Tax Questions


Q. How do I report my business income?

A. The income tax forms you need to report your business income depend on the form of your business.
If your business is a sole proprietorship or partnership, you report your business income on your T1 income tax form.
If you are operating a sole proprietorship, you will report your business income by completing Form T2125 (Statement of Business Activities). This form is included in the T1 income tax form package.
If you are a partner, you should first calculate the business income for all partners, then the business expenses for them, claim any expenses the partnership did not reimburse you for and any other deductible business expenses, and complete the “Details of Other Partners” chart.
However, if your partnership has had six or more partners during the fiscal year, you will also need to complete a PIR (Partnership Information Return). In this case, you will normally have a T5013 slip (Statement of Partnership Income) issued.
If your business is incorporated, you will report your business income on a T2 income tax return. But even if you run an incorporated business, you must still file your individual income tax (T1 form).

Q. Should I use the T4A or T5018 slip when I pay my subcontractors?

A. T5018 slip is issued to subcontractors in the construction industry. Box 22 shows the total amount of payments made by the payer to the recipient in the period. This total may include goods and services tax/harmonized sales tax and provincial or territorial sales tax, if applicable. Payments of less than $500 per year per subcontractor do not have to be reported.

Construction activities include the erection, excavation, installation, alteration, modification, repair, improvement, demolition, destruction, dismantling or removal of all, or any part, of a building, structure, surface or sub-surface construction, or any similar property if the person’s business income for that reporting period is derived primarily from those activities.

Please note that the CRA does not require sending copies of T5018 to subcontractors, and some businesses don’t do that. As a subcontractor, it’s your responsibility to report all money received on your tax return (normally on Schedule T2125 for non-incorporated subcontractors).

The T4A slip may include different types of payments including pensions, lump-sum payments, self-employed commissions, annuities, retiring allowances and so on. Box 028 Other Income” used to be very confusing as it included payments to subcontractors along with death benefits, registered disability savings plan payments, research grants, scholarships, bursaries, fellowships, artists’ project grants, and prizes. So the CRA has recently redesigned this slip assigning unique box codes to each of the different income types previously reported in Box 028.

Payments for fees for services were assigned to Box 048. So all payments to subcontractors made in the “course of your main business activities” should be included in this box. Payments not related to your main business activity (like, let’s say, one-time payment to electrician for fixing wires in your office) have nothing to do with T4A. At time of writing these notes, the Canada Revenue Agency has not yet determined what types of fees for services should be reported on Box 048 of the T4A slip. Accordingly, taxpayers will not be penalized for failing to complete Box 048.

Q. What business expenses can a Canadian business claim?

A. According to the Income Tax Act expense is deductible for tax purposes if it is:
- Deductible using GAAP (Generally Accepted Accounting Principles);
- Not a capital expenditure;
- Incurred to earn taxable income;
- Not personal or living expense;
- Reasonable in the circumstances.
Details could be found in our article “List of Deductions Available to Business Owners”.

Q. Are there any expenses small businesses cannot deduct?

A. Yes, some of the expenses are “restricted”, among them are:

  • Life insurance premiums (there is an exception where such insurance policy is used as a collateral for a business loan);
  • “Capital” expenses – those expenditures, for tax purposes, are subject to the capital cost allowance (CCA), which provides for deduction based on a percentage of cost on declining balance basis;
  • Personal expenses (there still could be a “business part” in some of them);
  • Prepaid expenses (for future periods);
  • Financing of business projects (such expenses should be amortized);
  • Most types of CRA’s interest and penalties;
  • Interest for vacant land (there is a limit you still can deduct);
  • Golf/sports clubs memberships (there are circumstances where you can deduct a portion of such fees – consult with your accountant for details);
  • Payments for some legal and accounting services;
  • Most payments for advertising in a foreign media;
  • 50% of meals and entertainment expenses (some of them qualify for 100% deduction, check the CRA’s website or consult with your accountant for details).

Q. What is the goods and services tax credit?

A. First of all, it has nothing to do with businesses. The goods and services tax (GST/HST) credit is a cash payment to low- and modest-income people to help them offset the cost of paying GST/HST on things they buy. The GST/HST credit is normally paid in quarterly installments.

Q. Do I qualify for the business-use-of-home tax deduction?

A. Yes, if you operate a home-based business. Details could be found in our article “Deducting Your Home Office Expenses”.

Q. Can I still claim business expenses if my company has losses for couple years in a row?

A. That depends. CRA normally doesn’t like it when small businesses show losses for more than 2 years in a row. Of course businesses are different, but generally you should be ready to prove that your business model is viable, and you do all necessary steps to turn your business around. There should exist some positive trend in the development of your business (for example, growing revenues or decreasing expenses).
If your business has some “personal element” or could potentially be qualified as a “hobby”, watch out! CRA will be tempted to disallow all your expenses.
This whole issue could be tricky, and you will probably need some help from us.

Q. How do I report payments to subcontractors for construction services?

A. Reporting is required by all businesses, whether carried on by an individual, partnership or corporation, whose principal activity is construction. For this purpose, construction is defined as “erecting, installing, altering, modifying, repairing, improving, demolishing, dismantling or removing any structure or part thereof”.
Payments to subcontractors for construction services must be reported if the amount paid for services is $500 or more (payments for goods are excluded). Subcontractors include businesses that are below the $30,000 limit for goods and services tax (GST) purposes.
The payments can be reported on either a calendar-year or fiscal-year basis. For example, assume your business’s year-end is July 31, 2010. Your reporting return for 2010 can either report all payments from August 1, 2009 to July 31, 2010 or it can report all payments made from January 1, 2010 to December 31, 2010.
You must report to the CRA the name of the subcontractor, the business address, the subcontractor’s Business Number (BN) or Social Insurance Number (if no BN is available), and the amount paid for the reporting period.
The information can be reported on either a Contract Payment Reporting Information return (Form T5018) or, alternatively, the information can be reported on a line-by-line basis in a column format with the appropriate summary information.

Q. What exactly is a tax refund or tax credit? How do I apply for a grant?

A. Tax refunds and tax credits provide funding for your business start-up and expansion by deducting certain expenditures from the annual tax bill of your business. Your business may apply for tax refunds of past expenditures or receive tax credits on future projects. These tax breaks provide a financial break which can free up your business’ cash flow allowing further development and security.
Every grant and loan program has a specific application process. These processes, as outlined in government publications, are often complicated and difficult to understand. However, Small Business Funding Centre (SBFC) representatives will help you to decipher these processes and provide the details in an easy to understand format. To find out which grants and loans you are eligible for and the application process, please contact SBFC at 1-800-658-9792 or visit the web site www.grants-loans.org

Q. How can I obtain a copy of the Income Tax Act?

A. Neither the Canada Revenue Agency nor the Department of Finance Canada publishes the Income Tax Act in print or electronically. Technically, it is “published” by Parliament in the form of bills that are enacted. In practice, however, it is a major task to keep the Act current because it is amended frequently. Therefore, it is left to commercial publishers such as Carswell, Commerce Clearing House, the Canadian Institute of Chartered Accountants and Ernst & Young to consolidate the Act (about 2,000 pages).
Should you wish to obtain a copy of the Act, you may consider contacting one of those publishers directly or you can check with a bookstore. As well, most public libraries carry the publication in their collections. The Department of Justice Canada also has a version on its website at http://laws.justice.gc.ca/en/I-3.3/index.html.

Q. What is the role of the Canada Revenue Agency (CRA)?

A. The Canada Revenue Agency, which falls under the purview of the Minister of National Revenue, is responsible for Canadian tax administration. Its responsibilities include assessing and collecting taxes and levies, and delivering social and economic benefits, such as the For more information, visit the Canada Revenue Agency website www.cra-arc.gc.ca

Q. What is CRA’s “My Payment”?

A. My Payment is an electronic payment service, accessed through the CRA Web site, that allows individuals and businesses to send payments directly to the CRA from their online banking account at a participating financial institution.

My Payment is a quick, easy, and secure way to send money instantly for payments to the CRA. My Payment simplifies accounting because the transfer is immediate. There is no need to pay early to make sure your payment arrives on time or to monitor your account because of an outstanding cheque.

You will need to enter the following information:

  • your SIN or CRA account number;
  • the remittance type and allocation; and
  • the amount you want to pay.

Q. I did not receive T4 slip from my previous employer. What should I do?

A. If you have contacted your employer or made other efforts to obtain T4 slip from him, with no result, you can still proceed to file your T1. In case you keep pay stubs, try to find the most recent one to calculate your employment income and other totals for the year in question. When you submit your tax return or have a tax preparer submit it for you, include a letter with the return explaining that your T4 slip is missing, and provide the CRA with details about your employer. They will most probably have a copy of your T4 on file – businesses should provide CRA with those copies. Then the CRA will recalculate your return based on the information they possess. As long as you file your tax return before the deadline, you will not be penalized.

 

CRA_AUDIT

Q. What is a tax audit?

A. A tax audit is the examination of taxpayers’ books and records to determine accurately the taxes, interest and penalties payable under the law. In other words, a tax audit is the CRA’s way of double checking the tax filings made by Canadians to make sure the taxes were reported accurately and honestly. The CRA can audit GST/HST tax returns, income tax returns, excise taxes, and payroll documentation.

Q. Who is usually selected for an audit?

A. According to the CRA, the tax audit program focuses mainly on small business owners, self-employed individuals, corporations and trusts. We can add that CRA often goes after construction sub-contractors, some professionals, and other businesses where cash is involved.

Q. How does the CRA select who will be audited?

A. The CRA divides and categorizes taxpayers by groups, and these groups will either have a low tax compliance rating or a high tax compliance rating (based on past tax audits and other evaluations). Tax groups may be established using different criteria, including profession, type of business, and income levels. The CRA want to focus their efforts on the groups that are least likely to be filing accurate tax returns. According to the CRA, their objective is to improve those groups’ tax compliance. The CRA, however, does state that each group should receive a minimal amount of tax audit investigations regardless of their tax compliance rating.

In addition, there are three other ways in which taxpayers may be selected for an audit:

1. A tax group may be chosen by the CRA simply to obtain more information on a specific group.
2. The CRA may obtain a lead on a specific individual or corporation from another file, tax audit or informer.
3. The CRA may select a taxpayer that is somehow associated with another taxpayer already being audited (for example, his business partner).

Q. Can I refuse to provide my personal financial information to a CRA’s auditor?

A. Unfortunately, the answer is “no”. According to the Income Tax Act, taxpayers are legally required to make their financial records available to authorized agents of the Canada Revenue Agency, but only those records specifically pertaining to the establishment of the amount of taxes that would be owed to the government. Also, the CRA may request to inspect the records of others (for example, your clients) to verify that your records are accurate. This information, however, does not have to come directly from you. An experienced tax lawyer can help you determine which financial records are absolutely necessary to comply with the tax law while at the same time ensuring your constitutional rights and financial interests are protected.

Q. How can I decrease the possibility of an audit?

A. The following tax audit tips will help you decrease the possibility of tax audit. Of course, there are no guarantees; we would rather call it preventative measures…

1. Be honest! You probably heard it from mom and dad…but speaking of tax returns, do not try to underreport your income or exaggerate expenses or deductions. We are in 21st century, and guess what…the CRA has computers. So they collect and process all the necessary information from different sources. As a result they know much more about you and your financial situation than you can imagine. Simply put, the CRA will match the information you provide with the information and industry statistics they possess, and if there is a major discrepancy, you may be selected for a tax audit. They may, for instance, see if your lifestyle matches the income you are reporting by doing a simple postal code check and assessing whether the neighborhood you reside in fits your income level. They may even check vehicle registrations to see if the car you drive matches your declared income. Avoid showing large home office deductions; be also careful with the amounts you claim as your car expenses. Lastly, your business expenses should be reasonable if compared with your earnings.
2. Make it a habit to file your tax returns before deadline. Those filed after the prescribed deadlines are more likely to be red flagged and selected for a tax audit.
3. Wait before you get all of the necessary financial documents to prepare an accurate tax return. Some financial forms will be received as late as in April. Therefore filing too early will increase the chances of having to make an adjustment to your tax return, which could alert the CRA.
4. Avoid mathematical errors. Any such error may increase the likelihood of a CRA tax audit. Use a tax software program or services of a tax professional to minimize mistakes.
5. Choose your business partners wisely. Check if they have ever had problems with the Canada Revenue Agency or are engaged in doubtful business activities.
6. If possible, avoid major changes in income levels, expenses or tax deductions from one year to the next. Anything unusual could be red flagged and will increase the likelihood of a CRA’s audit.
7. As a rule of thumb, avoid declaring business losses for more than two years in a row. Of course, it often depends on the nature of your business. For any professional services businesses, for example, two years of losses in a row would look pretty suspicious. Why would an accountant continuously incur business losses? On the other hand, if for example, you are a writer, and collect material for your next book, two, three or even more years of business losses could be justified. So in this case the key word is “reasonability”.
8. Last but not least…be nice to your ex. Be aware of your ex-spouses, ex-friends and ex-partners. They could provide the CRA with more information about your financial affairs than the rest of the world combined.

Also, you can read our article “I Have Been Selected for Audit – Now What?”

GST

Q. Do I need to register for the GST/HST?

A. You do not have to register for the GST/HST if you provide only GST/HST exempt goods and services. Examples of GST/HST exempt goods and services include child care services, music lessons and used residential housing.
You do not have to register for the GST/HST if you qualify as a small supplier according to the Canada Revenue Agency (CRA), and are not one of the exceptions to the small supplier rule.
Generally, a small supplier is defined as a sole proprietor, partnership, or corporation whose total taxable revenues before expenses are $30,000 or less annually. Public service bodies, such as charities, non-profit organizations, municipalities, or universities, qualify as small suppliers if their total taxable revenues before expenses are $50,000 or less annually. You have one month from the day that your business exceeds the small supplier threshold amount to apply for GST/HST registration.
However, some businesses are required to register for the GST/HST even if they are small suppliers:

  • Taxi and limousine operators;
  • Non-resident performers (who sell admissions to seminars and other events).

Even if you do qualify as a small supplier, you may want to register voluntarily for the GST/HST. No matter what kind of business you’re in, you will be paying GST/HST on the taxable goods and services you use in the course of your commercial activities.
If you are a GST/HST registrant, you will be able to recover some of the GST/HST you paid out on business purchases back through Input Tax Credits (ITCs).

Q. What is the difference between GST zero-rated and GST exempt goods and services?

A. From the point of view of the customer, there is no difference between GST zero-rated and exempt goods and services; in neither case GST/HST has to be paid.
However, as a business owner, you don’t charge GST/HST on zero-rated goods and services while you can still claim Input Tax Credits (ITCs) for them on your GST return.
On the other hand, you cannot claim ITCs for exempt goods and services.
If you provide only exempt goods and services, you cannot register for GST/HST.

Q. What kinds of goods and services are GST/HST exempt or zero-rated?

A. Some examples of GST/HST zero-rated goods and services are:
- Basic groceries;
- Medical devices;
- Most fishery products;
- Most farm livestock;

Some examples of GST/HST exempt goods and services are
- Long-term residential rent;
- Educational services leading to a certificate or diploma;
- Insurance policies issued by insurance companies, agents or brokers;
- Most child care services;
- Most services provided by financial institutions.

Q. Why would I want to register for GST/HST voluntarily?

A. Regardless of whether you register for GST/HST or not, you will still be paying GST/HST on your business expenses. But if you are not GST/HST registrant, you won’t be able to recover any of the GST/HST you paid on business purchases.

If, on the other hand, you register for the GST/HST, you will be able to claim (ITCs) for the GST/HST you’ve paid on taxable goods and services consumed in the course of doing business.

You might want to discuss this issue with us – in many cases registering voluntarily would not be a good idea, especially if most of your clients are individuals, and not businesses.

Q: When do I have to file my GST/HST returns?

A. When you register for GST/HST, the CRA will assign your business a GST/HST reporting period based on your company’s annual taxable supplies of goods and services made in Canada. According to CRA, your reporting period is based on the total of:

- annual taxable supplies of goods and services made in Canada;

- of goods and services;

- annual taxable supplies of all your associates.

Depending on which annual taxable supplies category your business falls into, you may be able to choose an optional GST/HST reporting period instead of your assigned one. To change an assigned GST/HST reporting period, you can either call the CRA at 1-800-959-5525 or fill out and send in Form GST20, “Election for GST/HST Reporting Period”.

For example, CRA’s chart shows that businesses with annual taxable supplies of $1,500,000 or less can file GST/HST return annually. They can choose to report monthly or quarterly but they don’t have to.

Q: What are the penalties for filing a late GST/HST return?

A. First of all, bear in mind that GST/HST collected is not your money. You collect this money from your customers on the CRA’s behalf. So if you fail to remit GST/HST to the CRA you are essentially stealing money from the Government. And guess what…CRA does not like that. So make it a habit to file your GST/HST return on time, even if you do not owe money to the CRA. In latter case you will not be penalized but CRA’s records will show that you are a late filer – and you don’t need that.

The situation changes when you do owe money but fail to file your GST/HST return on time. In this case the GST penalties are 1% of the amount owing plus the result of the following calculation:

- 25% of the amount you just calculated X the number of months the return is overdue, to a maximum of 12 months.

In addition, the Canada Revenue Agency will also charge interest on an overdue amount equal to the basic rate plus 4%. But that’s not the end of the story – you can also be fined for non-compliance. If you receive a demand to file a return and ignore it, a penalty of $250 will be charged. If you continue ignoring CRA they might audit you and even close your business account. Moral of the story: it is not a good idea to play games with the CRA when it comes to holding their money.