CPP/QPP Obligations for Self Employed Workers

When you are self-employed, you are essentially taking on the role of employer and employee.  As such self-employed individuals are required to remit both portions of the CPP or QPP to Federal or Quebec respectively, which is calculated on your earnings for the year.  This only applies to unincorporated business as if you are an incorporated business, you are an employee of the corporation regardless of whether or not you own the business.

The QPP rates for 2011 for self-employed persons is 9.90% of your net business/self-employed income for the year.  The maximum amount payable for 2011 is $4.435.20, which means that if you earn more than $48,300 of net business income, your QPP will remain $4,435.20 and there is a basic exemption of $3,500 i.e. if you earn less than $3,500 you do not have to pay QPP.

EXAMPLE #1: Income is less than maximum

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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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How to Pay Dividends: Completing the T5 Slip and Summary

 

If you are the owner of a corporation, you can choose to pay yourself (and other shareholders) dividends instead of a salary, or they can be paid in addition to a salary.  If you do decide to pay yourself dividends, it is important to ensure that you prepare the proper documentation for Revenue Canada (CRA) and if you live in Quebec, Revenue Quebec.  The documents are due by February 28th of the calendar year following the year in which the dividend was paid.  And although no taxes are due at the time of filing with the government, interest and penalties apply for late payment.  The documents that need to be filled out and returned to the CRA and MRQ are discussed below:

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5 Reasons to Change Your GST/HST/QST Reporting Period and How to Do It

When starting a business  the selection of the GST/HST or QST reporting period i.e. how often to file your sales tax returns is often based on new business considerations.  Either you are over enthusiastic and you want to file frequently or you don’t want to be bothered with the administrative hassle and select the annual reporting option.   As time passes and your business evolves, you might realize that the option that you initially selected may no longer be the most optimal.  There are several reasons that you might want change your reporting period:
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Guidance on Registering for Payroll and Remitting Source Deductions

 

There comes a time for many small business owners when they decide that they need to hire employees.  This is usually an excellent sign as it means a) the business is growing and b) the small business owner has learned to delegate.  It also means that additional paperwork needs to be filled out and additional taxes need to be paid.  The simplest option when deciding to augment your workforce is to have the new worker invoice the business, based on hours worked or some other formula.  Unfortunately, there are very specific rules as to who qualifies as a self employed contractor.  Essentially, if your worker  is working full time, has little flexibility and you provide the tools, then the tax authorities will classify them as an employee.  In this case, you must take your new worker on as an employee, register for payroll, pay them a salary and submit regular, periodic payroll reports and payments to the Canada Revenue Agency (CRA).  As usual, if you live in Quebec, you must submit to Revenue Quebec (MRQ) as well.  The registration procedure is discussed below:

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Revenue Canada Interest, Penalties and Payment Arrangements for Income Tax and GST/HST Returns

Whether you are an individual or a business in Canada, taxes are an inescapable part of your existence.  All sources of income need to be calculated, tax returns needs to be filed and taxes owing must be paid.  This is somewhat facilitated if you are an employee as your employer tends to take care of the majority of remittances.  Self-employed individuals, sole proprietorships, partnerships and corporations on the other hand, must account for their income and expenses , determine taxes payable  and remit the appropriate amounts.  Additionally, businesses are also responsible for other filings including GST/HST and QST and payroll.  A lack of knowledge, imperfect accounting systems and the business of running a business sometimes interfere with the timeliness of filings.  The Canada Revenue Agency attempts to curb these tardy behaviours by imposing penalties and interest on late filings as follows:

Unincorporat

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3 Provisions from the 2011 Federal Budget that Benefit Small Businesses

Although the 2011 federal budget tabled in March was not directly responsible for an election, a change in government and one of the most interesting election results in recent history, it was certainly a contributing factor.  When the excitement was over however, the budget pretty much remained the same.  The budget’s primary focus is the economy and includes provisions to stimulate jobs and growth, while, for the most part, maintaining current tax rates.  Some provisions that impact small business are discussed below:

Temporary Hiring Credit 

A one-time credit of up to $1,000 based on the increase in an employer's employment insurance (EI) premiums paid for 2011 over those paid for 2010. 

Small businesses whose EI premiums were less than $10,000 in 2010 and whose premiums increased in 2011 from 2010, are eligible for a one time credit.  The credit will be automatically calculated when you submit your T4s and summaries for 2011.  The deadline, to be eligible for the credit, is January 15, 2015 (if you haven’t filed your T4s by this time, you probably have bigger problems). 

Note that you cannot reduce your payroll deductions by the amounts anticipated.  You must wait for the CRA assessment subsequent to filing your T4 returns.

Further info can be found here

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Private Health Service Plans (PHSPs) for Small Businesses and Sole Proprietors: How to Make Medical Expenses Tax Deductible

One of the perks of being an employee, in many cases, is that your employer will provide health insurance benefits.  Whether they pay for all of the premiums or only a portion, this can help to mitigate the costs significantly.  Although, Canadians do have the luxury of Medicare, this is often inadequate and as anyone who has ever waited in an emergency ward can attest,  may require you to take days off just to have your condition diagnosed (if one wants to look at this positively, it can be a great time to catch up on the classics).  While the discussion of our Medicare system is a discussion for another time and another blog, the point is that having health insurance of some variety can help make the process a lot less painful.  If you are self employed or a small business owner, however, the cost of health insurance can be prohibitive as you do not benefit from having a policy covering a group of people (thereby spreading the cost which is essentially how insurance companies work).  On a personal level, Revenue Canada does provide for a tax credit, but this is only beneficial if your costs exceed 3% of your taxable income (up to approximately $2,000).  Additionally the federal credit reduces your income taxes payable by 15% of the excess of medical expenses over the three year threshold.  Eg. if your taxable income is $50,000 and your medical expenses are $2,000, your net federal reduction to your taxes payable is$2000 –( $50,000X3%) = $500X 15% = $75.00.  This is very small relative to the actual expenses incurred.

So, how can a small business owner or self employed individual convert their medical expenses into business expenses?  The answer is to use what is known as a Private Health Insurance Plan or a PHSP.

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Is the Quick Method of Reporting GST/HST & QST the Right Choice for your Small Business

If you are self employed or a small business with annual sales between $30,000 and $200,000, it might make sense to select the Quick Method of reporting your GST/HST and QST (note that if your sales are less than $30,000 you are not required to collect sales taxes).  While regular reporting of sales taxes requires that you calculate all amounts collected and paid on eligible expenses, the quick method requires the application of a single rate to your sales.  The key details of the Quick Method and its suitability for your business are discussed below:

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Understanding Payroll Deductions: Personal Income Tax Rates, CPP/QPP, EI and Basic Exemption

The automation of the tax preparation and filing process has been a boon to individuals and tax preparers alike.   Gone are the days of struggling to find the right box on the return, adding everything up 5 times and still getting different results, and hoping that the CRA can read your chicken scrawl.  Present day tax software not only guides you through every step of the process, it also helps to optimize your allocations thereby reducing your taxes payable.  There is however at least one downside to automation: Since we are more removed from the actual calculations, our understanding of our tax situation is somewhat diminished.  We have an idea of what we expect to pay, which we can see every week on our paycheques (or for self employed individuals, the breathtaking moment when we see the final result on our tax return), but often we are not really sure how these amounts are derived.  Below is a discussion of the  tax rates, deductions and maximums to improve our comprehension of this somewhat complex topic:

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Are You Ready For Real Estate Moguldom? The Business and Tax Implications of Owning Rental Property

From the Rothschild family to John Jacob Astor to Donald Trump, a great many fortunes have been made in real estate.  Conversely, as was evidenced in 2008 with the deflation of the housing bubble, many fortunes have also been spectacularly lost.   Fortunes aside, owning real estate is one of the best ways to build equity.  If you own your home, you are already one step ahead.  With rental property, you can further augment your net worth while, after investing the necessary down payment,  having the investment pay for itself (Leaving you free to move on to buying your next property).  This is not a decision to take lightly and there are several business and tax factors to consider before taking the plunge:

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20 Essential Tax Facts for Small Business Owners

As the income tax filing deadline for the year approaches small business owners and their accountants are starting to feel the pressure.  Receipts need to located, invoices entered, bank statements reconciled.  Accountants’ offices are littered with shoeboxes and accordion folders while tax return checklists and missing info lists are being compiled and checked off.  Google is starting to note an increase in tax related searches as business owners and accountants search for clarity on a variety of tax regulations, deductions and deadlines .

In an effort to assist business owners understand their obligations, gain a better understanding of the tax filing process and provide some structure to the chaos, I have prepared a list of some essential facts and resources that should help make the process a little more manageable:

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RRSP Facts and Figures: Infographic

One of the most significant tax breaks available to Canadian taxpayers are contributions to retirement savings plans.  As the contribution deadline approaches for 2010, I have compiled some facts and data into an infographic to provide some insight on how they work, and how we measure up to other Canadians:  
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3 Government Wage Subsidy Programs for Small Businesses

Budget limitations and inexperience can make hiring new employees a difficult decision for small business.  Happily the Government of Canada as well as the provincial governments have a variety of programs to stimulate hiring through tax credits and outright grants and subsidies.   Most popularly there is the Scientific Research and Experimental Development credit, which allows for substantial tax credits for businesses that engage in research and development  for businesses of all sizes.  For small business that are not not engaged in research and development, there are, however, several other, smaller programs that can both directly contribute to your bottom line and allow for expansion of your business.  Three of these are discussed below:

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How to File T4s using Quickbooks

For all Canadian businesses that have employees on their payroll, the deadline to file your T4s is February 28th, 2010.  The good news is that it has become much easier to do particulary if you are efiling.  The Canada Revenue Agency (CRA) is encouraging businesses to file electronically (efile) the T4s and it should be noted that e-filing is mandatory for employers with more than 50 employees.  
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Quebec's Gift Card Legislation and the Solidarity Tax Credit

Some interesting (somewhat) new legislation from Quebec's Consumer Protection Act regarding gift cards eliminating expiry dates and requiring refunds of amounts under $5.  And a new (but) old tax credit from Revenue Quebec, requiring eligible taxpayers to sign up for direct deposit.
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New Revenue Quebec Requirements for Mandatory Billing/SRMs in Restaurants

To combat perceived tax evasion in the restaurant sector, Revenue Quebec(MRQ) has implemented a new program which requires all businesses in the restaurant sector to comply with certain rules, most notably the installation of a Sales Recording Module (SRM), that has been selected by the MRQ.  To compensate for the costs of installing the system, Revenue Quebec is (kindly?)offering a subsidy, the amount of which is dependent on the date of the installation.  Below are some of the key details relating to the program:
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Quebec Parental Benefits for Self Employed Workers

Parental benefits in Canada are administered by Service Canada.  They fall under the EI program, and to receive benefits it requires opt in to the EI plan for self employed individuals. However, in Quebec, unlike the rest of Canada (a common theme with Quebec), parental benefits are administered by the Quebec Parental Insurance Plan (QPIP), which does not specifically require opt in.  Instead all workers in Quebec whether self employed or employees are required to pay premiums, based (similar to QPP) on their insurable earnings.  For the self employed, premiums are payable at a rate of 0.86% upto maximum insurable earnings of $62,000. 

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How to Update Quickbooks for the 2011 QST Rate Increase

On January 1st, 2010, Revenue Quebec will be in increasing the QST rate to 8.5% (yay!), bring the effective rate of QST to 8.925% and  total sales taxes (GST and QST) to 13.925%, since the QST is actually charged on the net price + GST.  This will affect anyone who charges QST including small businesses and self employed individuals.  More info on the rate increase can be found at Revenue Quebec QST Rate Increase page.

For those of you using Quickbooks you will need to update the QST being charged on both sales and purchases.  The goal is to make a copy of the already existing QST on Sales and QST on purchases items, which will maintain the old rate.  Once this is done the existing "items" should be updated with the new rate.  This will automatically feed into and update the sales tax codes, so that you do not have to re-create them.  Keep in mind that this should be done on January 1st, 2011 or first day back after the holidays, so that transactions prior to 2011 are not affected.  The following are the steps required to make the change:

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