Repeated Failure to Report Income Penalty

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Far too often I have had new clients come to me after having done their own taxes, making a mistake, and getting penalized by the Canada Revenue Agency (CRA).  The CRA have the ability levy significant penalties if tax returns are not done correctly, usually when income is under reported.

If you under report income for a second time in four years you will be subject to a federal and provincial repeated failure to report income penalty, whether this was an honest mistake or an intentional omission.  If you failed to report income for your 2011 tax return and you had also failed to report income on any of your 2008, 2009, or 2010 returns you would be subject to a 10% fine by BOTH the federal and your provincial/territorial Government.

For example if in 2008 you forgot to include a T5 that you received from your bank showing $50 in interest income and then in 2011 you started renting out your basement suite for $1200 a month and decided not to or forgot to include the rental income on your income tax return, you would receive a failure to report income penalty totaling $2,880 ($1,200 x 12 months x 20% penalty).  As you can see a significant penalty could potentially arise out of a couple of simple mistakes.

If you realize that you have made this error and could be subject to this penalty you may choose to voluntarily disclose this to the CRA and they may waive the penalties.

To ensure that you are completing your tax returns properly and thus not subject to CRA fines and penalties you should have a professional accountant complete your taxes.  If you need assistance disclosing past errors to the CRA or if you want the peace of mind of a Chartered Accountant completing your taxes to avoid future errors please contact us at steve@wattsca.ca , 604 510-0156, or visit our website at http://www.wattsca.ca

 

Disclaimer: The information in the blog is for general information only and is not intended to be a substitute for professional advice.  Each person’s situation is unique, and a designated professional accountant can assist you in using the information on this blog to your best advantage.  The author of this blog strives, but does not guarantee, to provide information which is current and accurate.  Due to the nature of the information, it should not be relied upon for decision making without talking to a designated professional accountant.  By obtaining information from this blog, you fully release Steve Watts, Chartered Accountant of any liability that may arise from using this information.

Kiddie Tax

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One of the best tax saving opportunities for family owned and operated businesses over the years has been income splitting.  This is the practice of splitting income amongst family members to use up all of each family member basic personal tax credit and low tax rates at the lower income levels.  The Federal Government and Canada Revenue Agency (CRA) recognized this lost revenue and in the year 2000 put measures in place to reduce these income splitting opportunities.  These rules are generally referred to as “Kiddie Tax” and apply to these situations involving minor children.

Kiddie tax is applied on the following income:

  • Dividends received and other shareholder benefits, directly or through a trust or partnership.  Income or benefits from publically traded shares are excluded.
  • Business income from property or services provided to businesses in the following circumstances:
    • A corporation where a relative owns 10% or more of the shares
    • A person related to the minor is earning business income
    • A professional corporation where a relative of the minor is a shareholder
  • Since inception the kiddie tax rule has been amended to capture the following circumstances
    • Rental or interest income earned by a trust or partnership from a family business then received by minor children
    • Capital Gains on the sale of private company shares

There are some exceptions to the Kiddie Tax:

  • The Kiddie Tax is not applicable if neither of the minors parents are residents of Canada
  • The tax is not applicable on property or income inherited from a parent
  • The tax is not applicable on income from property inherited from others when the child is attending university, or is disabled

If the Kiddie tax rules are applied, all of that income will be taxed at the highest marginal tax rate, also personal tax credits cannot be used against Kiddie Tax related income.

Even though the Kiddie Tax rules are pretty tough and do eliminate a significant amount of income splitting opportunities, there are still opportunities for income splitting in family owned businesses and similar situations:

  • There are still income splitting opportunities with your spouse and children 18 years old and older
  • Salaries can legally be paid at non-kiddie tax rates to minor children for work done for the company.  Although you must be able to prove the work done by the child, and you must pay them the no more than the market rate to do this work.

If you are in a situation and think that you may get caught up in the Kiddie Tax rules, or if are looking to do some tax planning around the Kiddie Tax rules and you want to discuss it with a Chartered Accountant please contact us at steve@wattsca.ca , 604 510-0156, or visit our website at http://www.wattsca.ca for more information.

 

 

Disclaimer: The information in the blog is for general information only and is not intended to be a substitute for professional advice.  Each person’s situation is unique, and a designated professional accountant can assist you in using the information on this blog to your best advantage.  The author of this blog strives, but does not guarantee, to provide information which is current and accurate.  Due to the nature of the information, it should not be relied upon for decision making without talking to a designated professional accountant.  By obtaining information from this blog, you fully release Steve Watts, Chartered Accountant of any liability that may arise from using this information.

Incorporation vs. Proprietorship

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One of the biggest considerations for small businesses is whether to incorporate or to operate as a proprietorship.

What’s the difference?

The main difference between corporations and proprietorships is that corporations become their own legal entity while proprietorships are operated under the name of the proprietor. From a tax perspective a corporation is taxed on its own, while a proprietorship is taxed on the proprietor’s personal tax return.

To Incorporate or Not

Like most big decisions there is no general rule but rather a number of considerations that must be evaluated in each unique situation to make the determination. The most common scenario for small businesses is to start as a proprietorship and then incorporate when it becomes beneficial to do so, which depends on a number of factors

Benefits of Incorporation

  • Year to year Tax Planning opportunities
    • Income splitting – Opportunities to pay salaries and dividends to family members to maximize the use of lower marginal tax rates.
    • Tax deferral – Corporate tax rates are much lower than personal tax rates, owners may choose to only withdraw the funds they need, and leave the remaining funds in the corporation without paying high personal tax rates.
    • Small business rate – To support small business, businesses are given the “small business deduction” which is a reduction on corporate income taxes of 17% on the first $500,000. The combined provincial and federal corporate tax rate on the first $500,000 of active business in British Columbia for 2012 is 13.5%.
  • Limited Liability – In general the shareholders liability is limited to amount of      money that they have invested in the corporation.
  • Unlimited Life – Corporations do not end with the death of the shareholder, this can be useful in families as the family business can be passed down from      generation to generation.
  • Estate Planning – As discussed above, with the proper corporate structure and tax planning having a corporation allows the owner to pass down the business      from generation to generation with limited tax consequences.
  • Raising Money – Whether public or private, having a corporation allows for a      simple method of raising funds for the company by selling shares. For example you could sell 40% of the shares of the company to raise funds to invest back in the company, while maintaining majority ownership.
  • Legitimacy – This may seem superficial, but potential clients/customers may feel more comfortable dealing with a business that has Ltd., Inc, Corp,. or other similar characteristics as they may see these types of businesses more stable, established or legitimate.

Disadvantages of Corporations

  • Increased Costs – Having a corporation requires the retaining of a lawyer and an accountant, and in the initial year professional fees may be a few thousand dollars, and from that point forward yearly professional fees are likely to be north of $1,000/year. In most cases (if companies are big enough and profitable) these costs are more than made up for in tax savings.
  • 2nd tax return to prepare – As corporations are their own entity they have to file tax returns, corporate tax returns are more complex than personal tax returns and a designated accountant (CA or CGA) should be engaged to complete this work.
  • Increased paperwork and responsibility – Being the majority shareholder of a      corporation carries certain responsibilities such as ensuring corporate documents are filed annually, ensuring corporate tax returns are filed on time, and ensuring all corporate and financial records are in good standing.
  • Liability may not be limited – When corporations borrow money the lender may require the owner to sign a personal guarantee, which would then extend the      financial liability of the company to guarantor shareholder.

As you can see there are many factors to consider when making this decision, there are obvious occasions when a corporation is appropriate. If a business is has grown to a point that a business is making $500,000/year this would be a situation where a corporation would be appropriate, or if an individual has a small side business where they are earning $10,000/year this would be a situation in which a proprietorship would be appropriate. For businesses that fall between these two scenarios I would recommend getting professional advice to determine the best option for you.

If you are considering starting a business or have a business and are considering incorporation, please contact us at steve@wattsca.ca , 604 510-0156, or visit our website at http://www.wattsca.ca for more information.

 

Disclaimer: The information in the blog is for general information only and is not intended to be a substitute for professional advice.  Each person’s situation is unique, and a designated professional accountant can assist you in using the information on this blog to your best advantage.  The author of this blog strives, but does not guarantee, to provide information which is current and accurate.  Due to the nature of the information, it should not be relied upon for decision making without talking to a designated professional accountant.  By obtaining information from this blog, you fully release Steve Watts, Chartered Accountant of any liability that may arise from using this information.

First-time home buyers’ tax credit

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Starting in 2009 first-time home buyers’ are eligible to claim a $5,000 tax credit in the year that their home is purchased.  Many people are not aware of this, and I have even encountered people who do their own taxes and have missed out on the credit because they were not aware of it.

To qualify for this credit you or your spouse/common-law partner must purchase a qualifying home and neither of you can have lived in a home owned by either of you in the year of purchase or any of the four preceding years.  You and your spouse do not both receive the $5,000 credit, but either one of you can claim it or it can be split between the two of you as long as the total does not exceed $5,000.

A qualifying home includes:

  • Single-family house
  • Semi-detached house
  • Townhouse
  • Condominium Unit
  • Apartments
  • Mobile homes
  • Certain co-op housing situations

If you are not familiar with basic tax rules and credits I would encourage you to get the assistance of a designated accountant to assist you with your tax returns to ensure that you are not missing any significant tax credits such as the First-Time Home Buyers’ Tax Credit.   If you have any questions related to the First-Time Home Buyer’s Tax Credit or if you want the peace of mind having a chartered accountant complete your tax return for you please contact us at steve@wattsca.ca , 604 510-0156, or visit our website at http://www.wattsca.ca for more information.

 

 

Disclaimer: The information in the blog is for general information only and is not intended to be a substitute for professional advice.  Each person’s situation is unique, and a designated professional accountant can assist you in using the information on this blog to your best advantage.  The author of this blog strives, but does not guarantee, to provide information which is current and accurate.  Due to the nature of the information, it should not be relied upon for decision making without talking to a designated professional accountant.  By obtaining information from this blog, you fully release Steve Watts, Chartered Accountant of any liability that may arise from using this information.

Starting a New Business

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Starting a new business can be an overwhelming process; there are so many considerations which makes it easy to overlook something.  Not only is it important to not overlook anything, it is important to do things in the correct order.  In my time assisting clients go through this process I have developed a checklist to ensure that nothing is overlooked.

In this blog post I am unable to go into specifics as each situation is unique.  For example the first decision that needs to be made is whether you are going to incorporate or not, this decision will affect virtually every other decision that you make in this process.  As you will see below One Stop at the BC registry services is a great resource when starting a business (http://www.bcbusinessregistry.ca/ )

Here are the main items that need to be considered when starting a business (Information relates to British Columbia, but is similar to other provincial jurisdictions in Canada):

  • Incorporate – This is one of the biggest decisions that will need to be made.  This decision will be based on many factors such as projected size of the business, tax planning, number of owners of the business, potential liabilities, and expected growth.  Each situation is unique and needs to be evaluated separately to determine the best structure.  I recommend that you consult with professionals prior to incorporating a company, but if you know what you are doing this can be done without professional assistance.
  • Register your name – whether you choose to incorporate or not you need to get the name of your business approved.  This done online through the BC Registry Services (https://www.bcregistrynames.gov.bc.ca/nro/)
  • Register with Canada Revenue Agency (CRA) – You will also need to register with the CRA to setup your Corporate Tax, HST, and Payroll Accounts.  This can also be done through the BC registry services (http://www.bcbusinessregistry.ca/)
  • HST/GST – You are not required to register for HST/GST until your business exceeds $30,000 in sales in a single calendar quarter or in four consecutive quarters.  You may decide to register prior to this and it can be beneficial to do so in certain circumstances, for example if you are in a business with significant start-up costs you may choose to register to claim the HST/GST credits on these initial expenditures.  Again you can register for HST/GST through BC Business Registry (http://www.bcbusinessregistry.ca/)  or the CRA website ( http://www.cra-arc.gc.ca/tx/bsnss/tpcs/gst-tps/rgstrng/hwt-eng.html )
  • WCB – You are required to register with Work Safe BC (WCB) if you have any employee’s, again this can be done through the BC registry service (http://www.bcbusinessregistry.ca/) or the WCB website ( http://www.worksafebc.com/default.asp )
  • Municipal Business Licence – Before you start your business you will be required to get a business license from the municipality or municipalities you will conduct business in.  Information on municipal business licences on your municipalities website or again at BC Business Registry (http://www.bcbusinessregistry.ca/)
  • Year-end Accountant – Whether you incorporate or not you will need a year-end accountant to ensure that your accounting information is accurate and to file your corporate tax return or complete the business activities portion of your personal tax return.  I would recommend using a designated accountant for this, in Canada there are three types of designated accountants Chartered Accountants (CA’s), Certified General Accountants (CGA’s), and Certified Management Accountants (CMA’s).    Our firm is able to provide the quality services of a Chartered Accountant at the rates affordable to small business, our contact information can be found on our website (http://www.wattsca.ca/)
  • Bookkeeper – You will need to find a way to do the bookkeeping for your business.   I recommend three options in this regard: your year-end accountant can do this, you can hire a bookkeeper, or you can do the bookkeeping yourself with the oversight of your year-end accountant.  Again our firm can provide these services, or we can evaluate your situation and provide a recommendation of the option that would best suit your needs.  Visit http://www.wattsca.ca/ for more information on our bookkeeping services.
  • Lawyer – If you are incorporating you will need a lawyer (you can incorporate without a lawyer, but I would only recommend this if you have experience with corporations).  You may also need a lawyer to discuss other aspects of your business (i.e. trademarks, copyrights, or liability issues relating to your operations)
  • Insurance – There will be various types of insurance that you may need, they range from liability insurance to premise insurance.  You will need to speak with an insurance agent to determine your needs
  • Bank Accounts – You will need to open a business bank account under your businesses name.  To open the account under the business name the bank will likely require the articles of incorporation or the business name registration, so these steps need to be completed before opening the account.  You will also need to determine who the signing authorities will be on the accounts and the number of signatures required on cheques, these decisions will be based on the size of your operations and the roles of your administrative staff.  Although local credit unions seem to feature some enticing offers, through my own and my clients experience I have found that the major banks are more business friendly.
  • Credit Cards – Like the bank account, it is generally useful to sign up for a credit card in the company’s name; this can be done at the same time as opening the bank account.
  • Receiving payments – Hopefully in your new business you will be receiving payments, some businesses only accept cash and cheques, but why limit the ways that customers give you money.  There are a couple of options out there for accepting payments via credit and debit card.  You can opt for the standard point of sale keypad, this is the most common and trusted method but is also the most expensive.  There are apps with card reading accessories that you can now use to accept credit and debit card payments on your smart phone or tablet, this option is cheaper and convenient, but some customers may not feel comfortable paying this way.
  • Budgeting – The first couple of years operating a business can be difficult.  New businesses are often not profitable, especially in the early years.  Also, there are significant costs associated with a business start-up some of which are often overlooked.  It is very important to make a budget at the earliest stages of your business, this serves two purposes; first the budget will give you an idea of the up-front capital needed to start the business, and second as the business develops you can look back at the budget and evaluate your performance to date.
  • Cash flow forecasts – although budgeting is important, projecting cash flow is even more important.  The majority of young businesses that fail do so not because they are not profitable, they fail due to being unable to meet their cash obligations.  For example in some businesses you may make a sale but that money will not be collected for 30 days or more, in the meantime you have bills that need to be paid.  The cash flow projection is like a budget but it doesn’t look at profit and loss but rather cash in and cash out, and you may be surprised there is often a big difference.

As you can see there is a lot to consider when starting a business and it can be overwhelming, but with the proper team around you it can be a fun and rewarding process.

Of course I am just touching the surface of what is required when starting a new business, but I would love to discuss your business with you in more detail.   If you have any questions related to any of the items in this blog, or if you want to sit down for a free one hour consultation to discuss how I can assist your business please contact us at steve@wattsca.ca , 604 510-0156, or visit our website at http://www.wattsca.ca for more information.

 

 

Disclaimer: The information in the blog is for general information only and is not intended to be a substitute for professional advice.  Each person’s situation is unique, and a designated professional accountant can assist you in using the information on this blog to your best advantage.  The author of this blog strives, but does not guarantee, to provide information which is current and accurate.  Due to the nature of the information, it should not be relied upon for decision making without talking to a designated professional accountant.  By obtaining information from this blog, you fully release Steve Watts, Chartered Accountant of any liability that may arise from using this information.

Interest and Penalties

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For those of you who did not manage to file your personal tax return on time, you may be wondering what the consequences are for failing to file the return as well as failing to pay the balance owing on the return.  The consequences come in the form of Interest as well as a Late Filing Penalty; we will discuss each of these separately.

Interest

Interest is charged on any unpaid amount owing for 2011 (or any previous tax year – this post will refer to the 2011 tax year) starting on May 1, 2012.  Interest is also charged on amounts owing as a result of a reassessment as well as any penalties that have been applied to you.  The interest rate that is charged is based upon the “prescribed rate” which is updated quarterly (currently in the 2nd quarter of 2012 the rate is 5%, and has been unchanged since the first quarter of 2009).

Late-Filing Penalties 

If you fail to file your personal tax return on time and you owe a balance, you will be charged a 5% penalty on the balance owing.  In addition, you will be charged a 1% penalty of your balance owing for each month the return is late up to a maximum of 12 months.  If you have a been charged a late filing penalty in any of the three previous years prior to the current late filing penalty, the initial penalty will be doubled to 10% of the balance owing, and the monthly penalties will be doubled to 2% of the balance owing for each month to a maximum of 20 months.

If you are behind on your taxes you should get caught up as soon as possible to minimize interest and penalties.  If you need assistance getting caught up on your taxes or need any help with any tax or accounting needs please contact us at steve@wattsca.ca , 604 510-0156, or visit our website at http://www.wattsca.ca

 

 

Disclaimer: The information in the blog is for general information only and is not intended to be a substitute for professional advice.  Each person’s situation is unique, and a designated professional accountant can assist you in using the information on this blog to your best advantage.  The author of this blog strives, but does not guarantee, to provide information which is current and accurate.  Due to the nature of the information, it should not be relied upon for decision making without talking to a designated professional accountant.  By obtaining information from this blog, you fully release Steve Watts, Chartered Accountant of any liability that may arise from using this information.

Lifetime Capital Gains Exemption

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The Lifetime Capital Gains Exemption is one of the biggest tax breaks or incentives offered by the Canadian Revenue Agency (CRA), most people are not aware of it and it is seldom used.  This tax break offers Canadians an exemption to paying tax on capital gains of up to$750,000 (was $500,000 until March 19, 2007) on the sale of qualified small business corporation shares, qualified farm property, and qualified fishing property.  This blog post will focus on small business corporation shares, as this is the exemption most applicable to my clients.

These rules are applicable to many business owners running their own small business in Canada.  Under this exemption if you sell the shares of a qualifying small business, you can do so completely tax free up to $750,000.  Under the Canadian tax act, capital gains are already only 50% taxable, this exemption gives you a  deduction equal to the other half.

These rules are quite complex and do not apply in all situations to all corporations; the following is a framework of the basic rules.

  • The shares sold must be of a qualified small business corporation which at the time of disposition has 90% or more of its assets in an active business carried on in Canada, and over the last 24 months at least 50% of assets are involved in active business.
  • The shares must only be owned by the individual, or a person or partnership related to the individual for the 24 months prior to the disposition of shares

These rules may seem like they are easy to comply with but the 10% non-active portion includes investments, stocks, bonds, or rental properties, and has to be closely monitored.  Usually when individuals make use of this exemption they have planned it a few years in advance, it is not done on a whim.

This is a huge advantage to people who have sunk all of their own time, energy, and money into their own business and don’t have a pension.  Individuals can use the value of their business as a nest egg to retire with.  If maximized, using this exemption can save over $100,000 in taxes.  There are however other complications such valuating the business, finding a buyer, ensuring you comply with the CRA rules, and knowing the right time to pull the trigger.

If you own a small business for which this exemption could apply I would recommend investigating it further.   If you have any questions related to lifetime capital gains exemption and want to discuss it with a chartered please contact us at steve@wattsca.ca , 604 510-0156, or visit our website at http://www.wattsca.ca for more information.

 

 

Disclaimer: The information in the blog is for general information only and is not intended to be a substitute for professional advice.  Each person’s situation is unique, and a designated professional accountant can assist you in using the information on this blog to your best advantage.  The author of this blog strives, but does not guarantee, to provide information which is current and accurate.  Due to the nature of the information, it should not be relied upon for decision making without talking to a designated professional accountant.  By obtaining information from this Blog, you fully release Steve Watts, Chartered Accountant of any liability that may arise from using this information.

Principal Residence Exemption

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Recently I have received a few questions about the tax rules surrounding your principal residence.   The general idea behind the Principal Residence Exemption is that you are not taxed on gains you realize when you sell your residence.  But like many tax guidelines in Canada the rules are more complicated than that to ensure that people do not abuse them.

The first issue is what qualifies as a principal residence.  The basic rules are it must be a house or housing unit, you or your spouse/partner must inhabit it at some point during the year, and you must designate it your principal residence. Also note, an individual or married couple may only have one principal residence.  The rules are a little more specific than that, but in most cases and for our purposes this basic understanding is sufficient.

In certain cases when there is a large portion of land attached to the house, the CRA may only allow the Principal Residence Exemption to a portion of the land, 1.25 acres is often the cap.  If land bigger than 1.25 acres is not sub dividable and has no commercial uses it is usually allowable under the exemption.

If the home was not your principal residence for the entire time it is owned there is a calculation that is used to determine the taxable portion of the gain and the amount that qualifies for the Principal Residence Exemption:

The calculation is as follows:

 

(Number of years as principal residence + 1 year)x(Capital Gain)

Number of years the property was owned

 

Let’s look at an example to see how the formula works, let’s assume these facts:

  • House bought in 2006 for $500,000
  • House sold in 2012 for $600,000
  • Lived in the house from 2006 to 2010
  • In 2010 moved to a different city for family reasons, buying another house, at which point was designated the principal residence
  • Original House remained uninhabited from 2010 to the time of sale

 

(5 years as principal residence + 1 year) x 100,000        =$85,714

7 years

 

This results in an exemption of $85,714 leaving a capital gain of $14,286 (100,000 – 85,714), and taxable capital gain of $7,143 (50% of capital gains are taxable).  The extra year that is added to the number of years as principal residence is so that when someone moves, both the old house and the new house will be counted as a principal residence for that year.

These are just the basic rules relating to the Personal Residence Exemption.  There are more detailed rules for other issues such as change of use from rental to residence, or residence to rental, and elections that need to be made in these instances.   If you have any questions related to the principal residence exemption and what proportion you are eligible for, or if you want the peace of mind having a Chartered Accountant make these calculations for you, please contact us at steve@wattsca.ca , 604 510-0156, or visit our website at http://www.wattsca.ca for more information.

 

 

Disclaimer: The information in the blog is for general information only and is not intended to be a substitute for professional advice.  Each person’s situation is unique, and a designated professional accountant can assist you in using the information on this blog to your best advantage.  The author of this blog strives, but does not guarantee, to provide information which is current and accurate.  Due to the nature of the information, it should not be relied upon for decision making without talking to a designated professional accountant.  By obtaining information from this blog, you fully release Steve Watts, Chartered Accountant of any liability that may arise from using this information.