Tax Time with Pavel Tishchevskiy

A. Generally speaking, business income includes money you earn from a profession, a trade, a manufacture or any other activity you carry on for profit.

You can sell products, services or both. In all those cases you have business income that should be reported for tax purposes.

On the other hand, a salary you receive from your employer is not your business income.

A. Remember the words “any other activity you carry on for profit”.

In many cases you must report the money you make from your hobby as business income by completing Form T2125, (Statement of Business or Professional Activities) which is part of your personal income tax return.

On the other hand, in case where you can clearly show that there was no reasonable expectation of profit from your activities, you don’t have to include that money into your income.

Of course in that case you are not allowed to deduct any related expenses. CRA will often try to categorize your business as a “hobby” where you consistently lose money.

This whole issue is pretty complicated, and I would advise you to consult the professional accountant.

A. Rental income is normally not considered to be business income, and reported separately on your personal income tax return.

But there are exceptions, for example when you run a Bed-and-Breakfast business. As a rule of thumb, the more services you provide to your tenants, the more chances are that you run a business.

A. According to CRA, a barter transaction takes place when any two persons agree to an exchange of goods or services, and they do so without using money.

For example, I prepare a tax return for my client and he fixes my car.

I didn’t receive money but I still have to report as my business income the cash value of my services.

A: Simply put that’s money you spend for the purpose of earning business income. So those costs are necessary for developing and growing your business.

A: There are two kinds of expenses: operating and capital.

Operating or current expenses is a category where you spend money on your normal business operations. Examples would be rent, business supplies, salaries paid to employees, research and development costs, legal fees, accountant fees, bank charges, office stationary, utility bills, and so on.

Items such as equipment, office furniture, computers, vehicles and so on are called capital assets. Their useful life normally exceeds one year.

It is important to understand the difference between those 2 categories. Operating expenses are 100% deductible for tax purposes. On the other hand, capital assets are divided into CRA’s classes. They can be amortized over a number of years, depending on the Class number.

A: Good question. The rule of thumb is: every expense is deductible for tax purposes if it is business related. Exceptions are few, and we will talk about them in Part 10 of this video. So you have to be able to prove to the CRA that all the expenses you are trying to deduct are for business purposes. And they should be reasonable, for example you don’t have to travel overseas to buy a new computer, and so on. The key phrase here is “common sense”. Also remember that in order to be deductible an expense need not directly produce income. If it was incurred to reduce expenses, preserve the working capital, or prevent a business from failure it would be deductible.

You watch Tax Time with Pavel Tishchevskiy. I hope you find this information useful. Please give me a call (416)857-7570 if you have any questions

A: Yes, they do. As a small business owner you should remember one simple thing: the more aggressive you are with your deductions, the higher the probability is that you will get audited by Canada Revenue Agency. We will talk about the CRA audit in another video. So for now please remember that the name of the game is RECORD KEEPING.

Let me repeat this: the most important aspect of claiming your expenses and deductions is keeping good records. I suggest that you keep separate business bank and credit card accounts, make a record of all business transactions, and keep all your receipts. Record keeping is particularly important for deductions for car and travel expenses, meals and entertainment, and gifts.

Your receipt is normally your best evidence to prove the amount of expense.

The receipts have to show:

– The date of the purchase;

– the name and address of the seller or supplier;

– a full description of goods or services;

– and amount paid.

No description on the receipt? Write your own either on the receipt or in your expense journal.

A: Turn the receipt over and write a short story on its back. Just 2 or 3 sentences explaining why this expense was necessary for your business.

Some types of expenses that need a “business story” are gifts, promotions, meals, entertainment, supplies, travel.

In case of a gift, meals or entertainment that story should contain a client’s name and a phone number.

A: You can drop it into a big shoe box, and join those small business owners who don’t care about record keeping. But guess what – who typically gets attention from CRA? Exactly the same guys.

So your better choice would be to sort those receipts out by categories and put them into different folders or envelopes. If you make it a habit to do it 2-3 times a week, you will be fine.

You can use either Excel or QuickBooks to enter those expenses, or just give the receipts to your accountant.

A: Normally the corporation can deduct 100% of car expenses, but the situation gets more complicated where either employees or shareholders partially use that car for their own needs.

The personal use of the vehicle is considered a taxable benefit for the employee. The calculation of those taxable benefits is beyond the scope of our conversation.

You can always check the CRA website for details.

A: As a small business owner you can deduct a business portion of:

– Oil and gas

– Maintenance and repairs

– License and registration fees

– Insurance

– Parking, tolls, car wash, CAA membership

– Leasing costs or car depreciation

A: First of all you should keep an auto log, or a logbook of all your business trips. Every business trip should be documented, and records should contain the following information:

– The date of the trip

– the business purpose of the trip

– the number of miles driven

Personally, I use Excel to record my business trips.

The logbook has 5 columns:

– The date of the trip

– the business purpose of the trip

– odometer reading before beginning your trip

– odometer reading at the end of your trip

– and the fifth and final column will show the total trip mileage – Excel formula would subtract the number in column 3 from the number in column 4. At the end of the year Excel formula would total your business mileage. Let’s say your calculation shows that you drove 7,000 kilometers for business in a year.

Also, every January your should note in the logbook your car’s odometer reading at the beginning of the year. And you do the same at the end of the year. Now, if you subtract one from another, you will get the total number of kilometers driven in the year. Let’s say that was 12,000 kilometers.

And you get the business portion by dividing one number by another. In our example it is 7,000 divided by 12,000 which is 58.3%. So now you can deduct 58.3% of all car expenses that we mentioned earlier.

A: The situation is a bit different in case your business is incorporated, and you occasionally drive your personal car on company business. You still have to keep a logbook and all the receipts but you don’t have to calculate that business portion percentage.

Instead, you can use a flat rate established by CRA.

For example, the car allowance rates for 2012 for most provinces, including Ontario, are:

– 53¢ per kilometre for the first 5,000 kilometres driven; and

-47¢ per kilometre driven after that

Using our example above, the business mileage was 7,000 kilometers, and therefore, the deductible amount is calculated as follows:

– 5,000x$0.53 = $2,650

– (7,000-5,000)x$0.47 = $940

The total is $2,650 + $940 = $3,590

A: No problem, just take a piece of paper and put down all the information on your purchase. If you check your receipts on a regular basis you will easily restore all the details of any transaction.

And if those lost receipts are exception, not the rule – the CRA will accept them.

Last but not least, credit card and bank statements are not enough to proof your purchase – always keep the original receipt.

Whether it be a gas station, a liquor store, a restaurant, or anything else.

You watch Tax Time with Pavel Tishchevskiy. I hope you find this information useful. Please give me a call (416)857-7570 if you have any questions

• it is your principal place of business; or
• you use the space only to earn your business income, and you use it on a regular basis to meet your clients, customers, or patients.

So if you don’t have your office in downtown and work from home the rules are simple – you may be able to deduct a percentage of your home expenses such as property taxes, mortgage interest, utilities, maintenance and capital cost allowance or house depreciation. To calculate the portion you can deduct, just divide the area of the work space by the total area of your home. If you rent your home, you can deduct the part of the rent and any related expenses.

A: Sure, let’s say your house is 1,800 square feet and your office is 220 square feet. We simply divide 220 by 1,800 which is 12.2%. So 12.2% of the household expenses we mentioned above are deductible against the business income.

A: In that case you should calculate how many hours in the day you use the room for your business, and then divide that amount by 24 hours. Then multiply the result by the business part of your total home expenses. This will give you the household cost you can deduct. If you run the business for only part of the week or year, prorate that amount accordingly.

I know it might sound a bit complicated. You can check our website www.777taxes.com to see all the calculations.

A: Remember what we talked about at the beginning. In this case you should use the space only to earn your business income. And you should use it on a regular basis to meet your clients, customers, or patients.

Which means you cannot put a computer in your bedroom, and call it your office.

A: It depends on the nature of your business. In case you have a home office and also store supplies or equipment in your garage or basement, for example, that percentage could be as high as 18-20%. But for most businesses in would not exceed 10%. It could be more in case you rent an apartment. Be very careful when calculating that percentage. If it’s unusually high for your type of business, the CRA might want to ask you questions. So remember those two wonderful words – ”common sense”.

A:Yes, you can give gifts to your clients and prospects. It’s important to understand though that all those gifts should be business related.

In Part 4 of this video we explained how to proof that any particular expense was necessary for developing your business.

We suggested that you turn a receipt and write a short story on its back. Just a 2 or 3 sentences explaining why you incurred this expense. That story should contain a client’s name and phone number. And of course the amount should be reasonable.

A: From a small business owner’s perspective reasonable is when you spend some money and expect to receive a profit. That’s why we use the term
“common sense” all the time.

CRA auditors and the judges of the Tax Court of Canada use it too. And who knows better how much to spend on anything in your business? You, the business owner.

If you made an honest mistake and any specific expense did not pay off, it doesn’t mean you cannot deduct it. You can – and you should. We all make mistakes because we don’t have a crystal ball.

A: First of all, deducting meals and entertainment is not as easy as many people think. CRA puts limitations on what can be deducted and how much. The maximum amount you can claim for food, beverages, and entertainment expenses is 50% of the amount you spend.

And of course that amount should be reasonable. There are few exceptions from that 50% rule. We will not discuss them here. Most of them are not applicable for small businesses.

How can you determine if any meal or entertainment expense is business or personal? In order to be tax deductible there should be a business reason for meeting with your client or prospect.

So if you go out for lunch, you should discuss business  strategies, contracts, sales projections, and so on. This discussion should precede, or follow the meal or entertainment activity. And only in that case the lunch or hockey game expense will be deductible.

A: Yes, if you go to Tim Horton’s with your client and spend $5 on coffee nobody would question that expense. But if, for example, you decide to throw a big party for your prospects, be careful.

The rule of thumb is – the more fun your guests have at that party, the less chances are that expense would be tax deductible.

Again, you can only deduct the cost of the party if you do business before, during or immediately after that party. Whether it be presentation of new product or service, a sales pitch, or an educational seminar related to your business.

A: There are few rules:

– The family members must do the work for which they are paid. Make sure the work was necessary and you would have otherwise hired someone else.

– All the paperwork must be in place, including signed employment contracts. Keep the time cards showing hours worked.

– You can pay a family member a deductible salary provided it is not greater than what you would ordinarily pay a stranger to do the same job.  The pay cannot be excessive for the work performed.  Someone from outside the family must be paid at least a minimum wage. So no matter how small the job is, minimum wage is not unreasonable payment for family members.

– You don’t have to withhold taxes if the family member is paid under approximately $11,000 per year. But you still have to make payments to the Canada Pension Plan on behalf of your employees who are between ages 18 and 70.

-Salary is tax deductible for your business and taxable income for your family member employee.  You lose the tax advantages if you pay salary to a family member who is in a higher tax bracket than you are.

– The payments must be periodic.  Pay family members by cheque at least once a month, as you would pay any other employee.  If you pay a year’s worth of wages in the last month of the year, it would NOT work.

A: You can, but I wouldn’t advise you to do that. Paying cash to your employees is never a good idea, and in case of family members it will certainly attract the CRA’s attention.

A: Check the rules we just discussed. Of course many small business owners are tempted to pay salary to minor kids. Their logic is simple – it provides easy tax savings. But guess what – the CRA knows those tricks pretty well. Court decisions show us that the taxman will take a very close look at all the circumstances. CRA will even go as far as to verify if money was deposited into a bank account in trust for the child. And that child must be able to use them for his own purposes without any further control by the payer.

This is an excellent strategy – the kids are involved, have fun, learn responsibility and you are pocketing the tax savings! But you should use it carefully. My advice is – consult your accountant BEFORE employing minor kids.

A: There’s not much information on the CRA’s website. The agency allows deductions for public transportation, hotel accommodations and meals. As you remember, in most cases only 50% of meals are deductible.

Generally speaking, you can deduct all the above expenses plus taxi, business related training and registration fees, and dry-cleaning expenses while on business trips.

But before that you have to prove that your trip was for business purposes. Whether it is meeting with clients or prospects, negotiations, educational seminar or professional training.

A: As we mentioned more than once, the key is good record keeping. This is another case where a paper trail could save you lots of money.

So rule number one: keep some documentation to proof that the primary purpose and intent of the trip was business. If there is no business purpose for your trip none of your expenses will be deductible. E-mails are good so keep them and all other invitations from your partners, prospects etc.

Rule number two: make it a habit to document your “business movements” in your day planner, whether it is the old paper style, or an electronic gadget. Remember that your day planner is a huge money saver when it comes to justifying travel related deductions. In case of an audit, if there is a missing or questionable deduction, the day planner can serve as a corroborating tool.

It doesn’t mean that you should do business 8 hours a day. You can meet with your friends, go to the theatre and so on – and the trip would still be 100% deductible.

Keep all the business cards of people you meet with, brochures or any other business related materials. Last but not least, the cost of the trip should be reasonable in the context of your business.

A: It simply means that if you live in Toronto and want to learn an Excel program, you shouldn’t go to Las Vegas to take courses. That travel expense will be disallowed by CRA, I guarantee you.

The whole issue becomes more complicated where your trip is both for business and for fun. In that case the expenses should normally be prorated.

I hope this video was helpful. And of course if you have any questions you can always call me 416-857-7570, and I will try to help you.

A: Sure. First of all, you cannot deduct personal or living expenses. For example, you buy furniture for your bedroom. That would be your personal expense, and therefore not eligible. Another good example would be personal clothing.

Some other expenses are specifically mentioned in the Income Tax Act and Regulations. You cannot deduct:

– interest and penalties paid in relation to your income tax;

– life insurance premiums;

– donations to charities and political parties;

– in most cases golf/sports clubs memberships;

– prepaid expenses;

– payments for some legal and accounting services;

– most payments for advertising in a foreign media, and some other expenses.

Also, you cannot deduct any operating expenses if you paid for them before you started your business.

A: In Part 3 of this video we talked about capital versus operating expenses. So capital expenditures like computer, printer or office furniture can be amortized even if you bought them before starting a business. But their cost would be not the purchase price but a fair market value.

A: Yes, before we finish I would like to remind you about that “common sense” principle. Every type of business has its average percentage for any category of deductions, and CRA has that statistics.

So don’t try to cheat, or be extremely aggressive when it comes to claiming expenses.

You would be much better off if you stay organized and keep good records of all your business expenses. Just look around – there are dozens of them.

And of course if you have any questions you can always call me 416-857-7570, and I will try to help you.