JBS BUSINESS SERVICES

 “B U I L D I N G   S U C C E S S   T O G E T H E R”

778 Rossland Ave, Trail, BC, V1R 3N3 

250 364 2235             info@jbsbiz.ca            www.jbsbiz.net

 

TIPS & PITS

“Ron Clarke has earned his MBA and is a business owner in Trail providing accounting and tax services.  He contributes a column weekly January through May to the Trail Times.” 

Guy Bertrand, Editor

 

From the Trail Times – February, 2018

‘TIS TIME TO PREP OR NOT PREP?

Is it too soon to prepare your personal tax return?

Despite the tax filing deadline being about 60 days away, it’s likely unwise for most people to prepare and file their tax return just yet.

Canada Revenue Agency (CRA), although requiring a February 28 distribution date for most tax information slips such as T4 slips from employers and T5 slips from investment firms, does extend to March 31 the distribution of some tax slips to taxpayers.

In particular the providers of T3 and T5013 slips, both reporting investment activity, are given an extra month to the end of March to arrive in the taxpayer’s hand. Also, if you have made an RRSP contribution near the March 1 deadline you will have to await the tax slip’s arrival, something easily forgotten by those who make regular RRSP auto deposits throughout the year.

This year CRA is allowing the electronic distribution of T4 employment tax slips to employees whether or not consent is given to the employer. However, only employers with secure internal email service may use this distribution system.

A word to the wise, distribution of tax slips via email may be missed since people won’t necessarily be looking for them. Not to mention the tendency to delete emails because of the caution associated with spam and scam emails. It may be best for employers to communicate with employees before emailing T4 slips.

While waiting for all your tax slips to be in hand, there are some things you should do before tax preparation whether using a professional tax preparation service or do-it-yourself software or even paper forms. And yes, the federal government is still permitting paper filed tax returns.

A visit to the CRA website is time well spent. Review CRA’s tax tips and changes so you don’t mess up or miss new opportunities. If you are self preparing, become familiar with this year’s tax schedules because chances are they have changed, and new ones added.

Once all tax information is gathered, and this may include more than T slips, sorting through everything not only reduces the chance of errors and omissions, but presenting organized and complete information when using a tax prep service may actually lower your preparation fee.

Speaking of fees, when using a tax prep service it’s fair to ask how the fee structure works. What constitutes “extras”? What happens with a CRA review, and how will the preparer help you, and at what cost? Is the preparer available year-round?

The last filing date is Monday, April 30. Filing late with taxes payable creates an immediate interest charge. Additionally, CRA has the authority to impose a penalty of up to 50% of taxes payable.

Refund coming? It’s your money so be sure to file. Last count, there is over $700,000,000 of unclaimed refunds sitting with CRA. And yes, that’s almost a trillion dollars.

 

From the Trail Times – February, 2018

EXPENSING CONVENTIONS CRA STYLE

Business owners often assume if they attend a convention, all the costs are deductible as a business expense, and at 100% no less. However, it’s not that simple. Canada Revenue Agency (CRA) has set specific conditions.

The convention must be hosted by a recognized professional organization. In other words, it is not a group of like minded business owners holding a meeting. True that some of those costs can be expensed, but that is not a convention.

The business owner does not have to be a member of the hosting organization, but the organization’s purpose must compliment the owner’s line of business.

The convention must be hosted the same year the expenses are being claimed. This means the expenses must be actually paid out the year of the convention, not accrued as a payable.

The location of the convention must be reasonable to the trading area of the businesses involved. Typically this means hosted within Canada, and in fact if it’s the BC Association of Whatever, then the location has to be within the Province of BC. And if it’s the Trail & District Chamber of Commerce, then the host location must be Greater Trail.

For some fortunate businesses that have the world beyond the Canadian border as their trading territory, a convention in Vegas, Europe or Asia could fit within CRA’s required location definition. And to be complete in this description, the Canada-US Tax Treaty may qualify a professional organization based in one country to host its convention in the other … so maybe Vegas is still in play!

The convention fee, travel to and from the convention, and accommodation can be expensed at 100% of the cost. However, meals and entertainment can only be 50% expensed, and if the convention fee includes meals and entertainment without specifying their specific value, a maximum of $50 per day is set by CRA and only 50% of this can be claimed.

For an employee attending a convention, typically the expense reimbursement by the business owner is not a taxable benefit to the employee except for any portion that is of clear personal benefit. For example, extending the trip to “visit” around the area adds a personal vacation component.

As well, the expense reimbursement associated with an employee’s spouse accompanying the employee is considered a personal benefit and therefore a taxable benefit to the employee. However, if the employer requires the employee to take the spouse for the purpose of going “to assist in the attaining the business objectives of the trip”, then the expense reimbursement for the spouse is not a taxable benefit.

Interestingly, no mention of the expenses associated with a business owner’s spouse. Perhaps it goes without saying, CRA believes the spouse is integral “to assist in the attaining the business objectives of the trip”. Although the vacation time before or after the actual convention will not be a business expense.

Finally, CRA permits two conventions per year. However, the Tax Court of Canada has ignored this limit when it is shown the outcome of attending conventions actually produces income and not just provides professional development.

 

From the Trail Times – February, 2018

E-COMMERCE AND THE TAXMAN

Virtual business is the selling of goods and services through electronic means, often referred to interchangeably as website or on-line or internet selling. However, e-commerce also encompasses selling through television, phone, fax and automated banking machines and credit cards.

E-commerce in Canada accounted for an estimated 5 billion dollars in sales in 2017, the vast majority coming from on-line selling. Over 85% of Canadians admit to shopping on-line, with a reported 27% of Canadians shopping on-line every month.

With numbers like these it’s no wonder Canada Revenue Agency (CRA) has adapted its tax returns to require the specific valuation reporting of e-commerce revenue, and even requires the identification of the websites where this revenue is being generated.

As with all businesses, virtual business owners must complete the applicable T2125 business schedules within the T1 personal tax return, or in the case of an incorporated business, the T2 return’s schedule 88.

As part of the completion of these schedules, up to five websites, complete with URL, must be listed on the tax return, and not just any five, the top five revenue producing websites. These include websites owned and operated by the business that accept orders, third party marketplace websites like Amazon or E-bay that “sell” the business’ services or products, and other such websites that drive buyers to the business’ website. And websites hosted outside of Canada are not excluded from making this list.

Telephone directories and information-only websites do not need to be listed.

Determine the revenue generated by each website and calculate the percentage of this sales revenue as a proportion of total revenue generated for the entire business which also includes revenue from non-website activities, if any. The percentage is reported on the tax return for each website.

When it comes to the costs of operating an on-line business, CRA has well established guidelines on how particular business costs must be expensed. Typically computer equipment, software and website development costs are not considered “current and deductible in the year they are incurred”. Rather they are deemed “capital and deductible under the rules for capital cost allowance”.

In plain language this means these costs cannot be written off as a 100% expense when they are purchased. Instead they are treated as an asset and grouped into a class of like-items, then depreciated at a specific percentage rate each year with that proportional dollar value claimed as an expense. Over time an asset class can be added to and subtracted from.

A word about GST and PST, although as always recommended, speak with the GST and PST people.

The GST small supplier exemption for businesses that have sales revenues under $30,000 is available to on-line businesses. Noteworthy to this, sales of products and services that are sold outside of Canada do not enter the calculation of this $30,000 threshold.

PST rules in BC include a $10,000 small supplier exemption on the sale of most goods, but not all. Unlike GST, sales sold outside Canada factor into this $10,000 PST threshold.

 

From the Trail Times – January 30, 2018

TAX RULES ALREADY EXIST FOR ASSOCIATED COMPANIES

Small business tax policy is under scrutiny. This is tax policy regulating Canadian Controlled Private Corporations (CCPC), not proprietorships. Some “loopholes” do exist, others may be perceived.

With this introduction in mind, a key component of CCPC tax policy is the lower tax rate applicable to the first $500,000 of income earned by a CCPC. This income is taxed at 12% in BC rather than the standard corporate rate of 27% on amounts over $500,000.

For the ever creative entrepreneur with CCPC income exceeding $500,000, it may make sense to split the business into separate components each operated by a separate CCPC so that each CCPC could take advantage of the $500,000 exemption.

Or there’s the option to start a completely unrelated business as a separate CCPC?

Sounds like a $500,000 exemption for each CCPC owned by the entrepreneur.

Sounds like a plan!

No can do.

Canada Revenue Agency (CRA) defines these businesses related through common ownership as “associated companies” and only permits one cumulative $500,000 income exemption.

So this is not a loophole.

The rule is quite complex. However, here are the three most common relationships that define associated companies.

The first: CCPC “A” controls CCPC “B”, or vice versa.

The second: A and B are owned by the same person or group of people.

And the third: A and B are each owned by separate people, but the people are related and one of them owns 25% or more of the other company.

By definition then, with this third example a couple could each solely own their own CCPC and each be allowed the $500,000 exemption, as long as neither of them owns more than 25% of the other’s company.

Sounds like a loophole.

Not really if CRA does it job.

CRA has the authority to look beyond technical ownership. CRA can investigate how these businesses are actually being operated. If CRA concludes that the corporations are designed simply for tax avoidance, the CCPCs will be deemed “associated” and only one $500,000 exemption permitted.

How is this determination made?

Often this comes down to the control of the companies. Control in its truest sense refers to legal control. However, control can be “de facto”. That is, control by influence and not by technical ownership of the majority of shares of the CCPC – a measured definition by the Tax Court of Canada. A key component to this determination is the identification of who actually is the decision maker of any particular corporation and the relatedness of the people through blood or marriage who own the corporations in question.

Rules are in place. Some latitude is available. CRA enforcement is key.

 

From the Trail Times – January 16, 2018

CRA’s SMALL BUSINESS TAX TWEAKS NOW IN EFFECT

It’s 2018 and the Government of Canada’s tax reforms are now in effect, including business tax changes, in particular “small business”.   To be clear, when the government says small business it’s referring to the Canadian Controlled Private Corporation (CCPC). It’s not referring to proprietorships since they aren’t incorporated.

If a corporation meets all of the following criteria, then it typically qualifies by Canada Revenue Agency (CRA) as a CCPC. The corporation must be resident in Canada and not controlled, directly or indirectly, by a non-resident, a publicly traded company or a Canadian company that lists its shares on a foreign exchange. And it must not have any class of its own shares traded on any stock exchange.

The tax policy discussion during 2017 has resulted in the government creating clearer definitions and shrinking the grey area in CCPC tax rules. Also, the government has committed a lot of cash for enforcement. This fact alone will likely be the key to successfully and rightfully assessing business tax.

As a qualified CCPC, CRA allows a small business deduction applicable to the first $500,000 of gross (after expenses) active income – “active” meaning revenues generated by conducting business activities.

Active income is different than rental or investment income the business may be paid or earn, often referred to as passive income that is taxed at 50.7% in BC.

The regular 27% combined federal and BC provincial tax rate levied on active income is reduced to 12% for a CCPC’s first 500k.

That is, without this small business tax break a small business owner would remit 27% tax on the net profits of the company. Instead, that amount is basically cut in half. This bottom line difference yields cash for reinvestment in and expansion of the business. And at other times simply makes the difference between survival and closure.

On the surface there appears to be a clear tax advantage to a CCPC owner versus an unincorporated proprietor faced with the personal tax rate on net earnings of up to 47.7% in BC. But remember, monies paid out from the CCPC to the CCPC owner is taxed at the personal tax rate just like the proprietor. In fact, if all the “profits” of a CCPC have to be paid out to the owner to meet personal living obligations, then the CCPC tax rate is effectively meaningless.

There are other tax advantages for a CCPC. It can pay dividends to the owner that are more favourably taxed than wages paid to the owner, although CRA has closed this measurably over the past decade.

In addition, dividends can be paid to other CCPC shareholders including family, although with new tax policy in place, CRA is now scrutinizing the use of this method of sharing profits among next of kin, referred to as “income sprinkling”. Also on CRA’s radar is the need to justify wages paid to next of kin for actual work completed.

Finally, the sale of CCPC shares qualifies under the lifetime capital gains exemption so when the CCPC owner sells the CCPC shares, up to about $425,000 of capital gain is not included in income, often justified as the CCPC owner’s “pension” in lieu of an employment pension fund.

 

From the Trail Times – December 6, 2017

ENTERTAINMENT AS A BUSINESS EXPENSE

‘Tis the season to entertain, even at work.

Many business owners take the opportunity to entertain customers, clients, suppliers, associates and staff. But, how does a business owner account for this business expense? And what qualifies?

Entertainment is a broad term. For tax purposes, Canada Revenue Agency (CRA) allows the entrance cost for activities, events and clubs, the rental fee for rooms and boxes to host, and food and beverage costs, although alcohol in moderation is best practice. Service charges, taxes and gratuities included.

CRA does not allow longer term purchases such as annual memberships or seasons tickets, nor the rental fee of recreational facilities.

When it comes to the accounting of entertainment expenses, CRA distinguishes between informal type activities with a select person or two, from organized business oriented events with an inclusive group of people. CRA defines the former situation as providing a personal value to the business owner, while the latter does not.

For example, in the case of a dinner and hockey game with one client, CRA assumes there is personal benefit to the business owner so only 50% of the cost is an allowable expense.

To be clear on this 50%, if four people go to the game making the business owner one quarter of the group, 75% isn’t the allowable expense (recognizing the fact that there are three clients). Only 50% of the total cost can be expensed. And the same math applies for a group of 10, only 50% is expensed not 90%.

To state the obvious then, it’s wise to entertain one person at a time when it comes to this type of non-business activity.

Then there are events that CRA permits as a 100% allowable expense. In these cases the event itself has to be deemed to be a “business input”. For example, a business presentation, workshop, training session or product launch for a broad group of people would qualify and the entertainment provided would be totally expensed.

The key is to conduct business with what would be considered necessary entertainment expenses, such as food and beverages or a rented hotel suite.

Given the business input requirement, a “festive open house”, although typically seen as a social activity, could arguably be a business input since its broad invite to people with general business discussion typically permits the full expensing of the costs. Remember to make the invite inclusive and ensure there is some business banter around the room.

Just to be safe, if a business event also supports a registered charity, CRA allows 100% expensing of entertainment costs. So be sure to remind the invitees to bring items for a local food bank.

Regarding staff in particular, CRA extends the perk to business owners to expense all the costs for the hosting of purely social type events and activities such as a company Christmas party … or say, a post-tax-season-celebration, as long as it’s a general invite to all staff. And CRA allows a half dozen of these events a year. Party on staff …

 

From the Trail Times – February 2017

SEPARATED PARENTS

Due to popular demand by Canada Revenue Agency (CRA), here’s detail on one of the most popular tax reviews conducted by CRA, and some tips to help get the ducks in a row before tax preparation.

Tax policy surrounding separated parents with minor children, is one of the most contentious topics when it comes to helping people prepare their tax return. And considering the frequency of relationships ending in separation, this issue arises frequently.

Tip #1, calmness between former partners is helpful.

If reviewed by CRA, things get off to a good start if CRA can be offered court registered documents.

A child support agreement, sometimes embedded in a separation document, identifying what is paid to whom is key. Failing such an official document, an agreement signed by both parents stating custody arrangements and following the regulated child support guidelines may suffice, but not always.

Likewise, if there is a spousal support agreement, this document will likely be reviewed by CRA too.

From this documentation naturally flows the application of the tax rules. Things like which parent can and cannot claim what child tax credit, and can and cannot deduct what child expense.  Also what constitutes reportable income and what payment is an allowable deduction.

Unfortunately the use of the term “naturally flows” does not mean straight forward. The best suggestion is to look at each child tax credit and expense deduction individually and determine how each has to be applied. Do not assume all child credits and expense deductions are applied the same because they aren’t.

Then there is child support itself. According to tax policy, child support is suppose to be reported on both parents’ returns but does not factor into either parents’ tax calculation. Child support is neither a deduction for the payer, nor income for the payee.

However, spousal support is treated differently. It is reported as a deduction for the payer and as income for the payee.

Consequently, there can be confusion when it comes to reporting child and spousal support. A typical error is the misreporting of child support as a deduction or as income.

Finally, if both child support payments and spousal support payments are in the mix, if reviewed by CRA it must be proven to CRA that the full amount of child support has been actually paid before any amount is assumed to be spousal support, and claimed as such. In other words, the kids come first.

In general, a comprehensive set of docs with a clear paper trail of payments goes a long way with a CRA review.

 

From the Trail Times – February 2017

PENSION SPLITTING: A 10 YEAR CELEBRATION

It was 1997 tax season when Canada Revenue Agency (CRA) allowed couples to split pension income, an attractive tax policy given Canada’s progressive tax rate scheme when one spouse has a hefty pension and the other has little or no income.

However, despite this favourable tax break in terms of tax rates, there are credits and payments that can be negatively impacted by a pension split so some arithmetic is necessary to ensure that the split doesn’t actually cost more than if it were not split.

A pension split can prevent the old age security “claw-back” that occurs when a person has income greater than the threshold amount. However, in some cases the amount of income needed to be transferred to lower one spouse’s income to eliminate the claw-back can, in actual fact, increase the other spouse’s income to the point where the claw back now applies to them.  The appropriate split to avoid this must be calculated.

A similar issue arises with the federal age tax credit. The transfer of income between spouses can directly affect the size of the tax credit for both spouses so it’s important that the gain in tax credit for one spouse is not offset by a greater loss in the credit for the other spouse.

Then again, in its totality, sometimes the complete lose of a credit is outweighed by the aggregate reduction in taxes created by the split. Mathematically this is possible.

A pension split may also lead to double dipping when it comes to the pension credit. That is, if the receiving spouse has no eligible pension income, once having pension income due to the pension split, that spouse can qualify for up to $2,000 of the pension credit, in effect doubling the pension credit for the couple.  Both spouses have to be 65 or older.

To be eligible for pension splitting, the transferring spouse has to be at least 65 and receiving eligible pension income defined really as any pension income other than government pensions. Up to 50% can be split with the spouse of any age.  If the receiving spouse is younger than 65, only registered pension plan income or pension income received because of the death of the spouse can be split.

With regards to the government’s various pension incomes, spouses can elect to pool this pension income and receive a shared amount of this total income, in effect splitting income and reducing overall taxes. This election is made directly to the Canada Pension Plan and not through CRA.

The process of optimizing a pension split is not simple, and if doing it by hand use a calculator, pencil and paper!

On this point, a word of caution concerning tax prep software, not all software is designed to take into account all the various permutations possible to create the optimal pension income split. If your software does, be sure your final tax prep step is to optimize the pension split to ensure any late changes you may have made to your two tax returns is taken into account by the software.

 

From the Trail Times – February 2017

REAL ESTATE AS INCOME

Income or capital gain: a determination not of minor significance when it comes to taxation.

Income, after netted against allowable expenses and deductions, is fully included by Canada Revenue Agency (CRA) to calculate taxes payable.

On the other hand, only 50% of capital gains and losses are included in tax calculations.

What’s a capital gain? The common belief is that if a revenue source is not earned income or interest, then by default it’s a capital gain.

Not true. Not all gains are capital gains.

The question becomes one of defining inventory.

If you buy goods – inventory – and sell them, the gain is your income, like a retail store. Or if you provide a service – your available time is your inventory – and you sell your time, the gain is your income. CRA defines these types of gains as personal income and after expenses, is taxed fully.

At the same time, a capital gain tends to be identified by the taxpayer as an asset that passively produces a gain or loss over time that is realized at the time of sale, like real estate for example. As such, only 50% will factor into taxes.

However, depending on circumstance, a gain on an asset could be considered by CRA as income and not capital gain if that asset is determined to be inventory.

If CRA considers your financial activity is an “adventure in the nature of trade”, then by definition you’re in business and any gain from that business is not a capital gain but rather it’s business income and fully included in the tax calculation. In other words, the asset is not a passive investment.  It’s active inventory, and as inventory, the gain is income and fully taxed.

The most contentious of all assets for determining how the gain is taxed is real estate.

CRA considers 12 factors relevant to the taxpayer’s “intention of the purchase and ownership” of any particular piece of real estate.

If CRA determines the intention of the taxpayer is to resell property, the property is not a capital asset eligible for capital gains taxation but rather the property is considered inventory and the entire gain is considered income and fully taxed as business income.

For example, buying vacant land with the intention to sell it to a developer – real estate speculation – could define that land as inventory resulting in the gain being classified as income and not capital gain.

The owning of rental properties is not only a rental income business, but if rental properties are bought with the intention of being re-sold, CRA could determine that there is also the business of buying and selling properties. This means the properties are inventory and the gains on any sales would be included as income and not treated as capital gains.

And this applies to the flipping of one’s house by building or buying and renovating, living in it, and then selling. This is especially attractive because of the principal residence exemption in Canada where no gain has to be reported from the sale of your house.

However, if CRA determines that you are in the business of flipping houses, the principal residence exemption will be denied and the gain will not be taxed as a capital gain, but will be taxed as income.

To this point, CRA is in pursuit of house flippers. New for 2016, CRA is requiring the filing of little known schedule T2091 used to report the sale of a person’s principal residence. It doesn’t affect tax calculations, unless of course red flags pop up during cross referencing by CRA’s super computer.

 

From the Trail Times – January 2017

GST: SMALL SUPPLIER EXEMPTION

If you run a business you likely are aware of the small supplier GST exemption that exists for businesses that have gross sales under $30,000. These businesses can choose not to charge GST assuming they remain unregistered.

This is a very gracious gesture from GST, but beware business owner. Although you may think you are operating under the exemption, you may not be.

It is amazing how many business owners discover down the road, usually via a nasty letter, that they are actually registered for GST.

Some owners register by accident when going through the process to register their business.

Some knowingly register because they believe they don’t have to collect GST until they achieve $30,000 in sales so what’s the big deal about registering.

Wrong. Once registered, the business must begin to charge GST on all sales as of the actual date of registration.

The business owner is responsible to remit the GST on the retroactive sales back to the date of registration. This either means going back to customers and asking them to pay the 5%, or eating that cost and remitting the GST.

Remember though, it won’t necessarily be the full 5% GST remitted because the business owner is permitted to deduct the GST paid to operate the business. Only the net amount is remitted.

If registered and the owner knows that sales will not achieve $30,000, contact GST and request the account be closed. Likewise, if business has changed and sales will never again achieve $30,000, call to have it closed.

On the other end of the spectrum are those business owners who do not register for GST and should. Here are some typical scenarios.

First, the exemption is based on gross sales and not net sales so watch that figure.

Second, achieving $30,000 in sales is not based on the calendar year but rather achieving that amount within any four consecutive quarters so don’t wait until December 31 to register.

Third, the need to register does not arise on the date that $30,000 in sales is achieved, but rather the requirement to register occurs when a business owner ought to realize that $30,000 in sales will be achieved. The typical scenario is a business that gets a contract that will pay out over many months but itself is worth over $30,000, or in combination with other sales, the contract will clearly take total sales over $30,000 sometime within a calendar quarter. In this case, all sales, even those prior to achieving $30,000, must have GST applied to them so the owner will be responsible for the retroactive GST on these sales if the owner fails to register.

Fourth, the $30,000 threshold exemption amount is based on all sales revenue from all businesses owned by a person. In other words, whether businesses are related in purpose or not, because the businesses are associated through a common owner, the sales are combined to test the eligibility of the $30,000 sales threshold. If the exemption is not met, all business operations of that owner must be registered for GST and have GST applied to all sales of all businesses.  If the owner fails to register any or all of the businesses, GST may make this a retroactive requirement for collection and remittance.  A matter GST has been taking seriously over the past several years.

Finally, GST registration will likely automatically happen if at personal tax time, the reporting of business sales exceeds $30,000. This is usually communicated on a timely basis directly to the business owner so that the owner can immediately begin to apply GST and not have a retroactive GST issue develop. However, if GST believes there was blatant disregard for registration, GST may retroactively register the business for a time period prior to the current date.

 

From the Trail Times – April 2016

HOME OFFICE EXPENSES

Claiming home office expense against earned income is not straight forward. A word to the wise, get it right because Canada Revenue Agency (CRA) is paying attention to this often used, and in CRA’s estimation abused, expense claim.

If you’re self-employed, your home has to be your “principal place of carrying on your business” or, “the space you occupy is used on a regular and ongoing basis to meet your clients, customers or patients” to claim business-use-of-home expense.

These criteria exclude a self-employed person who, by the nature of their work, earns their income outside of their home. For example, a tradesperson performs service at a customer’s house. And likely, a customer can’t come to a tradesperson’s home to receive the service.  Either way, neither criterion is met so no claim can be made.

In the case of an employer requiring an employee to work out of their home, CRA requires the employer to give a signed T2200 form to the employee.

However, the T2200 in and of itself doesn’t automatically translate into a CRA permissible claim. One of two criteria must also be met to claim work-space-in-home expense. Either the “work space itself is where you mainly do your work” to earn income or, it’s used “on a regular and continuous basis for meeting clients, customers, or other people in the course of your employment duties”.

These criteria exclude, for example, a remotely located professional, technician or sales rep working as an employee of a company who is based out of their home but goes to the customer’s location.

Whether self-employed or remote employee, sitting at the kitchen table to do calls, quotes, bookkeeping, and the like doesn’t cut it by CRA definition. Meeting with a client once in awhile at the house doesn’t either, nor does storage of products or supplies.

The litmus test for a home office claim?

CRA wants you to be earning at least 50% of your income directly from your home.

For those who qualify, the list of allowable expenses varies.

Both self-employed and remote employees can claim the home’s heat, electric, water and cleaning supplies. Both can include rent.

While the self-employed can also include the home’s insurance, property taxes, and mortgage interest, the remote employee cannot. However, employed commissioned sales reps can include home insurance and property taxes.

The allowable amount is calculated using the percentage of work area to total home square footage. And if the work area itself is also used for personal use, then the amount of the claim is reduced proportionally to the number of hours it’s used exclusively for work.

Home maintenance and repairs is a sticky one with CRA. The safest route is to claim only those expenses directly attributed to the work space, and if the work space is exclusively used for work, then claiming up to 100% may be permissible – paint your office, claim the paint.

Cell phone, home phone, and internet service are also sticky ones. CRA is accepting of these as expenses but don’t claim 100%.

And when all is finally calculated, CRA doesn’t permit the home office expense to create a business loss. Instead, the claim is carried forward.

 

From the Trail Times – April 2016

COURTS DON’T JOKE AROUND

So how does a tax preparer spend his or her free time? Reading court rulings, of course.

April Fool’s Day aside, no joke, reading court rulings can be entertaining.

That being said, in no way am I downplaying the significance and seriousness of anyone’s health and medical issues they may be enduring, but here is a legal challenge that might make you smile … and then say … if only.

To set the stage, and keeping things simple, for medical services that require travel out of one’s local area, Canada Revenue Agency (CRA) permits travel costs as an allowable medical expense. The needed medical service must not be available locally as defined by having to travel more than 40 kilometers to another location to receive that medical service.

In a 2015 court case that worked its way to the Federal level, this travel out of the local area for a necessary medical service was put to the test.

A taxpayer with an undisputed diagnosed debilitating medical condition that had led to the replacement of joints with prosthetic devices was seeking warmer conditions to alleviate the personal suffering caused by Canada’s winter climate caused by the prosthetics.

To provide the relief needed for this medical condition, the taxpayer traveled to Thailand and Indonesia and claimed the travel cost as medically necessary expenses on the T1 personal tax return.

The claim was denied by CRA.

The tax payer appealed to the Tax Court of Canada where the claim was reinstated by that Court.

CRA appealed the Tax Court’s decision to the Federal Court of Appeal where that Court ruled in favour of CRA stating that a more favourable climate cannot be defined as a “medical service”.

The taxpayer’s medical claim for travel expenses was denied.

Not passing judgement on the Appeal Court’s decision, but it’s interesting to ponder the number of new medical claims that may have resulted if the Court had sided with the taxpayer and allowed the travel claim to a warmer climate, given the annual migration of Canadian snowbirds.

 

From the Trail Times – March 2016

FORM T1135: OWNING UP TO THE TAXMAN

“Did you own or hold foreign property at any time in the year with a total cost of more than CAN $100,000?”

CRA would like to know.

This question has been on the T1 tax return since 1997 but until recently, didn’t appear important. About three years ago the government began to pay attention to taxpayers’ answers in order to ferret out tax revenue that perhaps it’s missing.

It’s the aggregate value of all the qualifying foreign assets that determines whether or not the $100,000 threshold is exceeded, and if exceeded, the answer is “yes” to the question.

This is not the reporting of income made outside of Canada. Rather, form T1135 requires the disclosure of foreign owned assets, assets that may or may not be earning income.

Such things as funds deposited in foreign bank accounts, shares in foreign companies, interests in foreign trusts, foreign bonds, units in offshore mutual funds, real estate, including vacant land, and in some cases even artwork, jewelry and vehicles.

For cash type investments, the value is determined by the highest value anytime during the year, not on the last day of the year, so moving or removing funds prior to year end cannot be used to prevent the reporting.

For capital assets, the value is based on its original purchase cost plus improvements over time. The inclusion on the T1135 is not determined by the current market value.

Exceptions?

Yes.

Assets to operate a foreign business are exempt, as are personal property type assets strictly used for personal use.

Having said this, if vacation property purchased for more than $100,000 is rented, the Canadian owner must not have an expectation of profit. Rental revenue must only offset expenses associated with that property.  Otherwise, the property has to be declared on the T1135.

When it comes to joint ownership of an asset, the value is divided according to each person’s original investment. So if an asset purchase was $250,000 with equal investment from both purchasers, both would report their $125,000 share on form T1135.  However, if one person had invested $200,000 that person would report $200,000 on form T1135 while the other person wouldn’t have to report their $50,000 investment since it’s under the $100,000.

And being married or living common-law doesn’t automatically split things 50/50. If both partners aren’t listed as owners, the value remains 100% with the listed partner. For example, if a $150,000 condo is purchased and only one partner is listed as the owner, the condo is reported by that partner.  But if both partners are listed as owners, then at $75,000 each, neither partner has to report the condo.

But remember, it’s the total value of all foreign assets.

And if the total value is over $100,000 but less than $250,000, a simplified method of reporting is offered on form T1135 … thankfully.

Finally, form T1135 foreign investment reporting is required not only of individuals, but also corporations.

 

From the Trail Times – March 2016

TAX TREATMENT OF SPOUSAL SUPPORT PAYMENTS

Considering the number of separated relationships, an explanation of spousal support from a tax reporting perspective is often needed to help people prepare their taxes.

In general, if there is a court order requiring “regular periodic basis payments” that permit the recipient “discretion as to the use of the amount”, then Canada Revenue Agency (CRA) allows the payer to deduct the spousal support payments as an expense from income and requires the recipient to report the spousal support payments as income.

To be clear, these CRA rules are referring to the reporting of spousal support, not child support. However, if there is also child support involved, it can have an effect on the reporting of spousal support – more on this later.

An occasional lump sum spousal support payment is not reported by either party on their tax return unless the lump sum is an arrears payment due to missed regular payments, or an acceleration payment if prepayment of regular payments makes sense to the parties.

Another exception for lump sum payments of which CRA requires reporting occurs when a court order specifies payment for identified expenses like rent, mortgage, medical, tuition, and the like. CRA will waive the “regular periodic” and “discretion” requirements and treat this spousal support as a deductible expense for the payer and reportable income for the recipient.

By the way, until a court order is in place, spousal support payments are not reported to CRA by either party, unless the court order when completed states a retroactive reporting requirement, and in that case, it’s applicable to only the preceding tax years stated in the court order.

If child support and spousal support are all involved in the separation, any shortfall on the total support paid is assumed by CRA to be a shortfall of spousal support – the kids’ cash comes first. The shortfall becomes spousal support in arrears, not child support in arrears.  The amount of spousal support reported on the tax returns is only that amount, if any, above the required child support amount.

To state the obvious then, the legal docs should clearly identify the amount of child support and clearly identify the spousal support. If the two amounts are not separately stated, the entire amount of support is assumed to all be child support and therefore nothing is reported to CRA on the tax returns as spousal support.

These are difficult conversations sometimes, but once past the emotion, unambiguous paperwork does move the process forward relatively simply.   Adding to the importance of having clear documentation, the review of spousal support, and child support too, is not an uncommon request by CRA.

 

From the Trail Times – February 2016

PUSHIN’ PAPER: CRA “My Account”

In search for excitement, if you happened to have read a recent Notice of Assessment from the Canada Revenue Agency (CRA), you may have noticed a paragraph dedicated to CRA’s offer to communicate with you via email.

The CRA paperless push is ramping up in 2016.

Last year at this time, CRA began inviting taxpayers to its website to set-up their “My Account”. If set-up, a taxpayer is able to view and in some cases change assessed tax returns, make requests of CRA, and access personal information. The taxpayer will also be asked to choose paperless communications with CRA.

On the latter point, when filing your tax return there is now a question asking for your consent for email communications to replace CRA letters arriving via Canada Post. If you agree, you have to give CRA your email address and have a CRA “My Account”.

It’s a bit of a process to set up “My Account”. Allow about two weeks from start to finish since CRA mails you a passcode. Once you receive it, that’s when you actually log into “My Account” for the first time, and of course change the passcode.

If you choose paperless communications, when CRA has correspondence for you, CRA will send to your email address an email telling you there is correspondence from CRA in your “My Account” in-box and to log-in and read it. In other words, the CRA correspondence itself will not be sent directly to your personal email.  You have to go on-line to retrieve it from CRA.

This means a CRA email will not contain detail, not ask for a direct reply, not have an attachment, and not have a link to “My Account”, a document, or a website. If a CRA email does include any of these items, it’s likely a scam.  The CRA email will simply direct the taxpayer to log into their CRA “My Account” in order to read CRA’s correspondence.

Now it should be noted that despite the apparent all inclusive paperless push, at this time only a few types of correspondence are actually included in this plan. The rest still come via Canada Post.  Having said this, CRA promises that almost all communication with taxpayers will become paperless, and this includes payments to and from CRA.

For years CRA has been encouraging taxpayers to set-up direct deposit for tax refunds from CRA, and now the government wants to directly deposit all CPP payments and the like.

In recent years CRA has been asking taxpayers to make payments to CRA electronically through on-line banking or using CRA’s relatively new on-line “My Payment”.

Now if you’re one who takes pleasure in paper, be aware that CRA’s current paperless requests may very well become requirements in the not too distant future. Having your “My Account” ahead of time may be wise.

 

From the Trail Times – February 2016

BEDROOMS & TAXES: MARITAL STATUS MADE DIFFICULT

It’s Valentine’s Day and you may be thinking no one is interested in your relationship … or lack of. Not so, the taxman is. Close your curtains!

As government benefits and tax credits expand and new ones are added, the more Canada Revenue Agency (CRA) is insisting you report your marital status using CRA definitions.

If you claim it incorrectly, you may be losing out on some benefit or credit. Or, you may be gaining right now but will be asked to pay the government back if one day your status is corrected.

CRA’s rules surrounding marital status are unmistakably defined, and at the risk of creating confusion, here is an abridged version.

The options for reporting your status include married, common law, divorced, separated, widowed, and single.

Married: Defined as the legal union of a couple, referred to as spouses.

Divorced: Defined as the legal break-up of a married couple. You report this status until you enter another relationship – once divorced you are not single by CRA definition.

Widowed: Having been married but having lost your spouse. You report this status until you enter another relationship – again, you are not single.

Common-law: Defined as living together in a conjugal relationship for 12 continuous months, referred to as partners. However, having or adopting a child or becoming a custodial parent to your partner’s child, the 12 month rule no longer applies.

Separated: Whether married or common-law, a period of 90 days must pass before this status can be reported. This means a married or common-law relationship that breaks down after October 1 in a given year, on December 31 of that year that relationship is still considered married or common-law for tax purposes because the 90 day separation rule will not be met until into the New Year.

In the case of establishing the status of a new common-law relationship, if temporary separation(s) of fewer than 90 days occur(s) within the 12 month continuous period, the 12 month timeframe is not lengthened by the days of separation, nor is the 12 month period restarted. So technically, a couple could live an “on-again-off-again relationship” over the course of 12 months whereby they may actually have lived apart more than together but still find themselves classified as common-law for tax purposes.

Single: As the adage goes, you’re only single once. Once married and if that relationship is no more, the claim is either separated, divorced or widowed. Similarly for common-law, if it’s no more, the claim is either separated or widowed. This is your status until you enter another relationship. In other words, you aren’t to revert back to single as your status with CRA.

And what should one do if one’s marital status changes? CRA tells us that we must report the change by the end of the month following the change (use form RC65) … I would suggest you certainly change it on your next tax return.