December Tax Planning
Now is the time finish up your tax planning for the year. Except for RRSPs December is your last chance to do any tax planning. Following are a few suggestions:
- If you are planning to make some charitable contributions, make them in December. If you wait till January you will have to wait another year to get the benefit of the tax credit.
- Contribute to you RESPs or RDSPs before the end of the year.
- Look at your stock portfolio. Are there any losers you want to get rid of or winners you want to cash out? You can carry back capital losses for 3 years or forward till used. December 23 is the last date to qualify for 2014.
- For the self-employed if you are planning purchasing new equipment early in the New Year, it may make sense to purchase it in December instead. You can deduct the same amount of Capital Cost Allowance (CCA) for 2014 if you bought it in January 2014 or if you buy it in December 2014. If you buy it in January 2015 you will have to wait another year to claim the CCA.
The Padgett Awards Night was on November 18, 2014. I am pleased to announce that I received several Awards:
2014 Leaders Club
This award is for the top 10 offices in Canada
All Star Team 2014
This award is for the top office owners in Canada. The Office Owner of the Year is selected from this group.
2014 Office Owner of the Year
This is the top award in Canada.
Vickers Award 2014
I received the Vickers Award for outstanding revenue growth.
November 17 to 19 I attended the Padgett Annual Tax Update Seminar in Montreal. Margaret Riggin has been leading the tax seminar for a number of years. Margaret Riggin, CPA, CA is one of Canada’s top tax accountants and has been a frequent instructor and lecturer for York University and the Chartered Professional Accountants of Ontario
I always get a lot from these seminars and the discussions afterwards.
HOW TO START A SMALL BUSINESS IN ALBERTA
So you want to start a small business now what. First decide if you want to be a sole proprietor, have a partnership, or a corporation. You may not be familiar with the terms and the legal relationship so I will discuss each briefly in the following document:
If you have a corporation you need to register the corporation for a business number but not necessarily for GST. Even a sole proprietor or partnership may need a business number. The following document provides some explanation:
When you hire employees you have additional obligations. First you need a payroll account with CRA (Canada Revenue Agency). See Part 2 for details of registration. There is a potential trap with hiring subcontractors. The following document provides additional information:
The next part discusses how to keep records and how long they need to be kept and in what format:
How do you pay yourself is a question I get quite often. There are tax and other consequences. The following document describes some the of basics:
The Family Tax Cut
This new proposed tax break for young families could save you up to $2000 in tax. The basic concept is that a couple with young children may have one spouse in a higher tax bracket than the other spouse. That results in a higher tax paid by the family than the family with the same combined income but with both spouses in the same tax bracket.
To be eligible the individual must:
- be a Canadian resident at the end of the taxation year
- have an eligible relation for the year
- have a child under the age of 18 at the end of the year who ordinarily reisdes throughout the taxation year with the individual or the individual’s eligible relation; and
- not be confinred to a prison or similar instution for 90 days or more in the year.
This is a common question I get from owners of corporations.
The answer depends on the person. Do you want CPP (Canada Pension Plan) when your retire? Do you want to invest in RRSPs? Are you disciplined enough to invest for retirement? Will your investments provide a better retirement income than CPP? Do you want to split income with a spouse or adult children going to a post-secondary school?
If you take wages you will have to pay into CPP. As you are the employer and employee you will have to pay 9.9% up to $4851 towards CPP in 2014. Half is paid by the employer and half by the employee. Self-employed persons pay both portions.
If you choose to only take dividends then there is no CPP to pay. You will also not increase your RRSP contribution room. Saving $4851 in CPP contributions also means you will not be adding to the CPP retirement amount. I recommend those that take this route put those savings into a TFSA to save for retirement. You need to be disciplined as you will not get the CPP payments when you retire. You can also invest inside the corporation. If you are not disciplined then wages may be a better choice.
The average CPP retirement payments are $607.33 per month if you retire at age 65. The maximum is $1,038.33. Consult with a financial planner to determine your options and make sure your investments will exceed this amount.
There are other strategies to be taken into consideration with tax planning. You can do a combination of things in your overall tax strategy. It is best to consult a financial planner for your particular situation. You need to put some money into retirement planning.
Certified Financial Planner
Now is the time to start planning. If you wait till January you will miss out on most tax planning options. For most people in January all you have left is an RRSP.
RRSPs are a good option for many people but the not best for everyone. If you are in a lower tax bracket, the refund from an RRSP deduction is not very high. I have seen situations where people made RRSP contributions when they were in low tax brackets but when they retired the RRSP income combined with other income resulted in paying a higher tax. They were in a higher tax bracket plus they had OAS clawback resulting in an effective tax rate higher than the top bracket. It is best to do some retirement tax planning long before you retire.
TFSAs (Tax Free Savings Account) is a great option. You do not get the tax deduction but you never have to pay tax on the investment income. Zero tax is better than a higher tax rate. Include TFSAs in your planning.
Charitable donations should also be considered. You can carry forward charitable donations up to 5 years. If you contribute $200 per year, it is better to accumulate those donations and deduct $1000 in the 5 th year. You save more tax that way. If it is your first charitable donation since 2007 you can get even more tax back.
If you have capital gains this year you might want sell stocks that are losers in order to offset the tax on the capital gains.
For longer term planning consider starting a business . This is not for everyone, but it is a good way to save on tax. You can reduce tax with income splitting and you can defer tax.
If you have life insurance and you own a corporation, consider selling the policy to the corporation and make the corporation the beneficiary. You do not get a tax deduction for the life insurance but it is paid with money taxed at a lower rate than the personal tax rate. The life insurance payout is still tax free and the cost to you is less.
It is important to consult a financial planner to determine what is best in your situation.
The Canada Revenue Agency (CRA) is targeting consultants & contractors in the oil patch.
A tax audit could cost you $6,000 per year or more in taxes and penalties. We have a solution to eliminate this concern. We will take care of all your tax compliance issues and provide all your bookkeeping in our solution. Check out SOS TAXMAN.com or PadgettAlberta.ca
For more information PH: 780 466 6747 FAX: 780 640 1246 email Les@PadgettAlberta.ca
If you are a contractor (especially in the oil patch) Canada Revenue Agency (CRA) may be looking at you closely. If you contract to only one company you are on their hit list. The problem is related to the employee contractor definitions used by CRA. To avoid getting caught in this trap most oil companies will insist their contractors incorporate. This is great for the employer since this absolves them of any responsibility for this issue. The responsibility is now placed squarely on the incorporated contractor.
CRA will look at this incorporated contractor and determine if the corporation is essentially an incorporated employee. If this is the case your corporation will be declared a Personal Services Business (PSB). Once considered a PSB the taxes are horrendous. You will lose tax deductions for a lot of expenses and almost all of the advantages of being incorporated. In addition the corporate profits will be taxed at a 38%.
If you are audited and CRA determines your company is a Personal Services Business, it will cost you thousands of dollars. It could easily cost you an additional $6,000 or more per year in taxes, penalties and interest. CRA will declare many of the expenses that your corporation deducted as wages to you that will then be taxed. In addition there will be penalties and interest for not paying CRA the source deductions on these expenses that were disallowed.
We have a solution. You will save some tax and avoid the hassle of getting an audit. In addition there are a number of attractive benefits. You can pay many expenses through this corporation and save money.
You will be paid in the form of wages and a dividend. The dividend can go directly to you or to your corporation. Your corporation will receive the dividend tax free. You can then invest this money inside your corporation.
As a business owner, you have now found out that only you can control how the business operates. Part of this control relates to the finances of your company. This article seeks to discuss the ways for you to pay attention to the revenues and expenses of the business you are operating. The bottom line is the bottom line. Any business is like an old row boat, with a large number of small leaks. Each leak in itself is not important or dangerous to the well being of the craft, but the sum of many leaks leads to disaster. As a business owner you have to have a way to watch for the leaks, and a way to stop them.
Let us first start with the cash coming into your business – my favorite kind of cash. Part of your business must include some kind of system to record sales and account for cash receipts. Today the cash register systems (point of sale) offer a variety of control features. Use whatever you have to come up with a total cash collected, and balance your cash drawer to this amount. In a retail situation where you have a number of floor staff handling the register, you are in jeopardy of leaking some of the cash. The cash drawer should be balanced once per day against the cash register total. It is a simple exercise where you count the entire drawer and match it to the internal tape maintained by the register. Beware of cash over and cash short situations. At the very least, these are indicators of poor customer service; at the worst, they are signs of an organized attempt by dishonest people to remove your cash.
Inventory & Supplies
The next area of control is in the supplies and inventory that you have on hand. A steady gross profit margin is usually the easiest control to have and this is achieved through regular inventories and a monthly profit and loss statement. If you achieve a stable gross profit margin consistently, then you are likely in control of your stock. Other ways include secure storage and display areas. Obviously, you cannot restrict access to the point where customers are unable to get at it, but that access should be visible so that this important asset does not develop legs. In your storeroom, keep supplies neat and organized. Keep this area secure with limited and controlled access. Keep track of the supplies that you use so that abnormal usage can be spotted. Make sure that your employees understand that shrinkage will not be tolerated.
Essentially, you should not have accounts receivables. Accept credit cards instead. In the service retail situation, giving credit to customers is unlikely to increase your business volume, so why bother? My attitude has always been if customers are unable to get a credit card to use, why should my business extend credit? The cost to accept credit cards, the vendor charge, will be much less than the running of your own credit department.
When paying your bills, be very careful that you are paying only for goods and services actually received. Inform your vendors that orders can only be placed by authorized personnel, and thoroughly check every shipment of goods you receive into your shop. Ensure that you are receiving what you ordered and it is in acceptable condition before you sign the shipping receipt. When studying your invoices, double-check the mathematics. These computer print-out bills can look very formal and correct, but check the addition and cross multiplication. Computers may not make a mistake in adding, but programmers do sometimes make mistakes on the instructions that they give. Pay particular attention to goods purchased for resale and use. These purchases may or may not be subject to sales tax, and careful attention on your part will save you money.
Pay your bills on time. While this may not be the time on the invoice, set a policy that your cash flow can live with. Always match the received date to the invoice date and take the later of the two. Set aside a portion of your week or month to do this task. Try not to hastily pay a bill because someone is trying to exert pressure. Paying of bills results in money leaving your business, and this is the worst kind of money.
We all work too hard to ring sales up in our cash registers, and when you consider how little of the total sale actually ends up in net income, you can appreciate how little mistakes can hurt you. Make sure that all services are billed to the customer. Often it is easy to overlook that small item, especially if several of your staff were involved in providing the service to the customer. Have some kind of system that records each service rendered to the customer, and make sure this reaches the final billing. At the billing stage make sure that the bill is calculated properly. If using an electronic cash register (point of sale) system, periodically review the “price look up tables” to ensure that they conform to your current pricing structure. A customer will usually check to see if he is over-billed, but few are looking for under-billings during this glance at the charges. Periodically review your billings to check the math and the services billed. If you have a number of people doing billing in your company, make sure that you can track mistakes back to the person so that appropriate action can take place.
All of the above can be generalized into the issues of the completeness, the accuracy and the authorization of every transaction your company makes. We appreciate that you cannot be there every moment for every transaction. You can, however, set up simple procedures for yourself and your staff. Ask yourself the following questions:
- Are my sales complete and accurate? How do I achieve this within my system? Am I sure that every product delivered and every service provided is at the price I have specified?
- When I pay a bill, am I getting the services and products I ordered, for the price I agreed to, and have I fully received the billed items?
- Am I keeping control of my assets? Am I getting full value for the resources I give away in order to improve my net income?
These are the basic questions that need to be answered by each company in business today. Take a moment and see if you can plug a few of those leaks. Do not fall for the temptation of thinking that if you have never had a problem, no problem will ever occur. Do not depend solely on people to catch mistake or not make them in the first place. After all, making mistakes is what humans are all about.
Do you know if you or a loved one is eligible for the disability tax credits offered by the Canadian and Alberta governments?
The disability tax credit is a non-refundable tax credit used to reduce income tax payable. The credit for 2011 is $7,341 for federal taxes and $13,095 for Alberta taxes. That could be a savings of up to $2,410 depending on your tax bracket. If you have a dependent eligible for the disability amount with little or no income all or a portion of this credit may be transferred to you. The dependent can be your or your spouse’s or common-law partner’s parent, grandparent, child, grandchild, brother, sister, uncle, aunt, nephew, or niece.
If a child is under 18 years and is eligible for the disability tax credit that child is also eligible for the child disability benefit, an amount available under the Canada Child Tax Benefit. Individuals who have a prolonged impairment in physical or mental function, use form T2201 to apply for the disability tax credit. The form must be completed by a qualified practitioner and CRA (Canada Revenue Agency) must approve the form. Often the practitioner will charge a fee to complete the form.
There are definitions for several different categories of disabilities. To determine if you are eligible look at Form T2201 or you can look at CRA’s website:
You may want to talk to your doctor or other practitioner about whether or not your situation fits the definitions. But for tax advice talk to a tax professional.
For tax advice talk to a tax professional:
There are a number of companies that will assist you in getting your tax credit BUT be aware that many will charge 25% to 50% of your tax savings for the service. Ours fees are based on the services we provide, not on the amount you will receive. A typical charge for a straight forward request is around $250.
If you are unsure if you qualify for the tax credits, please call us. We will help you with the paperwork and assist you in getting the tax credits that you deserve.
Les Grajkowski CFP
Bonnie Powers CMA (editor)