How do I deduct business use of my vehicle? I get this question a lot.
The following covers the basics. For specific situations contact your business advisor, book keeper, accountant, tax planner or tax preparer. They should all know this but, if they don’t call SOS TAXMAN (SOSTAXMAN.COM).
First do you have a proprietorship, a corporation, or is this for employment expenses. If it is a corporation you can use option A or B. For all others option B is your only choice. In all situations you need to have a vehicle log to track usage. Only business use can be deducted.
There are cellphone based apps, I have used ODOTRACK to keep my log. I now use Telus Drive. It is cellular based and uses GPS to track all my trips. I simply select business or personal for the trip. I can send the trips to my computer and enter the purpose of the trip. For example “Airport – Toronto – Padgett Convention” or “met John Doe (potential client) for lunch“ are good. The GPS shows the start and end points of the trip and the kilometers. If I made a mistake and marked a business trip as personal I can change it. It is best to do this weekly or monthly before you forget the reason for the trip.
This is the easiest option and what I do in my office. I own the vehicle pay all expenses personally. I then fill out an employee expense sheet and charge per kilometre for the vehicle use. I use the CRA maximum rates.
The automobile allowance rates for 2022 are 61¢ per kilometre for the first 5,000 kilometres driven and 55¢ per kilometre driven after that. For 2021 it is 55¢ for the first 5,000 kilometres driven and 53¢ per kilometre driven after that. For 2020 it is 59¢ for the first 5,000 kilometres driven and 53¢ per kilometre driven after that. In the Northwest Territories, Yukon, and Nunavut, there is an additional 4¢ per kilometre allowed for travel.
If my company owned the vehicle and it was available for personal use there would be a problem. You have to use form “RC18 Calculating Automobile Benefits” to determine the taxable benefits. I find that this taxable benefit can be very high and stays high even when the vehicle ages. For these reasons for most clients it is best to own the passenger vehicle in your own name and charge the corporation for usage. The situation is different for other vehicles such as welding truck that is never used for personal use.
For a typical passenger vehicle I have found the per Km method is the best for most clients. This method results in lower bookkeeping fees and fewer receipts that you need to keep.
This is your only option if you are self-employed or want to claim employment expenses. Again you need to keep a log. You need to keep all vehicle expenses such as, fuel, maintenance and repairs, insurance, registration, and capital cost allowance. The amount that is deductible is the percent of business use determined by dividing business km by total km for the year. For employment expenses a form T2200, Declaration of Conditions of Employment has to be signed by the employer.
Life insurance inside a corporation can save on taxes if done correctly
Why put your life insurance inside of your corporation?
If you have a small business the cost of your life insurance could be cut approximately in half. A Canadian Controlled Private Corporation that is earning active business income below the small business limit pays 14% tax in Alberta. The tax rate varies by province. In Alberta the 2015 top personal tax bracket is 39%. With proposed tax increases that is expected to be 48% in Alberta and over 50% in Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia.
The life insurance (in most cases) is a non-deductible expense for the corporation just as it is not deductible on your personal tax. However, your corporation may be paying less tax. Consult your tax professional to find out your marginal tax rate.
Let’s use the 50% marginal tax bracket to make the comparison simple. To pay for $1000 in life insurance you need to earn $2000 before taxes to pay for it personally. Your Canadian Controlled Private Corporation that is earning active business income needs to earn $1162.79 before tax to pay for the $1000 in life insurance. That is a savings of $837.21.
If you are not sure how to do this talk to me or your tax advisor.
First make sure you have a Canadian Controlled Private Corporation that is earning active business income below the small business limit.
You have to sell the insurance policy to your corporation. The corporation has to be the owner of the policy and the beneficiary. You can sell it at the ACB (Adjusted Cost Basis). Ask your insurance agent for this number. You may be able to sell it at a higher number but that is beyond the scope of this article.
On your passing the insurance is paid out to the corporation. This amount is credited to the Capital Dividend Account and can be paid to shareholders tax free.
Remember to consider the shareholders of the corporation. If you are the only shareholder there is no issue. If you have other shareholders they may have a claim on this payout.
Remember to have a will that specifies who gets your shares of the corporation. Talk to your lawyer, insurance agent, financial planner and tax professional.
TAX LOSS SELLING
Now is a good time to do some tax loss selling!
Do you have any stocks that are worth less now than when you bought them? Some oil stocks come to mind. Did you have some capital gains in 2012, 2013, or 2014? Now is a good time to use those losses to your advantage. You can sell those stocks and have the capital losses applied to other capital gains.
You can apply your capital losses to past, current or future capital gains. If you do not have enough gains this year to use all your capital losses. These losses can be carryforward until used or carried back to apply to capital gains in the last three years. You can have those capital losses in 2015 applied to your capital gains in 2012, 2013, and/or 2014. This is done by using Form T1A on your 2015 tax return.
If you are not sure how to do this talk to me or your tax advisor.
Timing of tax loss selling is important.
First make sure the sale occurs in 2015. Watch the transaction order dates and transaction dates. The transaction date must be completed in 2015 to use it this year. There is usually a delay of 2 or 3 days in trading stocks and with the holidays make sure you place your order in time. If you plan to buy those stocks again make sure you do not have a superficial loss.
If you or a person affiliated with you buys the same stock either 30 calendar days before or after the sale your loss is now a superficial loss. That means you cannot use the deduction. Affiliated person means your spouse or common-law partner, a corporation you control, a partnership or a majority interest partner of the partnership, or a trust. That also includes any registered investment vehicles you have such as an RRSP, RESP, RRIF, TFSA and etc.. Yes, I know their definition of affiliated person includes much more than persons in any normal definition.
If you want to do some tax loss selling make sure to not buy it back within those 30 days on either side of the sale.
You can use that superficial loss rule to your advantage. If your spouse buys that same stock within the 30 days you have a superficial loss. This superficial loss is added to the ACB (Adjusted Cost Base) of your spouseâs purchase of the stock. Make sure your spouse keeps those stocks for at least 30 days. If your spouse has capital gains this will allow your spouse to use this capital loss. This is a neat way to transfer losses to your spouse.
Make sure you discuss this with your tax advisor to make sure you do this correctly.
The government is changing some of the rules regarding the exempt status of income earned inside an insurance policy. The change is effective January 1, 2017.
Life insurance inside a corporation has been an effective tax planning strategy. The changes will reduce the effectiveness of the tax planning. However, existing policies issued before January 1, 2017 will quality for grandfathering.
As a result of these changes it is a good idea to put your policy in place before the deadline. Do not wait for the last minute start the process now. Even if you do not have extra money today to invest inside your insurance policy it can be beneficial to set it up now so
Start by calling your life insurance agent. Ask about corporate owned life insurance for tax benefits.
If you provide a loan or a loan guarantee to a business it is essential that there is a written agreement even if it is for your spouse or child. I am not talking about whether they are trustworthy. That is whole other discussion. I am just talking about the tax consequences if it is not paid back.
A good illustration of this is a Tax Court of Canada case. In this situation a mother guaranteed a business loan for her son’s corporation. She tried to deduct the losses on her tax return. It was denied. She had no expectation of investment income so no deduction is allowed.
What could she have done differently? She could have had an agreement that the corporation had to pay her an annual guarantee fee. This would have made all the losses deductible.
Another common situation is a loan. The same principle applies in this situation as well. There needs to be a loan agreement detailing the terms. The interest rate needs to be specified.
When people go into these arrangements for relatives they still need a written agreement or tax deductions will be lost.
The Allowable Business Investment Loss (ABIL) can be used for these losses but there is a requirement that there was a potential of investment income. The written signed agreement provides you the evidence needed.
I believe that the average person knows how to spend their money better than the government. For that reason I want everyone to pay the least tax that is legally possible. Instead of voluntarily paying extra taxes so the government can give it to their favourite cause or to subsidize some business that competes with my clients, I prefer to use that money for my family and to give to the charity of my choice.
I have clients that were not doing their taxes or bookkeeping correctly costing them Tens of Thousands of dollars. I corrected these mistakes resulting in refunds of up to $20,000. I am not talking about wealthy people. This is significant money for them. The sad part is there are limits to how many years we can go back to collect these refunds. It is 3 years in most cases and up to a maximum of 10 years in some situations.
A lot of people start a business without a lot of knowledge beyond their area of expertise. This costs them money. Sometimes they will concentrate on the business and not worry about the paperwork. It is easy to justify spending time on finding new clients and getting work done. Doing all the paperwork may not be as exciting or fun. But it needs to be done. I know some people that are months behind in sending out invoices. If you do not invoice on time it can cost you. Customers may not remember what you did and be annoyed at getting a larger bill all at once. Many find it more palatable to receive smaller invoices monthly or weekly. A customer might go bankrupt and you may never collect. This is work you have already completed but did not get paid. Can you afford to work for free? You are losing money you already earned.
If you are not compliant with CRA rules, it could cost you a lot in interest and penalties. The first penalty is bad enough but the next one could be doubled. Repeat offenders can get very high penalties.
If you do not keep the bookkeeping up to date, how do you know if you are making a profit?
If you have several products or services do you know which one is making you the largest profit?
Are you calculating GST correctly? If not you may be paying more than is necessary.
Are you calculating and paying payroll source deductions correctly and on time? Errors and late filing can cost you in penalties and interest.
Presentation Topics we are going to discuss :
- The legal setup of your business.
- Registration with CRA and tax compliance.
- Avoiding Audits
- Avoiding Penalties
- Hiring Employees and Sub Contractors
- Record Keeping
- What are Debits and Credits
- Paying Yourself
- Paying the Least Tax (Tax Planning)
WHEN: Thursday May 14, 2015 8:30 am to 12:30 pm
WHERE: Atlas Business Centre 7633 50 ST Edmonton AB
PRICE: $97.00 plus GST
The Everyday Communities
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If you are in the top tax bracket and have the money it makes sense to maximize your RRSP (Registered Retirement Savings Plan) and TFSA (Tax Free Savings Account). For everyone else the answer is not that clear. With all the options it would be wise to talk with a financial planner to determine what is best in your situation. Following are some options that are available.
I have seen people that invested in RRSPs when they were in a low tax bracket but on retirement paid tax on those RRSP withdrawals at the top tax bracket. With OAS (Old Age Security) claw back the effective tax paid could be higher than the top tax bracket. Check with a tax planner well before you are at retirement age to minimize taxes and claw backs.
In the past the thinking was that the investment income growth made up for the higher taxes paid on withdrawal. Now that we have TFSAs you can get tax free investment income. In the RRSP all investment income is taxed when withdrawn. With a TFSA all withdrawals are tax free. If you are not in the top tax bracket, I recommend you consider a TFSA before deciding on an RRSP.
If you have children and want to save for their education then an RESP (Registered Education Savings Plan) is worth considering. Grants and bonds from the government are available.
If you have disabled children consider an RDSP (Registered Disability Savings Plan). Grants and bonds from the government are available.
There are some scenarios where it makes sense to purchase spousal RRSPs and the spouse could withdraw the RRSP some years later in a low income year. If you do this make sure you check the attribution rules otherwise you may have to pay the tax.
I have not even mentioned all the options available for investments inside all of these vehicles.
With all these options available it is best to consult with a financial planner.
DISABILITY INSURANCE FOR THE SELF EMPLOYED BUSINESS OWNER
Regular employees may have group insurance health, disability, and life.
However, many self employed people have no disability insurance in case of accident or illness.
If you are self employed and break a leg skiing will your business continue earning the same amount of money? If you become ill and cannot work, can you still meet your financial obligations?
These are questions we should all ask ourselves. If the answer is no then you are at risk.
Call us for a discussion on the group and individual plans available for the business owner.
Plans are also available for your employees.
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.
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.