Saturday, 25 February 2017

Reducing Payroll Deductions - for Canadians

Reducing Payroll Deductions

If you are making RRSP contributions, you might be able to reduce the income tax deducted from your paycheque. Consider asking your employer to make your RRSP contribution(s) directly to your RRSP administrator and deduct the payments from your salary. Your employer can then reduce your tax withholdings because the payments made directly to your RRSP are not subject to income tax withholdings.
If you have an employer willing to make direct RRSP contributions without tax withholdings, be prepared to provide proof to your employer of your RRSP deduction room for the year. This will generally require you to provide to your employer a copy of your Notice of Assessment for the prior year showing your RRSP deduction limit for the year. You do not need to apply to the CRA for the reduced withholdings.
If you pay amounts for spousal support, childcare expenses, charitable donations from your paycheque, employment expenses, rental losses, as well as interest and carrying charges on investments, consider completing Form T1213, Request to Reduce Tax Deductions at Source, and filing it with the Client Services Division of your Tax Services Office along with documentary support of the various expenses. If accepted by the CRA, your employer will be authorized to reduce your payroll withholdings.
Payroll withholdings will generally not be reduced for amounts related to child support because these payments are not deductible for income tax purposes and for tax shelter investments.
Reduced tax withholdings generally means a smaller tax refund when you file your income tax return because a tax refund is inevitably the return of the overpayment of withholdings.

If you think you might be able to reduce your payroll withholdings, you should consult a Chartered Professional Accountant to see if you qualify and to understand the implications of reducing your withholdings.

 Eugeniu Braila, CPA

Friday, 16 December 2016

Deductible Automobile Expenses for Canadians

If you are required to use your passenger vehicle for business or employment purposes, you are permitted to deduct reasonable expenses for operation and ownership of the vehicle. Such expenses include fuel, licence fees, insurance, repairs and maintenance, depreciation (called CCA - capital cost allowance for income tax purposes), finance charges, and lease payments. There are specific limits placed on CCA, finance charges and lease payments you are permitted to deduct. These limits vary from year to year and for 2016 CCA is limited to the first $30'000 of the automobiles cost, plus applicable GST/HST/PST (not including amounts that will be refunded through input tax credits); Interest on financing of automobiles is limited to $10 per day; Deductible leasing costs are limited to $800 per month (other constraints apply); Deductible rates = $0.54 for the first $5'000 kilometers and $0.48 for additional kilometers; The deductible portion of automobile expenses is based on the proportion of your total kilometers driven in the year for business or employment purposes relative to the total kilometers driven in the year.
Driving between your home and your normal place of business or employment is generally considered a personal activity, therefore, the automobile expenses in respect of this portion of your driving is not deductible unless you make a stop for business or employment purposes while travel to or from your home. The travel between your home and your employment is considered a personal activity even if you drive a vehicle with your employer's logo on it or your employer requires you to have the vehicle to be "on call".
To support your automobile expense deduction you should maintain a careful record of your business and employment kilometers driven for the year, including the date, destination, the distance driven, and purpose for each business trip. If you are audited by the Canada Revenue Agency (CRA) and you do not have a mileage log, the CRA will almost certainly assert your business or employment mileage is a fraction of what you otherwise claimed. There is now mileage tracking software and apps to make recording your mileage easier (for example Mileage Logbook for Android phones). 
If you receive a reasonable per-kilometer allowance from your employer for the use of a motor vehicle, that allowance is not included in your income and you are not permitted to deduct your actual motor vehicle expenses.  Where you receive both a reasonable per-kilometer allowance and a flat allowance, the entire amount must be included in your income but you may deduct your actual expenses.
Your employer must sign the form T2200 Declaration of Conditions of Employment to certify the conditions of your employment require you to use your passenger vehicle. Administratively, the CRA does not require you to file the T2200 with your tax return; however, you must retain it in case they wish to see it. 
If you believe you might be eligible to claim automobile expenses on your personal income tax return, consult a Chartered Professional Accountant to help you calculate your allowable deduction.

Eugeniu Braila, CPA

Wednesday, 8 June 2016

Non-arm’s Length Transfers -- Gifts (Canada)

Related persons are not considered to deal with each other at arm's length. Related persons include individuals connected by a blood relationship, marriage or common-law partnership, or adoption (legal or in fact).S1-F5-C1- Related Persons and Dealing at arm's Length 

Also, a corporation and a shareholder who controls the corporation are related. Control  here mean more than 50% of the voting shares. Two corporations can also be "related persons".IT64R4- Corporations: Associations and Control 
If property is transferred for a consideration greater than the FMV to a person who does not deal at arm’s length with the transferor, the acquirer is deemed to have acquired it at FMV.  Its cost for tax purposes is therefore less than the price paid. For the vendor, there is no price adjustment and the actual selling price constitutes the proceeds of disposition.

If property is transferred for a consideration less than the FMV to a person who does not deal at arm’s length with the transferor, the transferor is deemed to have transferred the property at FMV and the cost to the acquirer for tax purposes is equal to the consideration paid. There is therefore a risk of double taxation.

If depreciable property is transferred in a non-arm’s length deal, the acquirer’s capital cost, for CCA purposes only, is equal to the transferor’s capital cost plus 50% of the capital gain realized by the transferor. Also, where the transferor is an individual and the property was eligible for the CGD, the capital cost for the acquirer must be reduced by the amount of CGD claimed by the transferor.

In the case of a gift, the transferor is deemed to dispose of the property and the beneficiary of the gift is deemed to acquire it at FMV. If you donate capital property, you must report any capital gain on your return and in some cases, you may be able to claim a capital loss in the year you donated the property. Under certain situations, the donor can designate the transfer price between FMV and adjusted cost base of the property donated and thus can reduce or avoid the capital gain on donation.

For tax purposes, the eligible amount of the gift is the amount by which the fair market value (FMV) of the gifted property exceeds the amount of an advantage, if any, received or receivable for the gift.

Thursday, 29 October 2015

Employed Versus Self-Employed - why does this matter?

Sometimes it is difficult to determine if an individual is self-employed or an employee and the question is  if this distinction does really matter? The issue is important because many employers find it beneficial to hire sort-term consultants, rather than long term employees. Employer costs of EI. (Employment Insurance), CPP (Canada Pension Plan) and benefit packages are reduced and the employer does not need to commit to the contractor for a long term.

Tax implications for Self-Employed 

For tax purposes the distinction between an employee and an independent contractor is important for the following reasons:

1. The deductibility of expenses is considerably more restricted for employees. Self employed individuals may be in a position to claim more deductions.

2. Employers must remit income tax, EI and CPP payments to the CRA (Canada Revenue Agency) for employees only. 

 The deductibility of expenses

An employee can only deduct those expenses that are specifically allowed under ITA (Income Tax Act) Part I, Division B, Subdivision a, Section 8, whereas a self-employed individual may deduct all expenses incurred to earn business and property income as permitted by ITA,  Part I, Division B, Subdivision b.

The deductibility of expenses for sales/negotiation employees
Expenses incurred for the purpose of earning income from employment for employees who sell property or negotiate contracts may be deductible only if the following  five conditions are met:
a. he/she must be employed in the year in connection with the selling of property or negotiating of contracts for his/ her employer;
b. under the terms of his/her contract of employment he/she must be required to pay his or her own expenses;
c. he/she must be ordinarily required to carry on his duties away from his/her employer's place of business;
d. he/she is remunerated in whole or in part by commissions or other similar amounts fixed by reference to the volume of the sales made or the contracts negotiated.
e. he/she was not in receipt of a reasonable allowance for traveling expenses in respect of the taxation year that was not included in computing his or her income.

An allowance is a fixed amount which is paid to an employee in excess of his or her salary without the requirement that the employee be accountable for the amount expended. An unreasonable allowance is one that is less than a reasonable amount, greater than a reasonable amount, or deemed not to be reasonable. A reasonable allowance is not taxable, thus any expense deductions are not allowed if a reasonable allowance is received. An unreasonable allowance has to be added to the taxable income and only then the expenses incurred for the purpose of earning income are allowed.

Non-Tax implications for Self-Employed

The noon-tax implications for a self-employed person include:

1. they are ineligible for general EI benefits, holidays and employer-paid or other non-cash benefits;
2. they have a potential liability issue for the service they perform;
3. they cannot collect severance pay;
4. they lack job security, and thereby assume increased economic risk

The difference between being employed versus self-employed is important because self -employed individuals are treated as businesses and are allowed to deduct all reasonable expenses incurred for the purpose of producing income from business. Employees, on the other hand are strictly limited to those deductions specifically listed in section 8.

It is interesting to note that for labour law purposes, individuals usually prefer to be employees to gain protection for their severance, pension and injury compensation rights, but prefer to be self-employed for tax purposes.  With regret this option is not available.

The courts have applied the following tests in order to determine whether an individual is an employee or self-employed:
* The economic reality of entrepreneur test - examines several economic factors such as control, ownership of the tools and chance of profit/risk of loss. In cases where the taxpayer doing the work supplies neither funds nor equipment needed to do the work, takes no financial risks or managerial responsibility and has no liability, the courts have applied the economic reality test and held that the taxpayer is an employee.
* Integration or organization test - examines whether the individual doing the work is economically dependent on the organization. The more dependent the individual is on the organization, the more he or she will appear to be an employee.
* Specific result test - examines whether the individual doing the work and  payer agree that certain specified work will be done and possibly with the use of assistants provided by the worker. In this situation it may be inferred that an independent contractor relationship exists. In the CRA's view, this test is satisfied where the facts suggest that  a person is engaged to achieve a defined objective and is given all the freedom to obtain the desired result.

It has to be noted that no one test can be used to determine whether someone is an employee or is self-employed and all tests should be considered together before a conclusion is reached.

Income Tax Act;
Federal Income Taxation: Fundamentals, 5th Edition- published by CCH  Canadian Limited

Eugeniu Braila, CPA

Friday, 24 July 2015

What Is the Difference Between a Sales Order & an Invoice?

Businesses use a great deal of documentation in order to keep companies running smoothly. Doing so generally results in greater revenue. Two of the most basic documents companies uses are sales orders and invoices. Although there are some similarities between the documents (e.g., both may list the company and purchaser addresses), there also are major differences.
  • Sales orders indicate that the company that is providing goods or services needs to take action (i.e., to complete the order). Usually this involves finding the product, packaging it, etc., or setting up a meeting so that services can be rendered. Invoices indicate that the purchaser of goods or services needs to take action. This typically means that the purchaser needs to compensate the company monetarily for the products or services, which can be done by sending the company a check or money order, transferring money from a bank account, or going to the company website and using an online form to pay with a credit card.
  • Sales orders are triggered by the purchase order of the consumer. This is because a company cannot list the items or services that an individual wants until the individual lets the company know what is desired. Invoices are triggered by the completion of a sale or service. This is because the company cannot charge an individual for products that were never delivered or for a service that never was given.
  • Sales orders list the products or services that the consumer wants. This can be a single item/service or it can be an extensive list of multiple products/services. These often are listed with an item/service number and a short description. Invoices list the amount of money owed for those products or services. The invoice may reiterate the product and service list to show clearly how the total owed was obtained, but the main objective is to indicate that money is due.
  • Sales orders indicate the date the consumer's request for a product or services was processed. This means that the date listed indicates a time in the past. Invoices indicate the date that money is due for those products or services. This means that the date listed indicates a time in the future.
  • Sales orders are used to approve, track, and process the completion of an order. For example, once the sales order is received by the purchaser, if there are any errors such as missing items/services, incorrect items/services, etc., then the purchaser can contact the company to revise the order and correct it. Invoices are used to communicate that the order is complete. By this time the goods/services have been delivered or rendered, so the individual cannot make changes.

    Eugeniu Braila, CPA 

What books and records must be kept for a Canadian individual or a business ?

If you are a person carrying on a business (individual, partnership, corporation, registered charity, trust etc.) and are required to pay or collect taxes according to the Income Tax Act, Employment Insurance Act, Canada Pension Plan, or Excise Tax Act (which includes GST/HST), you have to keep books and records. The records that must be kept include books of accounts and records which provide the ability to calculate taxes payable.  Books and records must be supported by "source documents" which substantiate the amounts in the books of account.  Canada Revenue Agency (CRA) indicates that supporting documents for the income tax return of an individual should be kept for six years, in case they select your return for review.  They may request more documentation than official receipts as proof of deductions or credits claimed, including cancelled cheques or bank statements.  For instance, for a tax return filed in April 2009 regarding the 2008 income tax return of an individual, the source documents must be kept until at least January 2015.  However, it would be better to retain the documents until six years after the date on the notice of assessment or notice of reassessment.
Source documents include (but are not limited to) invoices for purchases and sales, deposit slips, cheques, and contracts.  These books and records are used to prepare financial statements of the business, which must be prepared according to GAAP (generally accepted accounting principles).   Recent changes in accounting standards means that now, financial statements must be prepared according to International Financial Reporting Standards (IFRS) or Accounting Standards for Private Enterprises (ASPE).

For purposes of income tax, most books of accounts, records, and source documents have to be retained for a minimum of six years after the end of the last tax year to which they relate.  In the case of records regarding capital purchases, the last tax year to which they relate would be much later than the acquisition date.  It would be the tax year in which a disposal of the capital property occurred, because the purchase records would be required to calculate the gain or loss on disposal.  Thus, records regarding capital property should normally be kept until six years after the end of the tax year in which the capital property was sold. 

For more info see: 

Eugeniu Braila, CPA