The RRSP contribution deadline for a 2012 tax deduction is fast approaching (February 28th, 2013) so if you are still eligible to contribute to your RRSP, you should determine whether it makes sense for you to do so. (Note that the last day you can contribute to your RRSP is December 31st of the year you turn 71.) Important factors you should consider when determining whether or how much to contribute to your RRSP include:
• Your current tax bracket
• Your contribution room
• The value of your RRSP currently
• Your expected annual retirement income
Another important decision is determining when to start collecting Canada Pension Plan (CPP). You can start collecting CPP from age 60 or you can delay in until age 70. If you collect it earlier, the annual amount you will receive will be lower than if you were to wait. In 2012, there were some changes made to CPP. One of the important ones to note is that even if you are currently collecting CPP, you are still required to pay CPP if you are younger than 65. Once you turn 65, if you are still working, you can choose to opt out of paying CPP but you have to file a document with your employer and the Canada Revenue Agency (CRA). Important factors you should consider in deciding when to collect CPP include:
• Your current tax bracket
• Your expected annual retirement income
• How long you expect to live
• If you require the income now or later
• Your current annual pensionable income
To make tax time easier and ensure you report all your income properly, track all of your various sources of income (employment income, interest income from savings accounts, dividend income from investments held, income from mutual funds, income from investment partnerships, rental income, income from the sale of investments and properties and more). The Canada Revenue Agency has computer systems that are able to match the income you report on your return with your income slips such as T4s (employment income), T5s (interest and dividend income), T3s (mutual fund income) and so on. If the CRA finds income that you did not report, you could be charged a penalty. Be sure to track of all the slips that will be coming in over the next couple of months and include them on your tax return.
For help determining whether to make an RRSP contribution this year, start collecting CPP, to develop a document to track your income slips or for assistance with your taxes, please contact Angus Shuttleworth, Chartered Accountant at 289-337-0497 or visit our website at www.shuttleworthca.com.
EI benefits for the self-employed can make sense to adopt in some circumstances but I find in most cases, they lack value to most people for two major reasons. Firstly the nature of owner management businesses do no lend themselves well to the EI benefits currently in effect for 2 major reasons; business failure and business success. Secondly the cost of the EI payments compared to the benefits received is often tilted in favour of the government and not the self employed individual.
Risk of Business failure: Take for example an accountant Annie who wants to take maternity leave in April. If Annie suggests her clients find another person to file their tax return this year, there is a high probability they will not return the following year. Annie may be able to claim EI benefits (maternity and parental) however she may not have a business to go back to once the benefits cease.
Business Success: In another example Sandy operates an on-line sales business that is fairly successful and requires limited involvement in day to day operations. It may be possible for Sandy to step away from the business and take maternity and parental leave and claim EI benefits without seeing a decrease in sales. As the business continues to bring in revenue Sandy’s benefits will be reduced based on the income she earns from the business and potentially reduce the benefits to zero.
In the first example if Annie takes maternity leave it may result in a decrease in business viability while in the second example Sandy’s EI benefits will be reduced by the profit realized in her business and so EI benefits for both Annie and Sandy do not appear viable options.
Second, once you take benefits you are required to continue paying into the program for as long as you are self-employed. The biggest EI benefit is for maternity leave and parental leave (15 weeks + 35 weeks). The downside to this is that people receiving these benefits are typically young and thus have many more years in which they are required to pay into the EI program and thus end up paying more into the program than they receive. If you plan on having more than one child the benefits to start to add up and can exceed the payments made over your career.
Before deciding to opt into the program here are some questions to think about.
1. Do you have children? Do you plan to have any? If so, how many? (If you receive multiple maternity/parental leave benefits, there is a greater likelihood that the benefits received will exceed the payments made to the program.)
2. What is the likelihood of you claiming sick-leave? (It may be expensive for some people to receive short-term disability benefits due to past history. No medical examination is required for EI benefits for the self-employed, so in this case, the program may be beneficial for the business owner as a way to enhance or supplement short-term disability benefits)
3. Do you have members of your family who may require your care in the future? (If the answer is yes there is a greater chance of needing to use the compassionate leave benefit.)
4. How seasonal is your business? (If there are periods where there is low income i.e. roofers, landscapers, etc the entrepreneur may have a higher likelihood of receiving EI benefits in the low season because they do not have income coming in that would reduce their benefits. However, it is difficult to time sicknesses or births to coincide with seasonal lulls in one’s business)
In all cases, it’s important to do the math and determine whether EI benefits make sense for you. To do this, compare how much you expect to receive from EI benefits over the course of you self-employment career, to how much you expect to pay into the EI benefits (keeping in mind you must pay into EI for 12 months prior to receiving the benefits, and then after you receive the benefits you must pay into the program for the rest of the time that you are self employed).
If you would like any help with determining the viability of EI contact your Burlington Chartered Accountant or
With tax time fast approaching I thought it was a good time to pool together a few articles that I have read recently on some tax programs offered by the Government of Canada.
The first article deals with Registered Retirement Savings Plans(“RRSP”) and discusses some of the down sides and negative affects they can cause. One of the biggest negatives that people don’t think about is the size of the withdrawal from your RRSP that is required each year in retirement and the tax that must be paid on the withdrawal.
Far too often I find that people are looking for the sure automatic answer without considering the benefit today and the negative tomorrow. In this case often people think the sure answer is to invest in RRSP’s every year regardless and get that nice tax refund today and forget about the nasty tax they may have to pay later. The major reason to hold investments through an RRSP should be to give you a higher after tax return on your money over your life-time than investing outside of your RRSP. So the actual answer should be to do the math and put your money in the investment that makes the most sense to you after considering all the options and the implications of each option including tax now and in the future.
To read the full article here is the link
In 2009 the government introduced a new savings vehicle called a Tax Free Savings Account or TFSA. It is similar to an RRSP, the major difference being that you do not get a tax deduction when you contribute to a TFSA, but you don’t get charged tax when you take money out of it either. Similar to an RRSP your money can grow inside the TFSA tax free.
The Canada Revenue Agency has provided some information on TFSA’s on their website and here is a link to that:
Another article I came across recently looks at RRSP’s and TFSA’s together and how one can use them together to get the most out of each of them.
Here is a link to the article.
The last article I want to talk about today has to do with grants the Government of Canada makes available and how people are not taking full advantage of them. For example, the article mentions that eligible seniors do not receive up to $1 Billion worth of old age security benefits, scary isn’t it! Now major reasons for people not taking advantage of grants and benefits provided by the Government are because they either don’t know they are available, don’t ask for them, or don’t apply for them.
Here is the article:
To help with the “don’t know they are available” issue here are 2 links to Government of Canada websites where grants are available.
If you find other sites please write a comment with the link so that we can all benefit.
To help with the “don’t apply” and “don’t ask” issues please contact me and find out how I can assist. At times the paperwork can be over whelming but I am here to help.
On February 9th I am presenting at an estate planning seminar hosted by Peter Skoretz of Edward Jones. As an added bonus there is not cost and dessert will be provided.
When: Wednesday, February 9, 6:30pm – 8:00pm
Where: Burlington Seniors Centre, 2285 New Street, Burlington, Ontario
The presentation will focus on what an estate is and methods to protect your estate including writing a will, having a power of attorney, effective tax planning strategies and the use of insurance. Space is limited so please reserve a spot.
Angus Shuttleworth Chartered Accountant
Fall is a popular time for the Canada Revenue Agency (“CRA”)to perform audits on income tax returns and it certainly can be challenging navigating through the requests from the tax auditor. Having a Chartered Accountant there to guide you through the process is definitely an asset and can help you get a favourable outcome. If you are currently being audited it is recommended that you call me or another Chartered Accountant in Burlington.
During the preparation of your tax return, your accountant prepared your tax return with information you provided, but it is likely that he did not ask to see every last receipt. If the CRA is conducting an audit on you or your business, it is likely that they will ask to see support and they may ask for every single receipt or invoice supporting the amount reported. The kind of documentation the CRA can ask for includes sales invoices, purchase invoices, cash register receipts, formal contracts, credit card receipts, delivery slips, deposit slips, work orders, dockets, cheques, bank statements, tax returns, and general correspondence whether written or in any other form, and more. They type of document requested will depend on the number being questioned by the CRA. When in doubt it is always better to keep more support than less.
Recently the CRA has started focusing more on the underground economy. The attention paid to this area of the economy is only going to increase with the advent of HST in Ontario and British Columbia. Due to the increase in sales tax, more and more people may be tempted to “go underground” to help reduce costs. As a result, the CRA is focusing more on invoices and not just payments to support expenses you may deduct. If you hire a sub-contractor to do work for you and you pay him with a cheque but he does not give you an invoice when it comes time to deduct that expense, the CRA can deny that expense. The net effect of this is that you end up paying close to 50% more for the service than you thought you would. To protect yourself from this nasty penalty, make sure you get a valid invoice from your sub-contractor and file a T5018 at the end of each year. If you require assistance with this please contact me at 1-866-721-1817, or e-mail.
The best way to make the audit process as pain-free as possible is to maintain accurate and complete records. To do this, ensure your record keeping system is effective and efficient. Your accountant can help you with this.
As technology advances, people are getting more comfortable maintaining electronic records and that is certainly an option however there are a lot of extra things that should be considered such as backing up the data in a safe off-site location, the future readability of the information and the ability to access it when required. If you are interested in electronic record keeping, please contact me to discuss the benefits and challenges before you begin using an electronic record-keeping method.
Creating a Filing System
You can store the source documentation that supports the amounts reported on your income tax and HST returns developing an effective filing system. Here are some key steps in setting up an effective filing system:
1. Determine how you are going to organize your information.
Some people start a file folder called “Information for Accountant”. This is a very general file mane and may cause difficulties when you are looking for specific items. A better approach is to break down the “Information for Accountant” into smaller chunks. For example, have a folder for Meals and Entertainment Expenses, one for Office Supplies and so on. The advantage to this is that at the end of the period you can add up the items in each folder and provide that information to your accountant so when he asks how much you spent on meals and entertainment in the year you can tell him exactly. If you would like a detailed list of the types of income and expenses your accountant and the CRA will look for please e-mail me and I will get a copy sent off to you as soon as possible.
2. Determine where you are going to file your information
Now that you have decided how to organize your information it is time to decide where you are going to file it, and the best place for it given your filing strategy decided above. Depending on the volume of information you are storing you will have different requirements. Some businesses need entire filing cabinets for each category, other businesses only need a filing box for all their records. Make sure it is big enough to store all your information but small enough to manage.
3. Determine how long you need to keep your neatly filed information.
Under the Income Tax Act records are generally required to be kept for a minimum of six years from the end of the last tax year to which they relate (i.e. 7 years). The tax year is the fiscal period for corporations and the calendar year for all other taxpayers. For the specifics of your situation, contact me to discuss further.
For assistance in the CRA audit process and to help protect yourself in the event of an audit please contact me and I will be glad to help you implement strategies that will ensure a smooth stress free audit if you are ever unfortunate enough to be subject to one.
Before you determine what questions you should ask your prospective accountant you should ask yourself a few questions first. Please read my blog post on questions to ask yourself for a few examples.
1. Do you have a public accounting license? In order to have a public accounting license an accountant is required to:
• take professional development courses each year to ensure his knowledge is up to date,
• spend a set amount of time working in public accounting in the preceding 5 years which ensures her practical experience is up to date,
• have a practice inspection to ensure work is being performed to a suitable standard
2. Who will be working on my assignment? Will I interact with them? What are their qualifications?
Some accountants have a large number of staff that can include students or young accountants, by using one of these firms it might be possible to lower your annual accounting costs as the accountant himself does not spend as much time on your file. The down side is that the staff can turn-over fairly regularly resulting in you spending time “training” the “new guy” or having to constantly build a new relationship with your accountant as your contact from the prior year has moved to a different roll or changed companies.
3. How do you bill for your services? What is the fee range for jobs similar to mine?
Some accountants quote a fixed fee for work performed while others quote an hourly rate. Certain firms even quote a different hourly rate depending on who is doing the work and the type of work being performed. It is generally a good idea to get a range up front. It is difficult for an accountant to give an exact figure before the work begins as issues can come up causing the bill to increase, or the work could be completed faster and thus cost less than estimated.
4. Are you actively involved in the community?
An accountant activity involved with the community will have reliable contacts to assist you with other specialists such as lawyers, marketing specialists etc. An added benefit to an accountant active in the business community is that he can see opportunities for you and introduce you to prospective clients.
5. Determine if you will be an important client to your Accountant.
If you are an important client to your Accountant he is more likely to go above and beyond to assist you and ensure that you are being properly serviced.
6. Find an accountant who is focused on building a long-term relationship with you.
An accountant with a long-term perspective will naturally take the job more seriously.
7. Does your accountant use the most up-to date software and technology to ensure his business is running as efficiently as possible?
This will mean he is more efficient with his time when working on your engagement and also be able to advise you on technologies to help your business increase in efficiency.
8. Will you be there when I need you throughout the year?
Some accountants only work certain times of the year which means that if you have an issue and need guidance during the year it might be hard to get an answer if your accountant is away.
9. Why should I pick your firm?
This is a good question to ask to see how well he can put himself in your shoes as a client.
One of the best ways to help you select a high quality accountant for your small business is to first determine what you need from your accountant.
Questions you should ask yourself:
1. Is your business a new business? If so do you need help determining the correct business structure? Sole proprietorship, partnership or corporation?
2. Do you need tax and accounting assistance with your business, personally or both?
3. Do you want to use an accounting system or would you rather your accountant handle the bookkeeping aspects of your business?
4. Do you have any employees? If so do you need help with payroll? Is it more effective to outsource the payroll function?
5. Do you understand the tax filing requirements? Are you able to complete the tax filling yourself? Would you like your accountant to review or prepare your tax fillings?
6. Do you have a solid business knowledge or would you like to rely on your accountant for business guidance and advice, leaving you more time to do the things you love about your business?
7. Do you know the tax laws related to expense deductions, car mileage, office in house, or paying family members?
8. Do you know what kind of retirement strategies to employ to ensure you and your employees will be looked after in the future?
9. Once you have asked yourself these questions and have taken time to reflect think of a few other questions that you would like your accountant to help you with and post them below.
Once you have completed the above steps it is now time to move onto questions for your prospective accountant.
On July 1st 2010 the Ontario Government will be replacing its current retail sales tax with a new tax harmonized with the Federal Goods and Services Tax (“GST”) known as the Harmonized Sales Tax (“HST”). There are a number of rules dealing with the transition period from the date of the original announcement to July 1st 2010 that must be complied with. To find out more about how HST will affect your business I invite you to continue reading.
Small Business Transitional Credit
To help small businesses with the transition to the HST the Ontario government is providing eligible businesses with a one-time credit of between $300 and $1,000. The credit should help off-set some of the additional costs that businesses may incur, for example updating computer systems, upgrading accounting systems, upgrading point of sale terminals, and invoices, sales receipts and expense reports to name a few. To be eligible for the transitional credit the business must make taxable supplies, be registered under the Excise Tax Act, be an Ontario Business and not be a listed financial institution. Businesses with over $2,000,000 in taxable revenues are also not eligible for the credit.
|Total Quarterly Taxable Revenues||Amount of Credit|
|$15,001 – $50,000||2% of taxable revenues|
|$50,001 – $500,000||$1,000|
For more information on Small Business Transition support please visit the Province of Ontario Website: http://www.rev.gov.on.ca/en/taxchange/publications.html. The federal government also has some useful information http://www.cra-arc.gc.ca/nwsrm/txtps/2010/tt100601-eng.html. You are also invited to contact your small business accountant
Registering for HST
If your business is already registered for GST your business is automatically registered for HST. Your HST will be filed according to your current GST filling schedule. If you are not currently registered for HST you may be required to register. For more details contact your tax accountant Generally a for profit business is required to register for HST/GST when its total taxable goods and services exceeds $30,000 in 4 consecutive quarters, or $30,000 in one quarter. Limousine and Taxi companies that are regulated by federal or provincial laws are required to registered period. It should be noted that companies that only provide exempt “taxable goods and services” cannot register for GST/HST. In addition businesses cannot claim input tax credits incurred to produce exempt supplies. For more information on registering for GST/HST please contact your Burlington Chartered Accountant or visit following link http://www.cra-arc.gc.ca/tx/bsnss/tpcs/gst-tps/rgstrng/mndtry-eng.html
Generally speaking the HST is due to take effect on July 1st 2010, however in certain circumstances HST is required to be reported prior to July 1st 2010.
October 14th 2009: In certain circumstances when goods or services are paid for after October 14th 2009 but provided after July 1st 2010 the purchasers of these services may be required to self-asses the HST.
May 1st 2010: For the majority of Goods and Services paid for after May 1st 2010 and provided after July 1st 2010 the vendor is required to charge and remit the HST. There are limited exceptions to this rule, one of which is pre-paid funeral arrangements.
July 1st 2010: HST is required to be charged on all goods and services that are not exempt services. If your customers are paying for goods or services before July 1st 2010 and receiving the goods or services after July 1st 2010 you should discuss the circumstances and the types of goods and services being provided with you small business accountant such as a chartered accountant.
Other GST/HST Articles by Angus Shuttleworth
Perhaps the biggest reason for a professional to incorporate is to reduce and defer income taxes. For an Ontario resident, the top marginal tax rate for an individual is 46.41% where as a Canadian controlled private corporation carrying on an active business pays tax of 16.5% on the first $500,000 of active business income. As a result there is the possibility of deferring close to 30% of the tax liability if structured correctly.
In addition to the deferral of tax certain professional corporations can issue certain non-voting shares to family members and pay them dividends which, depending on the circumstances, can save additional taxes. Here are some other points to consider before deciding if forming a professional corporation is right for you.
Typically, forming a corporation can be a good way to protect yourself from certain liabilities. The ability to limit liability however in a professional corporation is restricted. For example, professional liability such as malpractice is not limited and the professional remains personally liable, however liabilities related to ordinary creditors may be limited.
Another difference professional corporations have from ordinary corporations is that the business undertaken by the professional corporation is restricted to only the business of practicing the profession. One thing professional corporations are able to do however is invest surplus funds which allows the professional corporation to earn investment income on funds not distributed to the professional or the shareholders which includes the deferred tax liabilities resulting from the difference in tax rates between individuals and active business income earned by a Canadian controlled private corporation as discussed above.
Professional corporations have restrictions around naming. All professional corporations must include the words “Professional Corporation” or “Société Professionel”. Each professional body may have additional restrictions about what the professional corporation can be named. Thus it is important to confirm with your professional body to ensure that the name you wish to call your corporation complies with these restrictions.
It is important to remember that the professional corporation is a distinct entity and separate from the professional. One of the implications of this difference is that one has to be very careful when it comes to removing funds from the corporation. One possible method is to pay a salary to yourself and to your employees. Employees can include family members however special attention must be given to ensure that the salaries paid to family members are reasonable in the circumstances. It is recommended that you discuss family salaries with your tax accountant.
Another possibility for extracting funds is through the payment of dividends. As certain professional corporations are able to have family members as shareholders it may be possible to pay them dividends. In certain circumstances the payment of dividends to family members may be inadvisable due to attribution. To find out if paying dividends is right for your professional corporation contact your Chartered Accountant.
A third method of extraction is through the repayment of a shareholder loan. For a number of reasons shareholders may lend funds to the professional corporation, for example to purchase more equipment or as part of the consideration received for the assets transferred into the corporation at the time of forming the corporation. Having the professional corporation lend money to the shareholder is not a recommended method for extracting funds.
Before determining the most appropriate method or methods for extracting funds from the corporation it is recommended that you speak to your accountant.
Immediately before the assets of the business are transferred to the corporation there is a deemed year end for the unincorporated business and deemed disposition of the assets of the business. As a result the unincorporated business will not be able to take capital cost allowance (depreciation) as there will no longer be any assets in this business.
Generally the professional corporation will be able to select a year end date that falls within 53 weeks of the date of incorporation. A number of corporations select a December 31st year end however there are advantages to having a year end different to December 31st. Year ends in the middle of the calendar year can be beneficial when it comes to determining the appropriate mix and amount to be paid in salaries and dividends to the professional prior to December 31st. As a result it may be easier to determine the optimal mix of salary and dividends prior to December 31st resulting in more effective tax planning. It is recommended that you work with your small business accountant to determine the most effective compensation mix.
If you have ever applied for a bank loan, you know how important your credit score is. It can be a mystery as to what causes your credit score to improve or deteriorate. The credit score that is most often used was developed by Fair, Isaac and Company and is known as the FICO score. Your FICO score is a number between 300 and 900, with 900 being the highest score. A score above 700 is a good one. Here are some tips about how to protect your credit score and even improve it.
- Request your credit score once a year. Equifax will provide you with your credit score for free by mail or over the phone. For more information, visit their website at http://www.equifax.com/contact_us/en_ca. You should review your score and make sure everything on the report is correct. Any errors in the report could negatively impact your score and might be an indication that your identity has been compromised. Remember, when you request your own score it does not affect your credit score. However, your credit could be affected if a third party, such as a bank, requests your score.
- Every time your credit score is requested by a lending agency such as a bank, points are deducted from your credit score. If you plan on shopping for a mortgage or a loan, do not allow the institution to pull your credit score. Instead, pull your own credit score (see point 1) and take it with you when applying. Once you select an appropriate institution, grant authorization so they can run a credit report to confirm your score and finalize your agreement.
- Be sure to pay your bills on time. It is critical that you pay your credit card bills and other forms of debt by the required time. Always aim to pay the entire balance of your credit card by the due date rather than simply paying the minimum balance. It is important to pay monthly utility bills on time because utility companies may report you if you are a consistent late payer.
- Do not exceed your credit limit. In fact, it is best to keep your account balances below 50% of your available credit.
- A large component of your credit score is your track record. If you can show over a long period of time that you have consistently paid your bills on time and used credit responsibly it will help your credit score.
- Average account age is also a factor in determining your credit score. The longer you have had the account the better your score, provided you are paying it reliably. As a result do not open a number of accounts in a short period of time as it will bring down the average age of your accounts. It is more important to pay your debts off quickly than to maintain credit for a long time.
If you are applying for a loan and want to discuss the best options, please contact your Chartered Accountant. We can offer useful advice to help you make the right decisions and we are not affiliated with any organization that offers loans.