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When you have a small business, it is important to keep track of all your income and expenses since you will want to do everything you can to minimize the amount of tax you have to pay. To claim these expenses, you need to have a real chance of earning a profit from your business and you should have the proper accounts set up. According to Evelyn Jacks, there are six types of expenses that you might be able to claim. Her original article in full, can be found here http://www.evelynjacks.com/?p=1336

Current Expenses:

These are used up in the course of earning income from the business. Examples are office supplies, wages, rent and other overhead costs. These costs are usually fully deductible against revenues.

Capital Expenses:

These expenditures are for the acquisition of income-producing assets with a useful life of more than one year. This includes cars, buildings, equipment and machinery. These expenses are subject to capital cost allowance rates and classes, which allow for a declining-balance method of accounting for the cost of wear and tear.

Prepaid Costs:

Most businesses must report income and expenses on the accrual method of accounting. In that case, the prepaid expense is prorated and deductible in the year the benefit is received. A good example is insurance, paid in advance for a 12-month period that may span a fiscal year end. Only those on the cash method of accounting may claim the full costs in the year paid. This is generally only farmers, fishers and very small businesses.

Non-Allowable Expenses:

Fines or penalties imposed after March 22, 2004, by any level of government (including foreign governments) will not be tax deductible. However, this will not apply to penalty interest imposed under the Excise Tax Act, the Air Travellers Security Charge Act and the GST/HST portions of the Excise Tax Act. Also not allowable, the cost of golf club memberships. Be sure to cover these and other expenses that fall into each category with your tax advisor.

Restricted Expenses:

This category includes the costs of meals and entertainment (50% deductible), and the costs of attending conventions (only two per year). Home workspace expenses are restricted to net income from the business.

Also remember that barter transactions are reportable although there is no exchange of cash. When your business trades goods or services for other goods or services, the fair market value of the goods or services you accept is income for your business; if the accepted items are used in your business to generate income their value may also be a business expense. Be sure to account for these transactions in your records.

It is critical not only to be aware of all the various categories of business expenses, but also to track and handle them properly throughout the year so that you can defend any “grey areas” that could be open to interpretation in the case of a tax audit. You do not have to give up legitimate claims to subjective decision-making by a tax auditor who doesn’t know your business or your business plans as well as you do, yet may challenge your business loss deductibility if your business plans and documentation records are sketchy.

Help the auditor understand your business. You can and should be able to show the “reasonable expectation of profit” in your venture; you know the future—the potential income earning capacity of your business—because you made an up-front investment in assets, business relationships and the making of the products or services you sell. Don’t give up your edge – and your legitimate tax deductions – by keeping poor records during the year.

This is a question that gets asked a lot, but the answer depends on your personal circumstances. When you are paying yourself a salary, you are required to pay into the Canada Pension Plan which will allow you to collect a monthly cheque when you are old enough to start receiving a pension. You also have to deduct income tax and EI premiums from every employee’s pay cheque, so that can add to your paperwork. If you don’t want to be bothered with that, you can get your accountant to do your payroll for you. Paying yourself a salary also helps to add to your RRSP contribution limit so that you can continue to contribute a certain amount of money towards that every year.

Dividends are much simpler to administer since all you really need to do is write yourself a cheque and make a note that it was a dividend payment. Dividends are treated differently for tax purposes so you have the potential to save some money, but you might be missing out on the Canada Pension Plan if you never pay into it. Watch the video below for a more detailed explanation of salaries and dividends.

The Canada Revenue Service has made quite a few changes that you will need to be aware of for the 2016 tax year. Make sure you meet with your accountant to find out which of the changes could possibly affect your family or small business. Planning ahead of time and being organized will potentially save you money and a few headaches.

Here are some of the changes as outlined by Evelyn Jacks at http://www.evelynjacks.com/?p=1286

1. For all taxpayers, changes to federal tax brackets and rates – the middle income bracket is reduced from 22% to 20.5% while a new high-income rate of 33% will apply to those with taxable income over $200,000. These changes will affect other provisions on the tax return, including charitable donation calculations, trust and estate taxes, taxes on split income with minors.
2. Tax-Free Savings Account (TFSA) annual contribution limits were reduced for 2016, back to $5,500 from the 2015 maximum room of $10,000. However, there has been a reinstatement of indexation for 2016 and subsequent taxation years.
3. RRSP contribution room remains at 18% of earned income, but the maximum contribution for 2016 is $25,370; for 2015 it’s $24,930. Any top-up for 2015 must be made by February 29, 2016.
4. For employees, there are changes to the calculation of automobile benefits. For 2015 the limit on tax-exempt auto allowances paid by employers to employees that use personal vehicles for business purposes, increased.
5. For those who turn 65 in 2016, the ability to postpone OAS benefits for up to five years if income is high. This could happen if a generous exit package is received, for example.
6. For retirees, the opportunity to recontribute withdrawals from a RRIF in 2015, when the withdrawal rules were relaxed. However, this must be done before February 29, 2016.
7. For families, the removal of the Family Tax Cut in 2016 could reduce refunds in spring 2017. An RRSP contribution could be especially helpful in reducing both net and taxable income in the 2016 tax year. This would not only save tax dollars, the RRSP could actually embellish cash flow for the family by creating or increasing the eligibility for the new Child Tax Benefit, expected to start in July.
8. More news for families: cut down on withholding taxes. Starting in the 2015 and future tax years, more is deductible for child care – $1000 more in fact – in each of the maximum dollar categories: children under 7, children aged 7-16 and disabled children for whom care is required. You can adjust tax withholdings as a result of these deductions, but you must file a T1213 form requesting permission from CRA to do so. This is the right time of the year to do so. This is also an opportunity for those who make RRSP contributions, support payments, or claim medical expenses, charitable donations and employment expenses, to reduce their withholding taxes by completing form T1213, too.
9. For those caring for the sick and disabled, tapping into the Compassionate Care Benefits is much more generous – they are available for up to 6 months, as opposed to six weeks, starting in 2016. In addition, a new Home Accessibility Tax Credit may bring relief in 2016.
10. For business owners, corporate tax rates are on their way down, dividend taxation is changing and a newly indexed capital gains exemption is available for 2016 if small business shares will be sold. The new amount is $824,176. Farmers and fishers can claim $175,824 on top of this for a total of $1 Million when their enterprises are sold this year.

Justin Trudeau’s Liberal government brought in tax cuts that were supposed to help the middle class and took effect on Jan 1st 2016. Will you benefit from those tax cuts or be left behind? That all depends on how much you make and where you live.

If you are making less than $45,282 a year, you won’t notice any difference on your paycheck because the cuts are targeted for people that make between $45,282 and $90,563 but people that make between $90,563 and $200,000 a year will benefit even more because they benefit from cuts in taxes in two tax brackets. Here in Alberta, people with high incomes of over $300,000 will pay a lot more because of increases to the federal tax rate on high incomes, and there was also an increase to the provincial tax rate on incomes over $300,000. So Those people will pay 7.75% more than they did last year.

Here is more on this from http://business.financialpost.com/personal-finance/how-much-more-of-your-paycheque-you-can-expect-to-pocket-or-lose-from-new-tax-rules

If you’re an employee, you may have already received your first paycheque of 2016. Assuming you didn’t get a raise this year, you may be wondering why the amount you received this payday was different than the amount you received in 2015.
Top 10 tax resolutions to help you make the most of your money in 2016

There are number of factors that affect how much actual cash you get to keep from your paycheque, the most significant ones being the amount of income taxes withheld at source by your employer as well as CPP/QPP contributions and EI premiums.

As we know, Trudeau’s middle-income tax cuts (although not yet passed) took effect on Jan. 1 and their impact is already built into the payroll deduction tables your employer uses to calculate the amount of tax that must be withheld from your pay. The middle-income tax cut applies to 2016 taxable annual income between $45,282 and $90,563 and the rate is now 20.5 per cent, down from 22 per cent in 2015. This means affected employees should experience at least a slight boost to their paycheque, once they have maxed out on their CPP and EI withholdings for 2016, whose rates remain unchanged.

Canada’s top income earners, on the other hand, now face a new, top bracket of 33 per cent, which applies to anyone earning more than $200,000 annually. Last year’s top bracket was 29 per cent and was reached once income hit $138,586 in 2015. For 2016, the 29 per cent rate becomes the second highest bracket and applies to taxable income between $140,388 and $200,000.
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To illustrate, let’s take a look at three employees, Angelica, Eliza and Peggy, whose employment income falls into the lowest, middle and top federal tax brackets and see what their take home pay looks like for their first payroll of 2016 versus what it would have looked like a year ago. For simplicity, we will assume that all three employees live in Ontario, where provincial tax rates for 2016 haven’t changed since last year.

Angelica earns $42,000 annually and as a result, does not benefit from the middle income tax cut. Assuming she is paid semi-monthly, on a gross pay of $1,750, her net take-home pay — after income tax, CPP and EI — would be $1,390, which is basically the same as it was in 2015 ($1,387), the slight difference owing to the indexation of the federal and provincial tax brackets for 2016.

Eliza’s annual income is $90,000 and as a result, she will fully benefit from the middle-income tax cut. Semi-monthly, her gross pay works out to $3,750, and she will net $2,640 after taxes, CPP and EI. This is up from $2,602 in 2015.

Finally, Peggy’s annual income is $240,000. While she will get the benefit of the middle income tax cut, her tax savings will be fully eroded by the extra four per cent tax she will pay on her income above $200,000. Assuming a semi-monthly gross payroll of $10,000, she will net $5,482 this paycheque, which is slightly less than the $5,507 she would have received in 2015.

For high-income earners living in Alberta, whose tax rates have increased dramatically since last year, the impact on their take home pay this month will be much more severe as Alberta’s top federal/provincial combined marginal rate went from 40.25 per cent in 2015 to 48 per cent in 2016. Ouch!

Financial Post

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Wealth Advisory Services in Toronto.

As 2015 winds down, you might be thinking about ways to minimize your taxes for the year while you still have some time. If you are thinking of selling a capital asset, there are several things you need to be aware of. You can realize either a loss or a gain by selling real estate, stocks, art, business equipment and many other possessions. So, there are several things you need to consider when you sell an asset at a loss. Evelyn Jacks explains four topics that you need to be aware of and offers tips for each. Her original article is at http://www.evelynjacks.com/?p=1266

Selling is permanent.

A capital loss occurs when certain types of assets are disposed of, for less than the total of their adjusted cost base (ACB) and any related outlays and expenses. Capital losses incurred will generally offset capital gains earned in the year, but not other income. While you can buy the securities back, you will have to wait until at least 31 days after the sale. Otherwise the losses are considered superficial and not claimable.

Deemed dispositions.

A taxable event can also happen in certain circumstances when there is a transfer of the assets, but not a sale. Examples of “deemed dispositions” include permanent departure from Canada, when shares held are converted, redeemed or cancelled, when options to acquire or dispose of property expire, when a debt is settled or cancelled or when an asset is transferred to an individual or trust. Generally, the proceeds of disposition will be the Fair Market Value (FMV) of the asset at the time of disposition. This is important, as, for some assets, an appraisal is necessary to justify that valuation for tax purposes.

Structure Family Transfers Carefully.

When assets are transferred by way of gift to your spouse or common-law partner, the capital gains or losses will be deferred until the asset is actually disposed of, resulting in a tax-free rollover at the time of transfer. This rule can be avoided when a spouse pays FMV for the property or when a spousal loan for that amount is drawn up. But again, there are special rules, to prevent investors from crystallizing losses without actually disposing of the property. Such losses will eventually be realized when the property is finally disposed of to a third party. Professional help is a must in these cases.

Don’t flip losers to RRSPs or charities.

When you transfer securities to either your RRSP or to a registered charity, that transfer will be taxed as a disposition at fair market value. Unfortunately, if the value of the securities has gone down, losses on transfers to your RRSP are deemed to be nil and therefore cannot be claimed. So transfer securities with accrued gains instead. That gain must be reported on your tax return before the security loses its tax attributes inside the registered accounts.

To fund your charities, be aware that while you can claim a loss when you donate shares, there are valuable income tax benefits to transferring qualifying shares with accrued gains. Not only do you get the donation credit for the FMV, but your capital gains are also exempt from tax. The plays: Either transfer shares that have an accrued gain, or sell the losers first and then contribute the proceeds to charity. In both cases, you will receive a donation receipt that will reduce your taxes payable.

However, if you wish to claim the Super Donation Tax Credit, available until 2017, transfers won’t count: You will need to donate up to a maximum of $1000 in cash; something you can do by selling your losers.

Cutting your losses, in short, is all about what you get to keep over time in a volatile investment climate, by averaging down the taxes on winners with the claims you can make on the losers.

Here is another great article from Evelyn Jacks on the problems that Canadians have with debt. Most of us know that credit card debt is one of the worst debts you can carry, especially if you only pay the minimum payment each month. If you do that, it will literally take you years to pay off your balance and that is if you don’t buy anything else on the card. Some of the credit cards even tell you how long it will take to pay off your balance by only paying the minimum payment – I think for a very low amount like $1000 it will take you around 20 years to pay it off. However, Jacks makes a great point about how expensive it can be to owe money to the Canadian government with all their penalties and interest payments. You can get into trouble pretty fast if you don’t take care of them first.

Here is the article:

It’s hard to believe that back in 1980, Canadians’ debt to disposable income level was 66%; today it is 164%, which means that households today owe more than $1.64 for every dollar of disposable income. That’s a big problem if job loss is in the future and, therefore, should be a topic of conversation for those working in industries suffering downturns and in retirement planning conversations.

One of the underlying conditions of borrowing of any kind is simple: There must be a strategy for paying back both the principal and the interest. People with multiple types of debt must also prioritize which should be paid first.

One of the most expensive forms of debt is money owed to the tax department. CRA will charge the prescribed rate of interest, plus 4% more on the taxes owed. But they will also charge the same rate of interest on unpaid penalties such as penalties for late filing, gross negligence penalties and tax evasion, all of which can multiply the cost of the original tax debt many, many times over.

CRA can also require employers to send portions of employee’s income by garnisheeing wages; the same is true of pensions. Not only can they shut down your income, but they can take away your assets. Therefore, tax debt requires immediate attention and should be paid first.

Non-deductible debt should be tackled next. This includes expensive credit card debt and the debt attached to buying a personal residence. Interest costs here are not deductible. Neither is interest paid when money is borrowed to invest in a registered savings plan like an RRSP or TFSA.

Deductible debt, on the other hand, includes the interest you pay on money borrowed for non-registered investments, as long as taxpayers can trace the use of the money to these purposes. The onus is on you to establish that the borrowed funds are being used for the purposes of earning income from a business (claim on business statement) or from property (claim on Schedule 4) or from your rental (claim on your rental statement T776).

When money is borrowed to buy securities, the investment must have the potential to produce “income from property.” If the investment does not carry a stated interest or dividend rate, which might be the case with some common shares or mutual funds, the interest costs on an investment loan may not be deductible. CRA will generally allow interest costs on funds borrowed to buy common shares to be deductible if there is a possibility of receiving dividends, whether or not they are actually received, but each case may be assessed individually upon audit.

If the investment for which you borrowed no longer exists or has substantially diminished because it has lost significant value, you may continue to write off the interest on the loan as if the underlying asset still existed. The amount considered “not to be lost” must, however, be traceable to the loan you are paying off. If you dispose of the asset at a loss, you may continue to write off the interest costs so long as the proceeds were used to pay down the loan amount.

It can pay handsome dividends to borrow for the right things: to get an education, to purchase income-producing financial assets, rental properties and homes in which tax-exempt gains accrue. However, a “Plan B” must be available if you no longer have the financial means to fund that debt.

In those cases, where would you go to repay the debt? Taking money out of a TFSA seems like a good plan: There are no tax consequences and the money withdrawn can be recontributed to the TFSA without penalty, providing reinvestment guidelines are met.

Another alternative is repayment from other tax-paid capital that is earning a lower return than the interest costs – a term deposit, for example, or a Canada Savings Bond. Another option, use your tax refund or other social benefits that are not yet allocated to another purpose.

Least attractive options include any withdrawal that generates taxes: money taken out of an RRSP, for example, or a capital asset with a large accrued gain.

Debt management is a critically important part of year-end tax planning conversations. For help, see a Tax Services Specialist and your Master Financial Advisor.

The original article was posted at http://www.evelynjacks.com/?p=1255

Here are some great year end tips from Evelyn Jacks at the Knowledge Bureau. They have a wealth of information at their website where they offer training for tax and Financial services professionals. This post was originally published at http://www.evelynjacks.com/?p=1249

The family’s tax returns are a great place to look for year-end planning opportunities that will create new money for that Christmas vacation or will help to pay off those credit cards come January. But the time to focus on this process is before the snow flies. Here are my top three tips for enhancing your family’s tax planning process—a few things you can do now so that you’ll have some extra “gold dust” at Christmas time:

1. Recover taxes owing from prior years. Tax refunds resulting from errors and omissions may be recovered for up to 10 years. So, if you’re a delinquent filer, now is the time to get caught up. Not only might you tap into refunds that could be waiting for you from previous years, but you can also avoid potential gross negligence or tax evasion penalties. If you have been dutifully filing your tax returns and simply have missed an important tax-saving provision in a previous year, be sure to adjust your tax returns by December 31, before the time runs out on the 2015 year. That’s especially important for building up your RRSP contribution room and recording those capital or non-capital loss carry-forwards.
2. Don’t overpay your quarterly instalments. If you pay your income taxes in quarterly instalments, you may have an instalment remittance due on December 15 or, in the case of farmers, it is due December 31. If you haven’t yet paid, be sure to calculate your estimated income for the current tax year first. If your income is lower than in past years, you may be able to reduce that payment or not make it at all. Simply use the optional “current year” or “prior year” methods of calculating your instalments. This is a nice way to create new capital for investment purposes before year end or to finance that much-needed vacation!
3. A TFSA is a must. Give your adult children a valuable Christmas gift: open a Tax-Free Savings Account and make sure you and/or they maximize the opportunity to put up to $10,000 in it this year. With a new government who has indicated the $10,000 limit will be notched back in the future, this is an important opportunity this year. The earnings that accumulate in the account are tax free and using this valuable savings room can build family millionaires.

Most people unknowingly leave tax savings on the table. But a tax-wise investor becomes wealthier over the long run regardless of the economic cycle—or new government. Be tax-wise and maximize your potential to reduce your after-tax income before year end!

Social Insurance Number 

Under the Employment Insurance Act, every person working in Canada is required to have a Social Insurance Number (SIN) and as an employer, you must ask to see the SIN card of all new employees when they are hired. You must also ensure that the employee is setup in payroll with the same name and SIN as they appear on the card.

If you are unable to ascertain the SIN of an employee, you should be able to show that you made a reasonable effort to obtain it. If an employee does not have a SIN card, you must refer them to a Service Canada Centre within 3 days.

If you do not make a reasonable effort to obtain a SIN, you may be subject to a penalty of $100 for each failure. Employees also have an obligation to provide you their SIN. If an employee does not do this, the employee may be subject to a penalty of $100 for each failure.