiver credit, the CCC is part of other tax credits. This means you also have to meet the conditions for claiming those other tax credits. See What amount can you claim?

Who can you claim this credit for?

You may be able to claim the CCC if you support your spouse or common-law partner with a physical or mental impairment.

You may also be able to claim the CCC for one or more of the following individuals if they depend on you for support because of a physical or mental impairment:

your or your spouse’s or common-law partner’s child or grandchild

your or your spouse’s or common-law partner’s parent, grandparent, brother, sister, uncle, aunt, niece, or nephew (if resident in Canada at any time in the year)

An individual is considered to depend on you for support if they rely on you to regularly and consistently provide them with some or all of the basic necessities of life, such as food, shelter and clothing.

What amount can you claim?

The amount you can claim depends on your relationship to the person for whom you are claiming the CCC, your circumstances, the person’s net income, and whether other credits are being claimed for that person.

For your spouse or common-law partner, you may be entitled to claim an amount of $2,150 in the calculation of line 303. You could also claim an amount up to a maximum of $6,883 on line 304.

 

For an eligible dependant 18 years of age or older, you may be entitled to claim an amount of $2,150 in the calculation of line 305. You could also claim an amount up to a maximum of $6,883 on line 304. See Note below.

For an eligible dependant under 18 years of age at the end of the year, you may be entitled to claim an amount of $2,150 in the calculation of line 305 or on line 367 for your child. See Note below.

For each of your or your spouse’s or common-law partner’s children under 18 years of age at the end of the year, you may be entitled to claim an amount of $2,150 on line 367. See Note below.

For each other dependant 18 years of age or older, who is not an eligible dependant for whom an amount is claimed on line 305, you may be entitled to claim an amount up to a maximum of $6,883 on line 307.

Note

If you are required to pay child support or have shared custody of the child, additional rules may apply. See lines 305 and 367 for more information.

What documents do you need to support your claim?

When you file your income tax return, do not send any documents. Keep them in case we ask to see them.

The CRA may ask for a signed statement from a medical practitioner showing when the impairment began and what the duration of the impairment is expected to be.

For children under 18 years of age, the statement should also show that the child, because of the impairment in physical or mental functions, is, and will likely continue to be, dependent on others for an indefinite duration. Dependent on others means they need much more assistance for their personal needs and care compared to children of the same age.

You do not need a signed statement from a medical practitioner if the CRA already has an approved Form T2201, Disability Tax Credit Certificate, for a specified period.

What is the Canada caregiver credit?

If you’re supporting a family member with a disability, the extra financial responsibility of being a caregiver can have a big impact on your budget. To help offset some of the cost, the Canada Revenue Agency has introduced the Canada Caregiver Amount. If you qualify, you could be in line for a tax break. Here’s what you need to know about the Canada Caregiver Amount.

Out with the Old

The Canada Caregiver Amount replaces three credits:

The Caregiver Amount,

The Amount for Infirm Dependants (18 & older), and

The Family Caregiver Amount.

The rules for claiming each of these credits were very different from each other. For example, the Caregiver Amount required that the person you were supporting must live with you while the Amount for an Infirm Dependant did not. The Family Caregiver Amount was the only one of the three available for children until 18.

Now, with the Canada Caregiver Credit, figuring out if you qualify for a tax credit is much simpler. There’s only one set of requirements; either you qualify or you don’t.

What’s Changed?

The Canada Caregiver Amount brings three main changes:

  1. The dependant you’re supporting must be “infirm”.

This means that your family member must be dependant upon you due to a physical or mental condition or “infirmity”. In the past, if you lived with a parent or grandparent over the age of 65, you were eligible for the former Caregiver Amount, even if the senior wasn’t “infirm”. That’s’ no longer the case.

  1. The dependant doesn’t have to live with you.

This is good news to all the caregivers whose help allows family members to stay in their own homes. If your disabled sister lives nearby but you assist with day-to-day chores like grocery shopping or paying bills, your help could earn you a tax break.

  1. Partial credit is available if your dependant’s income is too high.

Previously, if your dependant’s income was over $14,000, you may have been excluded from claiming any tax credits. The Canada Caregiver Amount features a more generous income limit ($16,163) for the full credit and partial credit for incomes up to $23,046.

Do I Qualify for the Canada Caregiver Amount?

If you’re caring for a low-income family member with an infirmity, there’s a good chance you qualify. There are two base amounts for the Canada Caregiver Amount – $2,150 and $6,388. How much credit you can claim depends on the dependant’s relationship to you, what other credits you’re claiming for them, and their income level.

If your spouse is infirm, the amount of your Canada Caregiver Amount depends on their income. First, the $2,150 figure is added to the usual spouse amount. If your spouse’s income is zero, you’ll claim the total of the spousal amount and the $2,150. If your spouse’s income is too high to claim the spousal amount, you still may qualify for the Canada Caregiver Amount. A “top-up” calculation is used for higher incomes so if your spouse earns less than $23,046, you will receive partial credit. Similar rules apply if you’re claiming the Eligible Dependant Credit for a child under 18.

If your infirm dependant is a family member other than your spouse or minor child, the full amount of $6,388 may be claimed if your relative’s net income is below $16,163. If your relative’s income is between $16,163 and $23,046, a partial credit can be claimed.

If your minor child is infirm and you are not claiming the Eligible Dependant Credit for them, you’ll claim $2,150 for each qualifying child.

If your parent or grandparent is over 65 but is not infirm, you do not qualify for the Canada Caregiver Amount.

Canada Caregiver Amount FAQs

If I pay support for my infirm dependant, can I claim the Canada Caregiver Amount?

If you are required to pay support for the dependant, you cannot claim the Canada Caregiver Amount.

Can I split the Canada Caregiver Amount with another person?

If more than one person cares for the infirm dependant, the credit can be shared. The maximum amount of $6,883 still applies.

What proof of infirmity is required?

A signed statement from your dependant’s doctor or practitioner may be required by the Canada Revenue Agency. The statement should contain details on the infirmity as well as when the infirmity began and how long it is expected to last. If your dependant already has an approved Form T2201 – Disability Tax Certificate – on file with CRA, no additional paperwork is needed.

By Jennifer Gorman

https://turbotax.intuit.ca/tips/everything-need-know-canada-caregiver-credit-8006

Claiming Automobile Expenses

One of the more common expenses claimed by taxpayers are automobile expenses (applies to any motor vehicle such as van, bus, pickup truck, station wagon, SUV or other truck). Many individuals use their automobile for work or business and incur personal expenses in doing so. It is important to note that only expenses of a business nature are eligible as a deduction against their related income.

As such, the Canada Revenue Agency (CRA) has strict requirements in ensuring that only business-related expenses are claimed. As a result, the retention of automobile tax records becomes imperative for every taxpayer that uses an automobile for work or business, so make sure to use a kilometer log book.

 

Employer-Paid Disability Programs

If you think that paying for your employees’ disability premiums is always a good thing, think again. If you provide your employees disability insurance as a non-taxable fringe benefit, the periodic payments they receive upon their disability will be, in most cases, FULLY taxable to them!

Payments received due to disability are not taxable if:

→ Your employees paid the premiums on the policy with after-tax funds, OR,

→ You paid the premiums but deducted the amount from their income.

The cost of disability insurance even over a good amount of time – can be far less than the tax due on the income received under the policy. Like all insurance, it all depends on whether you actually collect under the policy. Where the employer contribution is made after 2013, the contribution is a taxable benefit to the extent that the related coverage can be paid to you in a lump sum. However, lump sums received are not taxable.

Home Buyers Amount

Home Buyers Amount

As a first-time home buyer, you may be able to claim $5,000 in tax credits for the purchase of a qualifying home in 2017.

To qualify for the home buyers amount, you cannot have lived in another home owned by you or your spouse or common-law partner that year or in any of the preceding four years.

The qualifying home must be located in Canada and registered in your name and/or your spouse’s or common-law partner’s name per the applicable land registration system. It includes existing homes, such as single-family houses, semi-detached houses, townhomes, mobile homes, condominium units, apartments in duplexes, triplexes, fourplexes, or apartment buildings. It also includes homes under construction.

You do not have to be a first-time home buyer if:

→ You are eligible for the disability tax credit; or

→ You purchased the home for the benefit of a related person who is eligible for the disability tax credit.

 

 

 

LOANS TO A RELATIVE’S BUSINESS: What Happens When It Goes Bad?

You’ve loaned money to a family member’s corporation. Perhaps it was an investment, maybe it was a favor, or both. Or, perhaps, it was made for a completely separate reason. Regardless, sometimes the loan may go bad and you are not able to collect on the debt. What happens from a tax perspective when this occurs?

If the loan was made to earn income and other conditions are met, you may be able to write-off half against your regular income as an allowable business investment loss (ABIL). A recent tax court case shed some light on defining whether the loan was made to earn income.

In a November 3, 2016 Tax Court of Canada case, at issue was whether an ABIL could be claimed in respect of the loan from a taxpayer to his daughter’s start-up company. Within approximately two years, operations had ceased and the daughter had claimed personal bankruptcy. The loan agreement stipulated that interest at 6% was to be charged from the onset, but no payments would be made for approximately the first two years, which, as it would turn out, was after the business eventually ceased. The Minister argued that no interest was charged, and therefore, there was no intent to earn income. This was partially based on accounting records of the daughter’s company which were inconsistent in their reflection of accrued interest.

Taxpayer wins

Despite the conflicting records, the Court opined that the interest rate included in the agreement was legitimate and that there was intent to earn income. The ABIL was allowed. The Court did not opine on whether the intention to earn income requirement would have been met if the agreement only stipulated that interest would begin to be charged or accrued at the time that repayment commenced (i.e. interest free loan for first two years, but interest generating thereafter).

Action Point: Loans to businesses of relatives are more closely scrutinized by CRA due to the inherent possibility that it was made for non-income earning reasons. If considering a loan to a relative’s business, ensure that the income earning nature is clearly documented.

 

Issued from the office of Yale & Partners LLP, Chartered Professional Accountants, Chartered Accountants, Toronto http://cdn4.yaleandpartners.ca/wp-content/uploads/2018/01/TTT121.pdf

 

Contact Us

Padgett Business Services

1511 10 Street SW Calgary, AB T2R 1E8
Phone: (403) 220-1570

Email: Padgett Calgary

Subscribe to our SMALL BIZ BUILDER Newsletter.
Yes Please!

Our Rating

Click for the BBB Business Review of this Accountants - Certified Public in Calgary AB

Follow us