Should you register for GST/HST and QST and What it Means to Be Zero Rated

One of the first tax questions you will be faced with as a small business owner or self employed worker is whether you need to register for GST/HST & QST.  The answer in most cases is that if you anticipate that your annual gross revenues (total sales) are going to exceed $30,000, then you should register for GST/HST and QST UNLESS you are considered to be providing a zero rated or tax exempt product or service, in which case you are not required to register.

A more detailed analysis of whether you are required to register for GST-QST

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Should You Pay Yourself a Salary or Dividend? 7 Considerations For Small Business Owners

While incorporation has many benefits for small business owners, it does introduce additional complexities that are not faced by registered  businesses.  Unincorporated business owners are essentially taxed on their net business income, which allows for more time to devote to tax planning and how to spend all of your richly deserved profits.   Incorporated business owners, on the other hand,  cannot just withdraw cash from their businesses as the need or whim arises.  There needs to be a formalized structure in place which usually takes the form of either salary or dividends.  Either type of remuneration has tax and other implications that need to be considered before making a decision. 

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What to Do When your Tax Obligations are Overdue

Small business owners have the added responsibility of ensuring that they are aware of, and comply with, a variety of tax obligations.  For some, this can be somewhat overwhelming, resulting in an accumulation of government notices, assessments, requests for information etc. that just add to stress levels.  While ignoring the problem, hoping that it will go away, may seem like an attractive option, it is important to note that the revenue agencies never forget.  They are also both able and willing to take extreme measures to collect upon what they perceive to be unpaid debts eg. Freeze your bank accounts.
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Tax Filings for a Typical Canadian Small Business

When starting a business, it can be confusing and a little overwhelming to keep on top of the different types of tax filings that need to be submitted and the timing on each one.  Documents received from the government are not always clear as to what needs to be done, particularly if you are not familiar with what they are asking for.  It can be easy to put them aside to deal with them later, however this will usually result in more letters and if left for long enough, arbitrary assessments and interest and penalties. It is therefore prudent for registered and incorporated businesses to keep on top of their tax filing.
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Guidance on Deducting Home Office Expenses

One of the benefits of having a home based business (for freelancers, self employed contractors and small business owners) is that you can deduct the expenses relating to the space that you use to work.  This can result in a significant reduction in your tax bill for costs that you would incur regardless, giving you one more reason to love being your own boss.  

Criteria for Deductibility:

For home office expenses to be deductible, they have to meet the following criteria: 

  • It has to be your principal place of business i.e. you cannot deduct home office expenses if you have another office that relates to your business, elsewhere, even if you work 22 hours a day or you check your blackberry in bed.
  • The space designated as your home office is used to earn business income and/or you meet clients or customers on a regular basis.  You can deduct expenses relating to the workspace in your garage which is used for home improvement projects.
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GST and QST Considerations For New Business Owners

The Goods and Services Tax or GST is a consumption tax that is charged on most goods and services sold within Canada, regardless of where your business is located.  Subject to certain exceptions, all businesses are required to charge GST , currently at 5%, plus applicable provincial sales taxes.  A business effectively acts as an agent for Revenue Canada by collecting the taxes and remitting them on a periodic basis.  Businesses are also permitted to claim the taxes paid on expenses incurred that relate to their business activities.  These are referred to as Input Tax Credits.

Does Your Business Need to Register?

Prior to engaging in any kind of commercial activity in Canada, all business owners need to determine how the GST and relevant provincial taxes apply to them. Essentially, all businesses that sell goods and services in Canada, for profit, are required to charge GST, except in the following circumstances:

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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 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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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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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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The Importance of Staying on Top of Your Tax Obligations

Revenue Canada recently put a press release about a Sarnia businesswoman who pleaded guilty for failing to file 23 individual, corporate and sales tax returns from 2003 to 2009.  She ended up being fined $1,000 per count for a total of 15 counts (Penalties were not applied to the 8 outstanding GST returns).  She has 12 months to pay the total $15,000 fines and was ordered to file the outstanding tax returns before November 6th, 2011.  In addition to this fine, she is also responsible for any taxes payable and related interest and penalties that would be imposed by the CRA for late filing and payment.

As an accountant I frequently receive panicked calls from business owners who have received ominous letters from the tax authorities requesting that overdue tax returns be immediately filed.  Others receive notices of assessments for significant amounts (Revenue Quebec will often slap an $8,000 assessment on a corporation that has yet to file its corporate tax returns).  In more extreme circumstances, the tax authorities have the power to freeze your bank accounts or initiate tax audits.  This can be debilitating to a small business.  

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4 Alternatives for Preparing Your Small Business Payroll

Paying employees (or yourself) requires more than just knowing the amount that you are going to pay.  The Canadian tax authorities requires that employers calculate a variety of taxes on the salaries paid, remit them to the federal and provincial governments and prepare annual reports demonstrating that the calculations are correct and all amounts have been paid.  This can be a lot of work for business owners whose time is more valuably spent generating sales and building their businesses.  Luckily there are many options that help simplify and guide business owners through the process:
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