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The 7 Best Tax Write-Offs that Canadian Small Businesses Fail To Claim

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Ask me to name one of the most frustrating things I see on a quarterly basis, and my answer would be: waste. Waste is a prominent problem, so may think that I’m talking about wasteful spending, but there’s another big way Canadians are leaving cash on the table—losing out on opportunities to claim more on their taxes.

Here’s a dilemma I face on a daily basis: when to open my mouth when I see someone wasting their time or money on an accounting process that does not reap them all the benefits it should. I want to scream, “What about all the missed deductions you’re not taking advantage of?!” It’s like watching someone race through a video game to get to the end without ever collecting any coins or bonus lives along the way. These deductions are there to help you and your small business. Sure, they may be hard to navigate or catch them all, but that’s why you need a professional accountant on your side.

I say, it’s time for small business owners to stake their claim, especially when they are using their home as a workspace. The first step, in my opinion, is always to get an accountant who is sensitive to the laws around home business claims. But as you prepare for any tax season, keep in mind some of the most common expenses home-based business fail to claim and remember the only way to maximize your deductibles is to keep those receipts!

 

  1. Insurance

If you carry any business insurance, including buildings, machinery, and equipment, pay attention. Deductible insurance includes malpractice insurance or other business insurance—vehicle, product liability, professional liability—you may purchase. For more on the kinds of insurance that can be claimed by Canadian companies, the Line 8690 page of the CRA website is helpful.

 

  1. Publications & Memberships

Any trade specific publications you receive on a monthly, quarterly or annual basis, can be considered deductions. Just make sure that they are unique to your business and can’t be general publications. Like those publications, if you belong to any professional organizations, you can deduct your membership fees and dues provided they qualify. Union fees and licensing boards count!

 

  1. Child care expenses

Are you the lower income spouse in a household that pays for child care costs? Then you can claim $11,000 for each child born in 2015 or earlier and $8,000 for each child born in 2009 or later. Those expenses include babysitter or nanny fees, daycare costs, and after school program (PLASP) fees.

And, did you know that 2016 is your last year to claim your Children’s Fitness Amount? That’s the tax credit of 15% you can get back from a physical activity program for the kids. You can claim up to $500 if your child is under 16 and their program qualifies for the children’s fitness tax credit (check the receipt).

 

  1. Car expenses

If you are required to use your personal car or buy tools to carry out your employment duties, you can deduct expenses related to your vehicle, if you’ve completed form T2200, Declaration of Conditions of Employment. Deduct only the business use portion of your car, which includes:

  • Insurance
  • Repairs and maintenance
  • Lease costs (max of $800 + taxes)
  • Capital cost allowance
  • 407 charges
  • Parking fees

 

Considering whether to lease or buy a car? If you think the difference tax reasons, see Toronto Accountant Discusses Leasing vs. Buying Car.

 

As a Canadian taxpayer, you can also claim the Public Transit Tax Credit, for amounts spent on monthly or yearly public transit passes. Eligible passes include: This will end as of July 1st 2017. So do be aware of this.

  • Buses
  • Streetcars
  • Subways
  • Trains
  • Ferries

 

  1. Education and certifications

If you’re considering taking a course that is directly related to your present job—either at an accredited school or a place like Brainstation—and will expand on your skill set in the same industry, the tuition expenses are deductible. Do not deduct anything if you are taking something new to add to your business or to offer a different service.

 

  1. Safety clothing and uniforms

If your business includes outfitting yourself and your employees in uniforms or safety clothing, you can deduct the cost of all those items, plus the cost to have them cleaned. Unfortunately, this does not count the cost of dry-cleaning your day-to-day clothes—although that would be great, wouldn’t it?

 

  1. First-Time Donor’s Super Credit

Have you or your spouse not claimed a charitable donation tax credit for the last five years? Make a contribution to your favorite charity this year and claim a deduction of  40% of your gifts of $200 and under and 54% of donations over $200 (without exceeding the maximum of $1000). This super credit is applicable exclusively between the years of 2013-2017, so you’re right in the sweet spot right now. For more information visit the CRA website to see how the super credit works.

 

Of course, I don’t want you to forget to keep receipts for your office supplies, furniture, and tech items. Scan them and save them to a folder on your computer, or in the cloud, if you can.

 

If you have any questions about what you can or cannot claim, contact me. I’ll help you find all those deductions you didn’t even know you could claim.

Claiming Gluten Free on Taxes

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Many people living with Celiac Disease and cannot process the protein Gluten found in many food items. But did you know that you can claim those on your tax return as a legitimate medical expense?  Yes it’s true!  But there are limitations.
Here is how it works:  The CRA website states you can claim the incremental costs of Gluten Free food.  Well what does this mean? It means you must have the cost of a similar item that is not Gluten Free and subtract that from the cost of the Gluten Free item. So if a loaf of bread costs regular $3.00, and the Gluten Free loaf of bread costs $6.00, then you can claim just $3.00 of the Gluten Free loaf of bread.  If you are going the more frugal route, which some do and purchase flour to make your own breads, then you would get the price of a regular package of flour and compare it the Gluten Free package of flour and claim the difference. So in a nutshell you can claim the difference in cost between a non Gluten Free item and a similar item that is Gluten Free. The CRA must also have a copy of a letter from your physician stating you have Celiac Disease.

Yes but is it worth it.  Well considering how expensive Gluten Free products are it can be.  But it depends on your income.  For medical expenses to have any affect on your tax return the medical expenses must be at least 3% of your income. You must also be willing to put in the effort to keep track of everything for accurate records.  This is essential as some prices may be cheaper at the start of the year on regular priced items and then more expensive at the end of the year.  Which in the case of 2015 where our dollar dropped a lot, the amounts could vary a lot.  But think of technology as your friend in helping you out.  Yes you have to keep your receipts for the Gluten Free products, but just take a picture of the non gluten free item with your smartphone and record everything in a spreadsheet.  You can plug in the formulas in a spreadsheet to carry down in cells and once you have made up the spreadsheet all you have to do is plug in the numbers. Many software programs for taxes that professional tax preparers use have a feature where you can upload files with the tax return. You must keep the receipts for 7 years in case of an audit, and the spreadsheet or form you use is also good to keep in case of an audit.

You can’t claim gluten free soaps, shampoos or other grooming products.  But if you have a prescription for any special grooming products that are not available without a prescription they can be claimed.  Alcoholic beverages that are Gluten Free cannot be claimed either. If some of the Gluten Free products are being consumed by other family members that don’t have Celiac Disease then you can only claim the portion that you used of the Gluten Free products.

As always it is good to talk to professional tax preparers like us to make sure you are getting the most out of your taxes.

To Buy or Not to Buy a House

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Many young couples and families are looking to buy their first home. Some are undecided if they want to be life time renters or buy a home. What should you do? There is no easy answer to the question. What I will try to do is break down some numbers and put in a few scenarios to help you the reader decide.
First all it may depend where you live. Many large cities in Canada the average house price is well over 600k. Let’s say you purchased your house for 600k, and with the land transfer tax, and other fees, you have a 500k mortgage. A mortgage rate of 3% amortized over 25 years a monthly payment of $2996.06 would be paid. Assuming no extra was paid off during the 25 years with interest the 300 payments made would total $898,816.97. With property taxes of $187,500.00 over the lifetime of the mortgage.
Assuming at the beginning you will be paying $5,000.00 the first year on property tax, $35,952.72 in mortgage payments, and at least another $2,500.00 a year in heat and electricity, your yearly total of housing would be $43,452.72.
Let us also assume that after tax a couple is bringing home $80,000 a year. That is more than 54% of your income! Which is a very common scenario. This is not even including child care, food or clothing.
Now for renting a home. Assuming you will pay $1,500.00 a month for a nice apartment where the heat and electricity are included. That will equal $18,000.00 a year. Or 22.5% of income based on $80,000.00 a year.
Okay I’m saving all this money on housing but what about my retirement. As a couple if you put $20,000.00 a year annually into RSP’s for 35 years, with a 5% rate of return, you will have well over a million dollars for retirement. Plus if you max out your TFSA, even more. Verses the scenario of only $5,000.00 a year you will have less than 20% of that save up for your retirement. Plus you may have extra money for travel abroad, and or your children’s education.
If you do buy a house and sell it after 25 years you may make a substantial profit of 400k+, but remember by not buying a house and investing the money in RSP’s you are coming out on top of the game. Also house prices are so high at the time of this writing, and mortgages are quite low. This won’t always be the case, and when rates are high for mortgages the housing market slows down a lot. Home prices vary so much in a city, that the same size house and property maybe more than double the price in another part of town.
In the end it is all up to you. Many people don’t like renting and will always want to own a home. Some like being able to decorate however they choose without worrying what a landlord will or will not allow. There is no right solution for everyone. Especially if you live in a smaller town and the housing prices are a lot cheaper. Then you can maybe afford to put more into an RSP and have more for retirement.

When To Incorporate

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Incorporating is not always a good option when you first start your business.  We recommend incorporating once you reach 100k per owner in profit. The biggest reason not to incorporate is for tax reasons. When it comes to a lower income it is better to not incorporate.  An unincorporated business is put on the owner(s) personal tax return. If the business is at a loss then this in turn lowers the household income. Which may or may not put you in a lower tax bracket.  You can also claim part of your household expenses when you make a profit. We recommend when incorporating paying part of your home expenses but by having the corporation paying you rent.  In turn this will have to be a reasonable amount and you will have to claim this on your tax return.  A sole proprietorship or partnership is also easier to set up and takes less time and money to register. Doing a tax return for a sole proprietorship or partnership is also several hundred dollars cheaper, as it is done on your personal return. You will have to file only one tax return not two.

Sometimes people may find it in their best interests to incorporate before they reach the 100k thresh hold.  For example a client in the medical services profession has many people interested in becoming part of her business solely because of the name. So important is the name in the line of work she is in that many people from out of province and country are interested in it. Celebrities and sports people alike are searching for people when they come to town, and with a good name like the one she has it brings in lots of clients. To protect the name and her livelihood she decided to incorporate on the Federal level.

When you do incorporate the corporation will be considered a separate entity and you won’t be personally responsible. At the time of this writing tax rates are lower for corporations. But with each new budget things can change. Also with corporations it may be easier to get loans.  Some lending companies won’t lend out to a business that aren’t incorporated, or without assets.  You can also sell shares in the corporation to raise money.  Do keep in mind that the owners of the corporation are not allowed to collect EI should the business fail. So extra insurance for such a scenario may be warranted.

 Good practices when incorporating:

  • Seek the advice of an accountant to see if it is right for you
  • Always put the owners on payroll. instead of Owners Draw.  The government wants the taxes right away and considers it stealing from not only the government but from the corporation.
  • Get a new bank account under your new business name
  • Set up accounting software with your accountants help right away.
  • Carefully choose your fiscal year start and end.
  • Invest in some business insurance.

 

New Child Tax Credit

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So what does it mean with the new guidelines for the Universal Child care benefit (UCCB)?  Well it is  a taxable benefit.  It was introduced in 2006 originally to help families pay for daycare, but there were no rules as to what the money can be used for.  As of this writing the changes that have been made to the UCCB are the following: For children under 6 it is now $160.00 a month.  For children 6-17 it is reduced to $60.00 a month. To qualify the child must be living with you and you have custody.  There are a few more rules which can be found at this link: http://www.cra-arc.gc.ca/uccb/  But generally pretty much everyone with a child under 18 qualifies.

So it’s taxable what should I do now?  That all depends on your financial situation.  There are many things you can do.  However it all comes down to your financial situation. If you are in a low tax bracket you may not owe much on the benefit.  Here is how to make the tax situation better should you be able to:

First of all very few jobs now days are obtainable with just a grade 12 education.  Even if your child is not academic and college or university are not in the books for your child chances are high they will need a post secondary education.  There are many trade schools teaching all the trades.  From carpentry, plumbing, electrical, and welding just to name a few.  Education is expensive and is just getting more expensive.  So a good idea is to put the money into an RESP.  Or Registered Education Savings Plan. But how can this benefit you.  Simple the government will top it up by 20% per year with a $500.00 maximum per year.  So if you put at least $2500.00 per year you will get the extra $500.00 per year.  Which is more than the tax you would pay on the UCCB.  Not to mention that it will be earning interest over the years.  If you start an RESP for your child at birth, and for 17 years put at least $2500.00 into an RESP, the government will put in $8500.00 during that time.  Pretty good huh? Your child (or you) will have to register for a SIN in order to qualify for this benefit. For more information go to the CRA site: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/resp-reee/menu-eng.html

If you happen to be lucky enough to be higher income you may want to donate to a registered charity.   Make sure the charity is a registered Canadian charity before donating.  Many people like to research the charities they donate to, as they like to see how much of their donation is actually being put to good use.  Again the CRA has a website for this:  http://www.cra-arc.gc.ca/chrts-gvng/lstngs/menu-eng.html  You can check out the charity, look at reports on their revenue and what it was used for.  All charitable donations to a registered charity are tax deductible.  So many people have causes they wish to support and charities are a good way to do that.

Surviving an Audit

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People here audit and get scared.  When there really is no reason to be unless you made fraudulent claims on your tax return, or GST return.  Everyone at Revenue Canada that we have dealt with has been reasonable. Talking to them in a calm voice goes a long way. The last thing you want them to do is a full scale audit.  Not only does this take a lot of time which costs money, they usually fine something.  In which case chances will be higher you will be audited again on your next return.

In most cases the CRA Auditor will ask for a few basic items to back up what you have claimed.  You can then, depending on the audit fax, or mail in the necessary paper work to back up your claims. Sometimes they will come directly to your home or business. The Auditor will review what you sent in, at which point they may ask for more to back up your claim, have more questions and ask for more paperwork. or allow or disallow some items.  By law you have to keep records for at least 6 years. But it is not uncommon to keep back up records for 10 years, as that is how far back you are allowed to go to file tax returns and do adjustments on tax returns. Something else you can also do is keep digital copies of all your receipts.  The government does accept these in an audit, and to save space and or paper you may want to keep digital copies only.

The CRA selects businesses or personal returns to audit based on risk assessment of the business or individual.  Some are randomly selected for audits.  For more information the CRA website has a lot of information to look up.  For business audits go to: http://www.cra-arc.gc.ca/tx/bsnss/tpcs/lf-vnts/dt/menu-eng.html , for personal audits take a look at this link: http://www.cra-arc.gc.ca/E/pub/tg/rc4188/rc4188-e.html

If at the end of the audit, and you personally owe money for which there could be penalties and interest, it is always best to pay right away.  If you are under financial hardship you can fill out form RC4288 and mail it in.  It will take several weeks or months for the CRA to make a final decision.  They may ask for more information before they make a decision.  But just in case the decision is not in your favour then it is best to have paid it earlier rather than later.

GST/HST Confusion

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Over the past year I have added several clients, some whom have hired me for my knowledge of GST/HST rules and regulations.  It can get very confusing to the average small business owner.  In fact many big corporations don’t know all the rules either.  That is where a company like CBTS that works on several companies have a better over all view and knowledge.  For example many don’t know what Zero Rated GST/HST is.  To put it in simple terms, those goods and services that are normally charged GST/HST are charged the GST/HST but at 0%.  Yes that is right zero percent!  Why is it zero percent and not just exempt. The best way is to give an example.  Tom’s company sells and ships widgets world wide. All of his products are considered taxable. Tom’s company charges the GST/HST based on the rate of the province or territory that each customer is in.  But at least 25% of his clients are outside of Canada.  So they are not charged the GST/HST but the widgets are still considered taxable but at a zero percent rate.  There are many other examples and explanations.  This is one of the more common ones.  But some goods and services Canadian’s purchase are also Zero Rated.  For a further explanation take a look on the CRA website http://www.cra-arc.gc.ca/tx/bsnss/tpcs/gst-tps/gnrl/txbl/txblxmpt-eng.html

So if the above example of Tom’s business is used and only 75% of his clients are charged GST/HST does this mean he can only claim back 75% of the GST/HST he pays out on expenses?  No he can claim 100% of the GST/HST on expenses as all of his goods are taxable.  Even if the rate is Zero Percent it is still a taxable rate.  The only items he cannot claim 100% of the GST/HST are on the Meals & Entertainment expenses.  As only 50% is an allowable  expense to the business, this means that only 50% of the GST/HST on Meals & Entertainment expenses can be used.  The same would go for vehicle use expenses, and home use expenses.  If part of the personal vehicle is used for business then only part of those expenses can have the GST/HST claimed.  The same for household expenses. If only part of the house is used then only on that portion of the house hold expenses can you claim the GST/HST paid out.

One other thing to consider about GST/HST.  If your business has different items and or services where not all of them have GST/HST charged on them, then only that portion of sales that have GST/HST charged can be claimed on your expenses.  For example a Medical Rehab Clinic in Ontario offers several different services for their clients.  Physiotherapists, Chiropractors, Massage Therapists, and they sell some sports supplements and aids for sprains.  Only the supplements, aids for sprains, and Massage Therapy have GST/HST charged on them.  On average 25% of their sales are taxable.  So there fore they can only claim 25% of the GST/HST they pay out on expenses. BUT on the expenses related to the goods and services that have GST/HST on them they can claim 100% of the GST/HST.  In this example purchase of supplements and aids for resale.  Along with the massage lotions can have 100% of the GST/HST claimed back.

GST Return audits do happen and for good reason.  The auditors usually find money that has been claimed the shouldn’t have been claimed. Since they have proven valuable to the government in getting back more money, they are here to stay. So make sure you can back up all your claims.  Never accept an invoice from a supplier that charges you GST/HST without their GST/HST number visible. Some companies have thought their accountant when registering their business also registered them for GST/HST but never did.  Here is a neat little from the CRA tool for finding out if the supplied number is legit  https://www.businessregistration-inscriptionentreprise.gc.ca/ebci/brom/registry/registryPrompt.do

As always the CRA has extensive articles on the GST/HST and is a good place to start.

Example #1 How to claim

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Client is a young adult trying to save money for school.  She is babysitting her boyfriends nephew and wanted to know how to claim the money and do her tax return

First of all if you must keep track of your income. You can claim the money earned on your personal return. There is a form that we would fill out with your business income and expenses. As for expenses what did you incur for your business and what can you back up? Assume you will be audited every year and keep your receipts with your tax return. You can claim your phone, internet, and some home expenses if you made a profit after all other expenses. The part of your home will be based on how big your home is and the square footage used for the business. So if you use 10% of your home are for business, then 10% of your rent, electricity, heat, property insurance and home phone can be used. If you used your vehicle then you will need to keep an accurate diary of when it was used for business, and how many kilometres driven for business. Based on the non business mileage and business mileage a percentage will be worked out. If it is 10% then you can claim 10% of your fuel, insurance and repairs.
The person that you babysit for must also be issued a receipt for your services as they wish to claim daycare on their tax return.

Example # 2 How to claim

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Client was working out of province doing sub contract work. It is the same kind of work he does at home under his registered business. He was wondering if to put his income and expenses under his Corporate or Personal Tax Return. He stated that there wasn’t much profit if any. Here is my reply.

If you charged the company you were doing sub contract work for GST/HST then you will have to claim all income and expenses under your business. There is no choice on this matter. If however you charged them GST/HST on only part of your sub contract work then you can divide up the income between your Corporate and Personal Tax Returns. By doing it this way you will also have to separate all of your expenses to match the dates for each pay period.
It is important to remember that if you charged and collected GST, that the company you charged it to will be claiming it back. The government a few years ago hired more auditors to go over GST returns, as well as Corporate and Personal tax returns. This is one department in the government that does earn their keep. I have seen GST return audits in the past with not so good things happen to those that GST was paid out to. Some were collecting it without having registered for a GST number. Others that had not filed a GST return for years but were collecting it. So the government in turn knew these companies were active and wanted their money.

If no profit was made and you didn’t take money your of your business or didn’t charge any GST to the company you worked for then claim it under your personal tax return. The loss can be carried forward to when you do make more money. If you did take money out of your business to pay for some of the expenses then this would be a draw and you will have to pay taxes on your draws. But this may be minimal if you didn’t make a profit.
The government likes the taxes paid immediately on owners draws. As they consider this stealing from the Corporation and more importantly stealing from the CRA. This is why I recommend setting up payroll for the owner under a Corporation. The payroll taxes are paid monthly and a T4 is issued once a year. Very clean and simple.

Example # 3 How to Claim

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A question from someone doing subcontract work that has a corporation, wanting to know if they should bill the company under the corporation or their personal name.

Here are a few things for you to consider. The company you are doing work for most likely wants it under your business so they can claim the GST back. If they are not flexible on this then you will have to bill them under your corporation or business that has the GST number. You never said if your business is a corporation but I will assume it is as it has been around for quite a while. Corporations are taxed at a lower rate than personal taxes. I believe the corporate tax rate in NB, 16.5% of the profit. I am also assuming that since you are working out of province you aren’t taking a salary from your corporation. If you aren’t charging GST and the profit isn’t too big put it under your name as a sole proprietor. For corporations I recommend 2 bank accounts. One for the taxes you collect and have to remit. Too many small businesses are scrambling for money to pay the GST as they always spend it. This is what I do, and it has never failed me.

You will of course be able to claim your moving expenses as I mentioned before on your personal return.
If you do put anything under your corporation you will of course have to keep enough for your living expenses. Whatever they may be. Bottom line is if you are at a loss on a personal level or corporate level you can carry those amounts forward on your tax returns. So you just have to find which scenario applies to you. You may want to play with some numbers, when it comes time for your year end. Then decide if you want to claim everything under your corporation or on your personal tax return. If you do claim everything under your corporation but didn’t charge GST the government will expect you to carve GST out of your fees.