Guidance on QST Change in 2013 and Updating your Accounting Software

For the third year in a row, the Quebec Sales Tax (QST) will be changing.  Fortunately, the change is not to the rate, which effectively remains the same, but rather an effort to harmonize the QST with the GST. Consequently, the most significant change is the method by which the rate is calculated.

In the past, the QST used to be calculated on the total sale plus GST.  As a result the published rate was 9.5% while the effective rate was actually 9.975%.  The harmonization of the GST and the QST requires that the QST be charged on the sale amount only, without the GST.  As such the published rate and the effective rate will both be 9.975%.  This is illustrated below:

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10 Year End Tax Strategies to help Small Business Owners Improve their Bottom Line

Ready or not, the holiday season is upon us and the end of the year is fast approaching.  While it is quite a nice time of year (cold weather notwithstanding) there are many additional stresses –purchasing the perfect Christmas sweater, managing the logistics of family holiday time, making travel arrangements, all while trying to not to gain a million pounds.  This can be especially trying for the small business owner, who in addition to managing their business and the holidays, must carve out some time to ensure that there are ready for year end and maximizing their tax deductions while also planning for next year.  To help ease the stress I have compiled a list of tax tips to contemplate:
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How to Change Your Personal Tax Return After It Has Been Filed

Despite your best efforts (and/or your accountants’), occasional errors or omissions relating to your personal tax return are unavoidable.  It is possible that you forgot to include a tax slip, overstated your expenses or was unaware of a specific tax credit.  Luckily there is fairly simple mechanism that allows you to change your tax return, which can be done online or by filling out a form and mailing it in.
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What Small Business Owners Need to Know About Income Tax Instalments

One of the more difficult aspects of the transition from employment to small business ownership is having to cultivate a whole new level of discipline.  You can no longer rely on your employer to take care of business obligations that do not relate to your job ,and must take a much more active role in ensuring that you remain on top of your business obligations whether it is collecting payments from customers, paying bills or ensuring that you do not run afoul of Revenue Canada.  One of these obligations is that you are now responsible for remitting your own, which is done via the mechanism of instalment payments.
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Are Clothing and Other Personal Attire Costs Tax Deductible?

The fundamental rule for deducting any type of expense from your business income is to determine whether it was incurred for the purpose of earning income:
No deduction shall be made in respect of an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property
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What Happens When You Contribute Excess Amounts to your RRSP

Being able to contribute to an RRSP is one of the great tax saving strategies available to all Individual Canadian Taxpayers who generate “earned income” which is essentially income earned from employment (salaries) or self employment,  (Passive income like dividends and interest is ineligible for consideration when calculating how much you can contribute to an RRSP).  There are .unfortunately limits to how much you can contribute and Revenue Canada (CRA) actually imposes penalties on overcontributions to your RRSP.
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Tax Advice for Last Minute Filers and Procrastinators

If you have filed your tax return, you are entitled to thumb your nose at those of us who are still trying to get it together.  Given that the deadline to file your tax return is imminent, you should probably drop what you are doing right now and make it happen.  For the majority of taxpayers, the stress of having to file your taxes far outweighs the actual complexity of completing the tax return itself, particularly when software is available for even the most “numbers challenged” individuals.  And for those who really don’t want to do it themselves, there are tax preparation offices everywhere that are just a google search away. 
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What Happened to Quebec Property Tax Refund?

For Quebec taxpayers who have been trying to locate their RL-4 slips, the slip that your landlord usually provides, or the part on the tax forms or software where you would enter your property taxes (Schedule B), be advised that as of 2011, that this is no longer a specific tax credit.  Prior to 2011, both property owners and renters could claim a portion of property taxes paid.  This reduced income taxes payable for taxpayers whose total family income was under approximately $50k

However, per Revenue Quebec: 

The property tax refund was replaced by the housing component of thesolidarity tax credit. As a result, landlords no longer have to provide their tenants with RL-4 slips, and Part E of Schedule B (which tenants had to complete to claim the refund) has been removed. To claim the solidarity tax credit, complete Schedule D.

Essentially, Revenue Quebec no longer allows for a credit that is based on specific property taxes paid.  Rather, with the Solidarity Tax Credit, it determines whether you live in an eligible dwelling i.e. do you rent or own your home and calculates a monthly credit that is based on your total income.  (The higher the income, the lower the credit, until it reaches $0).  The solidarity tax credit is combined with the QST credit and is paid out to Quebec taxpayers on a monthly basis as long as they don’t exceed the income threshold.  Generally speaking, a single taxpayer who owns or rents their home will be eligible for the full amount of solidarity tax credit if their income does not exceed $31,695, which is approximately $900.   Net incomes between $31,695 and approximately $46,000 reduce the amount of the tax credit until the amount reaches nil.  Keep in mind that, to receive the credit, you must register for direct deposit.

More details on the solidarity tax credit and where to register

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What is the Hiring Credit for Small Business?

Recently, a client received a notice from the CRA indicating that he had received a credit of $265.  The explanation was simply that it was a hiring credit.  Upon further research, we determined that the credit was a result of the provision in the 2011 budget that gave a credit to small business for hiring additional employees.

To be eligible for the credit, small businesses are not required to prepare any additional reporting.  The small business hiring credit is simply calculated based on the increase in employment insurance (EI) premiums paid in 2011 over 2010.  The maximum amount that any business is eligible to receive is $1,000.

Since the calculation is based on amounts reported on your T4 slips for 2010 and 2011, you are only eligible if the slips have been filed for these calendar years.

It appears that the amount of the credit is 100% of the excess of 2011 EI premiums over the 2010 EI premiums, up to aforementioned limit of $1,000.

The credit will not actually be paid out immediately, but applied to your payroll account.

New businesses (like my client) will receive the credit.  Their 2010 EI premiums will be calculated at $0.

Note that since the EI credit should reduce your payroll expense, it will reduce your business expense and by extension, increase profits.  The journal entry is as follows:

Dr. Payroll (EI) Liability

Cr. Payroll Expense

Once you receive your payroll statement from Revenue Canada indicating the amount of the credit, you may reduce the payroll liability owing to them by the same amount.  You cannot, however, estimate the amount of the credit before you have received notification from Revenue Canada.

 

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Tax Return Checklist for Individuals and Unincorporated Business Owners

The deadline to file our tax returns is quickly approaching, resulting in slight feelings of panic for some individuals and small business owners.  As someone who provides tax services for a living, I have found that (like with many things) the stress is far more manageable when you know exactly what you have to do (rather than a vague idea that documents need to be located and forms need to be filled in).  One of the best ways to mitigate this stress is to prepare a checklist.  If you are looking for a comprehensive tax checklist , David at The Tax Issue has prepared an excellent one and I recommend that you check it out.

The checklist below has some of the more common income, deductions and credits that the majority of taxpayers are likely to have:

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10 Corporate Income Tax Facts for Small Businesses

There are essentially two types of tax returns for small businesses and the self employed.  If you are an unincorporated sole proprietor or a partnership, you are required to fill out the statement of business activities (T2125) on your personal tax return also referred to as the T1.  If you are incorporated, then you are required to complete a corporate income tax return referred to as a T2.  (The corporate tax return is in addition to the personal tax return).  Although the accounting for unincorporated and incorporated entities is almost the same, except with respect to the equity sections, preparing the T2 is more complex and is generally best outsourced to a qualified accountant.  Regardless, it is good to have an understanding of some of the important considerations when preparing a corporate income tax return.
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Accounting and Tax Treatment of Computer Hardware and other Fixed Assets

Investment in capital items such as computers, furniture, equipment and cars can cause confusion for small business owners.  Since these are purchases that affect the cash flow of the business, it seems that they should be accounted for as expenses just as you would reflect office supplies or rent.  There are however special rules for any acquisitions that qualify as “fixed assets”. 

A fixed asset, simply speaking, is an acquisition that provides a long term economic benefit to the business. In other words, any business purchases that has a useful life that extends beyond one year, will usually qualify as a fixed asset. 

From an accounting perspective, fixed assets as their category implies, are reflected as assets on the Balance Sheet.  This means that they when they are initially entered into your accounting system, they will have no immediate impact on your bottom line.  It is only with the passage of time that a portion of these costs become an expense, which requires an assessment regarding the useful life of the asset.  For example you might purchase some computer hardware that you expect to use for about 3 years after which you will need to replace it.   At the end of the 3 years, however, it may still have some value (you may be able to sell it) which is referred to as salvage value.  This too needs to be evaluated.  Once these factors are determined (since you are not psychic, they do not have to be exact – just reasonable) you have enough information to calculate your depreciation expense.  The depreciation expense is the amount by which you reduce your fixed asset value on an annual basis. 

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Is Facebook’s Valuation Justified? A Comparison of Key Financial Metrics to Apple and Google

The recent release of Facebook's S-1, the financial filings that are required to be publicly available prior to filing an IPO, has created a media frenzy. The report has been dissected and analyzed extensively, financial news networks can’t seem to stop talking about it and it seems that people who have never heard of an IPO are discussing it, fittingly, on their Facebook pages.   The most controversial issue, of course, is whether Facebook is actually worth $100 Billion. 

Although Facebook is unique in its global reach and ubiquity, the starting point for any valuation is to compare it with similar businesses.  I have chosen Apple and Google, given the similarity of their business models and their respective global dominance, to compare certain key metrics:

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Preparing your Small Business and Self Employed Tax Return with UFile Tax Software

Unincorporated Small Business and Self Employed owners are fortunate to be in an age where preparing tax returns have been significantly simplified.  Not only are calculations automated, but contemporary tax software provide interfaces which make input of data fairly straightforward.  Tax software also help taxpayers to optimize their deductions, so preparing your own taxes has never been easier.  Of course tax software is still only a tool and is not a replacement for tax expertise.  Business owners should be cautioned that, when in doubt, it is always best to consult with an an accountant. 
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Essential Facts about Shareholder Loans for Incorporated Small Business Owners

There are three primary ways in which you, as an owner-manager, can withdraw funds from your corporation.  You can pay yourself a salary, you can declare a dividend or you can borrow money from the corporation.  When you borrow money from your own corporation the Canada Revenue Agency (CRA) has put into place strict rules as to when you have to repay the loan.  This is essentially to ensure that the owner-manager does not avoid paying taxes indefinitely. 

The basic rule for shareholders loans is that they must be paid in the fiscal year following the year in which the loan was taken.  For example, if your fiscal year end is December 31 and you borrow money in 2011, then it must be repaid before December 31, 2012.  Failure to repay will result in the loan amounts being included in the shareholder’s income in the year in which the loan was taken, which in this case would be 2011.  The loan must also not be considered to be a series of loans and repayments eg. Repaying an amount at the end of 2011 only to borrow again in early 2012. 

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How to Handle a Tax Assessment

Tax assessments are often difficult to understand (surprisingly the explanations can be insufficient and/or confusing). If you had an accountant file your tax return, it is a good idea to consult them upon receipt of an assessment. If you filed it yourself, and do not understand the assessment, you should call the government agency. They are usually eager to help, if not always illuminating. If you still do not understand it, it is probably best to then contact an accountant.

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How to Update Wave Accounting for the 2012 QST Rate Increase

As of January 1st, 2012 the Quebec Sales Tax (QST Rate) which had gone up from 7.5% to 8.5% on January 1, 2011 will now increase to 9.5%.  The effective sales tax in Quebec will go up from 13.925% to 14.975%.  Since QST is calculated on the net amount + GST, the rate is not 14.5% but 14.975% .  In other words the effective QST rate is 9.75%.  Business owners will need to update their invoicing and accounting systems accordingly to ensure that the rate is properly reflected.

If you are using Wave Accounting, the update to the rates is fairly straightforward, with one little quirk.  Since Wave, unlike Quickbooks, does not allow for the QST to be calculated on the GST, the effective rate has to entered manually.  This is done as follows:

To update Quickbooks for the tax rate increase, please see “Updating Quickbooks for the 2011 QST Increase”.  The procedure is essentially identical except for rates.

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12 Tax Tips for the Self Employed

The self-employed lifestyle holds great promise when you first embark upon it, however you quickly find yourself doing things that you would never have dreamed of.  You are expected to take on role of salesperson, market researcher, accountant, lawyer and social media expert, while not getting paid for any of it.  Your available funds do not allow for outsourcing and at times you are not even aware of what you don’t know.  Luckily the internet provides a wealth of tips and tricks to make these tasks a little easier, and with a little discipline, some aspects of your self-employed existence can be made much simpler. Ensuring that you keep on top of your finances and tax obligations is one of those much hated, but absolutely necessary tasks for which it is essential to have a system in place, even if you do have an accountant. 
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Tax Tips: Medical Expenses Tax Credit

Canadian taxpayers are allowed to claim their medical expenses as a deduction subject to certain restrictions and limits.  Luckily your root canal and eyeglasses are deductible, but unfortunately your nose job is no longer eligible to be included in your medical expenses (cosmetic surgery was made ineligible as of March 5, 2010) nor is a hot tub that you install in your home, even if prescribed by your doctor.   Eligible medical expenses also have to reach a specific threshold before they can actually start reducing your taxes payable.  Details, pertaining to the medical tax credit, to keep in mind prior to deducting medical expenses are discussed below:
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9 Tax Facts about Charitable Donations for Individuals and Small Business Owners

Every good act is charity. A man's true wealth hereafter is the good that he does in this world to his fellows. - Moliere

Unfortunately, the Canada Revenue Agency (CRA) has specific criteria for what qualifies as a charitable donation and not all good acts qualify for a tax benefit. Growing a moustache (although not without its costs) or supporting your charity case brother-in-law, are generally not considered to be a charitable donations according to the tax code. Luckily there are a multitude of charitable organizations that do qualify the donors to receive a tax credit for their donations.  Some details about the tax credit are discussed below:

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