Do you have employees or do you have ‘sub-contractors’? At face value it may not appear to matter much, but the consequences of a run-in with CRA over the application of the employee vs. self-employed rules can be quite significant.
In today’s economy, many small business owners are doing whatever they can to save money, and many have turned to the use of ‘sub-contractors’ to avoid the costs of social benefits such as CPP and EI as well as payroll taxes such as Workers Compensation Premiums and health taxes.
But, are these people truly sub-contractors under the Income Tax Act?
When CRA looks, they will make a determination based upon 4 basic criteria:
1. Control: Who exercises control in the business relationship? Is there a master (employer) server (employee) relationship? Can the employer terminate the services of the employee? Does the employer control the method of work and where / when is it performed?
2. Degree of Integration: Is the employee an integral part of the employer’s organization? Would an outside person regard the relationship as that of employee / employer?
3. Economic Reality: Is the individual carrying on business for personal gain or for the benefit of someone else (employer)? Does the individual have an opportunity for profit? Does the individual have any risk of loss? Does the individual provide their own tools or equipment? Is there a lasting or permanent relationship between the parties? Does the individual provide similar services to other parties and does the individual actively seek out new business?
4. Specific Result: Is the work performed to obtain a specific result or for an indefinite period of time? Is the contract such that the individual must specifically do the work or provide the service, or are they only responsible to make sure it gets done (another party could do it)
When you take a look at the 4 points, it becomes a rare instance when an individual would be considered self-employed when working at your place of business on a regular and routine basis. CRA almost always rules against the self-employed scenario when there is any kind of doubt about the relationship.
Another belief by some business owners is that if their ‘sub-contractor is incorporated, that will alleviate the issue. True for the employer, they would not risk penalty. The employee however would likely be deemed a ‘Personal Services Corporation’ and would lose the benefit of claiming expenses against income as well as the small business deduction available on Corporate Taxes.
You really cannot win. If an individual resembles an employee, they are an employee! You cannot argue with CRA.
If you are utilizing ‘sub contractors’ in your business, beware of the penalties if you are caught. Not only will you be assessed any and all taxes that you failed to deduct from the individual, the social benefits of CPP and EI, and any additional payroll taxes, but you will be penalized and charged interest. The interest and penalties can easily DOUBLE the amount that you should have withheld from the individual’s pay.
Is it really worth the risk? You may save a few dollars today, but the financial penalties, the disruption of an audit, the stress to the employee and the frustration of dealing with CRA could destroy your business.
If CRA were to decide that you're paying individuals as sub-contractors instead of employees was a deliberate attempt to avoid taxes, you could be charged with tax avoidance or tax evasion. These claims both carry fines and penalties that could involve incarceration.
If you are ever in doubt, err on the side of caution and treat EVERYONE as an employee, withhold taxes and remit them to CRA as required
Some may have heard of a Health Spending Account or HSA, but few know the absolute benefits to a small business owner.
When you leave employment to venture into your own business, you generally leave behind your ‘benefits’ package and suddenly find yourself with no health-care coverage. There is however, a very simple, very cost-effective and tax-effective solution—the HSA.
Most people are familiar with or have had ‘Group Insurance’ and hence are aware how the programs work. They are however Insurance programs and have limitations, restrictions and high risk of fee increases each year. A ‘typical’ group insurance program can cost a business owner $300-$400 per month for family coverage, and this coverage would have significantly low limits for dental, prescription drugs, hospital stays, etc., and would likely not cover eyeglasses, orthodontics, medical devices, certain therapy etc. Under an HSA, all of these items can be covered at a fraction of the cost, in fact, the savings under an HSA can be quite significant - consider the following example:
Jesse is a small business owner, has a spouse and 2 school - aged children. If their medical/dental expenses were $2000 per year, they would have to pay this with ’after-tax’ dollars, therefore requiring gross income of approximately $3000 per year. However, only a small portion of the expense on for medical would be allowable as a tax-credit on their personal taxes. (medical expenses must exceed 3% of your taxable income before any is allowed for a tax credit) If they were to obtain group insurance, lets assume they paid $300 per month for coverage. Although some this would be deductible by the business as employee benefits, a portion of the plan would be a taxable benefit to Jesse, and the plan would have restrictions.
Now, let’s assume Jesse sets up an HSA for their family. By having the company contribute $200 per month to the HSA, Jesse would effectively have $2400 per year of ‘tax-free’ money to spend on virtually any medical expenses. The company would gain the benefit of a 100% tax deductible amount of $2400 per year.
As the money ‘belongs’ to Jesse, she may determine what expenses to submit for payment; orthodontics, eyeglasses, physiotherapy, contact lenses, prosthetics ... and the list goes on.
There are other great benefits to an HSA as well:
Employee retention products; you can establish an HSA for your employees, setting the contribution amount at whatever you want - all employees do not have to be treated equally. ‘Bonus’ payments may be added to the HSA, incentive prizes etc.
You can add an insurance component to your HSA - if someone experiences a catastrophic event, the insurance will pay when you exceed the value of funds in your HSA.
You can add emergency travel medical to your plan - safeguard for when you are out of the country.
One of the best benefits, completely unlike insurance, because the money is YOURS, you can carry forward any unused values at the end of the year to the next year - you do not lose any of your money.
Setting up an HSA is not difficult, and generally only takes a couple of days. There is a small setup charge, however, the tax advantages as well as the health advantages far outweigh this fee.
For more information, email email@example.com or contact your local Ledgers Professional. Page 4 provides a tax scenario for your review - you can see the benefit of this program
We have been asked this question over and over again, “Should I lease or should I buy?”. Unfortunately, there is no easy answer as every situation is different, however, there are a few criteria you can look at to help you to decide what may be best for you.
Leases and loans are simply two different methods of automobile financing. One finances the use of a vehicle; the other finances the purchase of a vehicle. Each has its own benefits and drawbacks.
When making a ‘lease or buy’ decision you must look not only at financial comparisons but also at your own personal priorities — what’s important to you.
Is having a new vehicle every two or three years with no major repair risks more important than long-term cost? Or are long term cost savings more important than lower monthly payments? Is having some ownership in your vehicle more important than low up-front costs and no down payment? Is it important to you to pay off your vehicle and be debt-free for a while, even if it means higher monthly payments for the first few years?
When you buy, you pay for the entire cost of a vehicle, regardless of how many miles you drive it. You typically make a down payment, pay sales taxes in cash or roll them into your loan, and pay an interest rate determined by your loan company, based on your credit history. You make your first payment a month after you sign your contract.
When you lease, you pay for only a portion of a vehicle’s cost, which is the part that you “use up” during the time you’re driving it. You have the option of not making a down payment, you pay sales tax only on your monthly payments, and you pay a financial rate, called money factor, that is similar to the interest rate on a loan.
With leasing, you may also be required to pay special lease-related fees and possibly a security deposit that you don’t pay when you buy. You make your first payment at the time you sign your contract — for the month ahead.
As an example, if you lease a $20,000 car that will have, say, an estimated resale value of $13,000 after 24 months, you pay for the $7000 difference (this is called depreciation), plus finance charges, plus fees.
When you buy, you pay the entire $20,000, plus finance charges, plus fees.
This is fundamentally why leasing offers significantly lower monthly payments than buying.
1. The short-term monthly cost of leasing is ALWAYS SIGNIFICANTLY LESS than the cost of buying. For the same car, same price, same term, and same down payment, monthly lease payments will always be 30%-60% lower than loan payments. This is still true even when compared to 0% or low-interest loans.
2. The medium-term cost of leasing is ABOUT THE SAME as the cost of buying, assuming the buyer sells/trades his vehicle at loan-end and the leaser returns her vehicle at lease-end. The overall cost of leasing compared to buying, over the same lease/loan term, is approximately the same, more or less, assuming the buyer sells the vehicle at the end of the loan. Comparisons sometimes show buying to cost a little less than leasing due to fewer fees, lower total finance costs, and the assumption that a purchased vehicle will return full market value if it is sold or traded at the end of the loan. However, when the benefits of wisely investing monthly lease savings are considered, the net cost of leasing can easily be less than buying.
3. The long-term cost of leasing is ALWAYS MORE than the cost of buying, assuming the buyer keeps his vehicle for years after loan-end.
If a buyer keeps his car after the loan has been paid off and drives it for many more years, the cost is spread over a longer term. Therefore, leasing is always more expensive than long-term buying. If long-term financial cost savings were the most important objective in acquiring a new car, it would always be best to buy the car and drive it for as long as it survives — or until the cost of maintenance and repairs begins to exceed the cost of replacing it. However, many automotive consumers have other objectives that reduce the importance of long-term cost savings.
So, which is better, lease or buy?
It depends on what’s most important to you. All of us have different lifestyles and priorities — in cars and in finances. Car lease-versus-buy decisions must be made with your own lifestyle and priority attributes in mind. What’s right for one person can be totally wrong for another.
If you enjoy driving a new car every two or three years, want lower monthly payments, like having a car that has the latest safety features and is always under warranty, drive an average number of miles, properly maintain your cars, and are willing to pay more over the long haul to get these benefits, then you should lease.
If you don’t mind higher monthly payments, prefer to build up some trade-in or resale value, like the idea of having ownership, like paying off your loan to be payment-free for a while, don’t mind the unexpected cost of repairs after warranty has expired, drive more than average miles, prefer to drive your cars for years to spread out the cost, like to customize your cars, and don’t like the risk of surprise lease-end charges — then you should buy.
For a long time, income splitting has been the talk amongst seniors due to the unfair taxation that can occur in retirement. After significant lobbying by CART (Canadian Association of Retired Persons) and others, the government has finally succumbed and introduced pension income splitting for the 2007 taxation year. With us nearing year end, it is time to look at the qualifications and ramifications of this new taxation policy.
Under the new policy, seniors with pension income can now allocate up to 50% of their pension to their spouse or common-law partner, theoretically reducing the overall tax burden for the couple.
To be eligible, the couple must be married or in a common-law relationship as of Dec. 31st and resident within Canada. In the event of a death, the individual must have been resident in Canada at the time of death. In addition, the pension income that is allowed to be split must be recognized as ‘eligible pension income’. Under the Income Tax Act, eligible pension income is generally the total of the following amounts received during the year:
Canada Pension, Quebec Pension and OAS payments do not qualify (it is however, possible to split CPP/QPP at source)
In order to split the pension income, both partners will have to file an election upon completing their 2007 tax returns, this will be done by way of a new form, T1032. Each partner will complete the form, illustrating the amount of income and tax deductions shared. (The taxes are prorated based upon the same percentage of the income splitting)
The splitting of the pension income has the ability to affect the pension income amount (tax credit), for both persons. The pensioner will be able to claim whichever is less: $2,000 or the amount of eligible pension income after excluding the amount allocated to the other person and the other individual will receive similar treatment: they can claim the lesser of $2,000 or their eligible pension amount. (subject to age restrictions)
In respect to GST and Child Tax Credit amounts, the splitting of income will not affect these calculations as they are based upon family income, whereas the individual credits such as the age amount, spousal amount and OAS payments could be affected.
Although the application of pension splitting will likely result in a reduction of the overall tax burden of a family, CRA will not allow a reduction of taxation at source as a result of the pension splitting measures. If however, the individual(s) are required to make quarterly tax installments, they could reduce these installments, but if they are short on their payments, CRA could assess interest for the under remittance.
As with any change in taxation that results in a more complex analysis of a taxpayers situation, the preparation of the tax returns should be left to professionals.
For more information relating to income tax for Senior Citizens, refer to Ledgers Information Guide “Income Tax for Senior Citizens” available by emailing firstname.lastname@example.org.
By now, most people should have heard about the housing crisis in Vancouver. This boom, has been spurned on by a tremendous amount of foreign investment, and has driven housing prices so high that most first-time homebuyers are going to be out of luck.
Politicians have been watching this trend and some levels of government have imposed taxes on foreign property buyers in an effort to calm the market.
CRA however, may now have found the answer!
Under the Income Tax Act, gains from the sales of your principle residence have always been exempt from Capital Gains Tax and many of these foreign investors have been using this exemption falsely to save a tremendous amount of tax.
Effectively, they have ‘claimed’ that the investment property was their Principle Residence in Canada and was therefore exempt.
Effective with the 2016 tax year, ALL Principle Residence Dispositions must be reported on your personal Income Tax Return (T1) whether exempt or not.
These new rules will apply to anyone that disposes of their principle residence; the disposition will be reported on Schedule 3 (Capital Gains) and eligible taxpayers will still be able to claim the exemption.
In similar fashion to other Capital Gains type transactions, the proposed legislation indicates that you will have to report the following information on your tax return:
What is your Principle Residence?
A Principle Residence can be any of the following:
And, it must qualify as your principle residence; to qualify, it must meet ALL of the following criteria:
It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation.
You own the property alone or jointly with another person.
You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year.
You designate the property as your principal residence.
Of course, to further protect the Taxman, CRA has created some new enforcement rules and penalties:
If you fail to report the disposition of a Principle Residence you could be subject to a fine of up to $8,000 (this is a retroactive change)
And, CRA has decided that they will now be given the authority to assess taxpayers beyond the current limit of 3 years to ensure that proper reporting did in fact take place.
As you can imagine, this is going to quickly become a very confusing and complicated area of Tax Legislation;
As always, entrust the preparation of your Personal Tax Return to an Accounting Professional, do not leave it up to just anyone. The interest and penalties due to improper reporting could cost you thousands of dollars!
Registered Education Savings Plans (RESP’s) are a fabulous tool for the planning and savings for your children’s post-secondary education.
With the growing necessity for higher education in the workplace to the ever increasing costs of continuing education, the need for professional, strategic planning becomes even more relevant.
Most parents will likely agree, ensuring our children have the necessary skills and education to have a fulfilling life is a top priority. However, over the past few years, the cost of education has spiraled upwards at an alarming rate.
With proper planning, foresight and the benefits of RESP’s parents can ensure funds are available to give their children the education they need to carry on in a prosperous lifestyle.
RESP’s have been around for many years, however, in 1998, the Federal Government introduced the Canada Education Savings Grant (CESG), further enhancing the benefits of the RESP program.
The CESG program matches RESP contributions at a rate of 20% to a maximum of $400 per year. This is a primary benefit of a RESP, where else does the government (or any investment) pay a guaranteed 20% rate of return?
There are also some very significant tax advantages to the earnings within the RESP; although contributions to a RESP are not tax deductible, the earnings are also not taxable to the contributor, providing the funds are used for their specific purpose - education.
When your child or children (in a family plan) reach post-secondary education, the cash accumulated within the RESP can be withdrawn in the form of Education Assistance Payments (EAP) and used to fund the costs of education, namely:
There are of course a few stipulations to the eligibility of the expenses, but in most cases, all full-time college or university education costs would be eligible.
When considering the tax advantages of an EAP, you should realize how CRA will treat the payments; The funds withdrawn are fully taxable as income to the beneficiary of the funds (child), and not the contributors (parents). When you think about the basic personal tax exemptions, along with the federal/provincial tuition and education credits available to students, they could withdraw and/or earn income in excess of $15,000 with little or no tax liability whatsoever. On the other hand, if the parents were to have to pay the taxes on the withdrawals, the burden could be as much as $6,000 on $15,000 in earnings.
Another consideration is how much (or little) one needs to contribute in order to ensure that there is enough money available to pay for the education costs down the road... Of course, with the power of compounding interest as well as the benefits of time, small contributions can add up to quite a lot.
For example, if you contributed only $167 per month from the time your child was 12, to the time they turned 18, you could have in excess of $18,000 in funds available. If you started making the same contributions from the time your child was 5 to the age of 18, you could have in excess of $53,000 in savings. (both examples based upon compounded interest of 8% per annum)
Of course, if you made higher contributions, the amount available would be higher.
There are limits to contributions, $50,000 per child, (lifetime), however, there are no minimum or maximum annual contribution requirements.
If you are a small business owner, you could, with planning make the contributions to a RESP a tax deductible expense for your business, further enhancing the benefits of the program.
If you want to know how, email email@example.com.
Every year at this time, the mad panic is on to acquire RRSP’s. Why the vast majority of people wait until the last minute each year is anyone’s guess, however, there are a number of instances where RRSP’s could be a very poor investment for you. Consider the following:
If you are self-employed, investing in RRSP’s is probably not for you at this stage of your life.
The basic premise of RRSP’s is to save for retirement while deferring taxes to a point in your life where your expected marginal tax rate should be lower. However, when you are self-employed, you likely claim a significant amount of ’personal’ expenses as business expenses. Consider this, if your business pays for your vehicle costs, home office expenses, some travel & entertainment, telephones & cellular etc., these expenses reduce your taxable income.
Perhaps today you earn $75,000 but after expenses your taxable income is only $50,000. When you retire, you will need to pay for your vehicle, telephones etc, from after tax dollars. In order to maintain the current lifestyle you have, you will likely have to withdraw upwards of $90,000 per year in retirement.
Your current income level is at an effective marginal tax rate of about 31%. When you retire and need to take in $90,000 per year for the same lifestyle, your marginal tax rate could be upwards of 37%. You are, in effect paying 6% more in taxes than you would today.
So the advice for a small business owner would be to invest in income generating assets today, when your marginal rate is lower, and pay the taxes on that income today.
Another instance where RRSP’s could be a poor investment is when an individual (or couple) have high interest bearing debt. Retail credit cards are a glaring example of this problem! Your typical retail credit card, Sears, Leons etc., carry interest rates of up to 29.9%.
Even if your RRSP’s are generating a decent return of say 8% per year, if you do not pay down your high interest debt, you are losing money by investing. When your RRSP’s are generating 8% return and you are carrying debt at 29.9%, you are losing almost 22% per year on your investments.
Of course, like anything else, these situations are very subjective as everyone’s specific circumstances are different. In many cases, people will use their RRSP investment as a means of forced savings; if this is how you justify your investment, this may be appropriate for you.
Investing and balancing your lifestyle with your retirement plans is a very delicate proposition, and a great deal of information should be reviewed before you make the decisions to invest or not.
Not only is the decision itself delicate, but the type of investments and level of risk you are willing to accept should be carefully considered.
In any case, before you make any investment decision, it is best to consult and Financial Services Professional, do not trust your own judgement
How often have you heard the expression “Your donation is tax deductible”? The truth is, donations are not ‘tax deductible’; they entitle you to a tax credit. So what is the difference? In simple terms, a Tax Deduction reduces your gross income to arrive at a taxable income amount. Once the taxable income is calculated, the applicable Federal and Provincial tax rates are applied, resulting in the net tax payable. On the other hand, a Tax Credit is applied to the net tax payable, reducing the amount of income tax you are obligated to pay to the Canada Revenue Agency.
For example, a RRSP contribution is a Tax Deduction, therefore if you earned $50,000 and contributed $5,000 to your RRSP, your income tax obligation would be calculated based upon taxable income of $45,000. On the other hand, if you had the same $50,000 in income and a Tuition Receipt for $5,000, your tax obligation would be based upon your $50,000 income and the applicable tax rates, once the tax obligation has been calculated, the credit relating to the tuition is applied and the tax obligation is reduced.
In this example, assume John earns $50,000 per year. His tax payable with no deductions or credits applied (excluding CPP & EI) is about $10,200. If he claims a $5,000 Tax Deduction for a RRSP contribution, his tax obligation is reduced to about $8,500, saving him about $1,700 in tax, about 30% of his RRSP contribution. If however we apply a Tuition Tax Credit for $5,000 his tax obligation becomes $9,200; he ends up paying higher taxes.
So why does this happen? The answer is relatively simple to understand, Tax Deductions reduce your taxable income at your marginal tax rate; this is your combined Federal and Provincial tax rates based upon your income. In our example John’s marginal tax rate is about 30%. The Tax Credits however are applied at the lowest Federal (15%) and Provincial rates (6% in Ontario), and the resulting value is applied to the tax payable reducing the taxes dollar for dollar.
Tax deductions include items such as RRSP contributions, Child Care expenses, Carrying Charges, Employment Expenses, Moving Expenses and Union Dues, whereas items such as Medical Expenses, Charitable Donations, Tuition and Education amounts, Disability amounts and Spousal Amounts entitle you to a Tax Credit. Furthermore, Tax Deductions can result in a tax refund; Tax Credits are non-refundable
In the recent Federal budget, the Government introduced a Tax Free Savings Account (TFSA). At face value, it looks like a good idea, but is it?
The premise of the program is solid; over ones lifetime, you will need savings to make large purchases, cars, homes, renovations, vacations etc., but where will that money come from?
Beginning in 2009, Canadians age 18 and older can deposit up to $5,000 per year into their TFSA, the deposits will not be deductible for tax purposes, however, interest and/or Capital gains earned on the TFSA will not be taxed, even when withdrawn.
Other benefits of the TFSA include:
As you may see, the benefits of the TFSA closely resemble those of a RRSP, but there are a couple of distinct differences:
The downside to the TFSA, in similar fashion to RRSP’s, is the contribution levels and limits. Currently the RRSP contribution limit is $20,000 (2008) and the TFSA limit is established at $5,000 per year. For the average Canadian taxpayer, these limits are completely unrealistic.
If you think about your friends, family and co-workers, how many people do you really know that could take advantage of these contribution levels? Even with the TFSA, can you afford to save more than $400 per month to take full advantage of the earnings potential?
Most families today, falling into the middle income class, have enough trouble getting by month to month, let alone having the ability to save an additional $400.
If you have young children, a home, a car or two and other financial commitments, you likely cannot take advantage of the tax benefits offered by the TFSA. So who can? The same people that can take advantage of the high contribution limits of the RRSP’s - the high income earners.
Of course, even if you cannot take advantage of the maximum contribution levels, any amount you can commit to ‘saving for a rainy day’ is a great idea. Not only will you have funds available in the event of an unexpected financial requirement, but the interest you earn on these savings will be tax free.
Another pitfall of the TFSA, as is already apparent with RRSP’s, is people succumb to media hype and pressure - contributing to RRSP’s when they probably shouldn’t be. Paying down high-interest debt should be your primary focus before contributing to a RRSP or depositing funds in a TFSA.
A solid consideration for the TFSA is the younger adults, those in college or university, planning for their future. They could contribute to a TFSA and withdraw the funds at a later date to use as a down-payment for a home, car, wedding etc.
Younger children that have part-time income can save their money in a regular bank account, then transfer their savings to a TFSA when they reach 18 years of age - again a sound idea.
Like any investment decisions, you should consult a financial planning professional before committing to any investment
One of the first questions asked by a new business owner is “What can I claim as business expenses?”
Under the Income Tax Act, there is no true definition of what constitutes an allowable deduction against business or professional income. Essentially, any expense incurred directly related to the operation of your business or in direct relation to earning professional income is an allowable deduction. It would be impossible to list every deduction allowed in computing business income, because in theory, any expense incurred for the purpose of earning income is deductible. There are certain restrictions and exceptions to this guideline.
In assessing whether expenses are deductible, first apply the two basic requirements of a deductible expense:
There are some common items that are regularly deductible, such as:
But what about less than common expenses such as Dog food?
If you operate a pet store, dog food would be a reasonable expense. What if you own a car repair facility though? Can you justify the expenses? If the dog were on-site 24 hours per day, and free to roam the building after hours, you could argue that this is a guard dog for the purposes of protecting your business, therefore, food, vet bills and related expenses could be claimed.
In respect to automobile expenses, contrary to popular belief, you cannot claim 100% of your personal vehicle as a business expense. The personal use portion of automobile expenses must be calculated as they are not deductible. This is generally done with the assistance of a mileage log. In fact, if you do not have a mileage log to support your claim for automobile expenses, CRA can and will likely deny your claim. All expenses are then pro-rated between business and personal use. Typical vehicle related expenses can include:
Most new businesses start from a home office, as such, there are a number of items that you can claim based upon the business/personal use portions, of household related expenses; these items generally include:
In similar fashion to automobile expenses, you have to prorate the costs based upon the amount of space the office occupies (generally using square footage) vs. the entire house. For example, if your house is 2,000 sq. ft., and the office occupies 100 sq. ft., you would be entitled to a deduction of 5% of the total household costs; of course, this is subject to 2 conditions:
A fairly recent change to the Income Tax Act has added another great business deduction: Premiums paid for private health insurance plans are 100% tax deductible, whereas they used to only factor into the medical expense credit. This is a great means of giving yourself and your family ‘benefits’ with before tax dollars.
Before you decide on any claims for expenses, it is best to consult an accounting professional to be certain your claim will stand up to CRA scrutiny. The onus is on you, the taxpayer, to justify the reasonableness of any deduction