Do the New Trust Reporting Requirements Apply to You?

As the Canadian government continues to strengthen its tax reporting regulations, new requirements have been implemented for trusts which are now in effect for the year ended December 31, 2023. These changes aim to enhance transparency and ensure compliance with tax obligations. It is essential for individuals and entities involved in trust arrangements to understand these new rules to ensure compliance and avoid penalties. In this article, we will provide a comprehensive overview of the New Trust Reporting Requirements in Canada. We will explore the definition of trusts, specifically focusing on bare trusts, and discuss the reporting obligations, exemptions, penalties for non-compliance, and future planning considerations.

What is a Trust?

Before delving into the specifics of the new trust reporting requirements, it is crucial to have a clear understanding of what a trust entails. In simple terms, a trust is a legal arrangement where the ownership of assets is transferred to a trustee who manages them on behalf of beneficiaries. Thus, the trustee holds the legal title to the assets, while the beneficiaries have the beneficial ownership.

Generally, a trust exists where the following three certainties are present:

  1. Certainty of intention - the individual (settlor) who transfers title to the property to the trustee must have the intention to set up a trust. The intention can be made orally or in writing.
  2. Certainty of subject matter - the written agreement must be specific with respect to property to be transferred to the trustee.
  3. Certainty of objects - there must be certainty of either the beneficiaries or the purpose of the trust must be sufficiently certain.

Types of Trusts

The two main categories of trusts are express trusts and bare trusts.

Express Trusts

Express trusts are formal trusts established with the intention of creating a trust arrangement. These trusts are established through formal agreements such as a trust deed that outlines the terms and conditions of the trust. Express trusts include:

  • Family Trusts
  • Alter Ego or Joint Partner Trusts

Bare Trusts

Bare trusts, also known as simple trusts or informal trusts are created when the parties involved do not explicitly intend to establish a trust but inadvertently do so through their actions. Hence why they are referred to as “informal trusts”. Unlike express trusts, bare trusts do not require a formal trust deed or agreement. They are characterized by the following key features:

  1. Legal Title vs. Beneficial Ownership: The trustee holds the legal title to the trust assets, but the beneficiary retains the beneficial ownership and control. This means that the beneficiary has the right to use, enjoy, and dispose of the assets as they see fit.
  2. Principal-Agent Relationship: The relationship between the trustee and beneficiary in a bare trust is often described as a principal-agent relationship. The trustee acts as an agent for the beneficiary, carrying out transactions and managing the assets based on the beneficiary's instructions.
  3. Lack of Discretion: Unlike other types of trusts, the trustee in a bare trust does not have any independent power or discretion over the trust assets. They must act in accordance with the beneficiary's wishes and instructions.

Examples of Bare Trusts

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Bare trusts can arise in various situations and have different applications in estate planning, real estate transactions, and business arrangements. Here are some common examples of bare trusts:

  1. Joint Ownership of Real Estate: It is common for parents to add their children to the legal title of their real estate as joint owners. This arrangement helps reduce probate fees upon the parents' passing and simplifies estate administration. However, the children do not have full ownership rights until their parents' passing, making this arrangement a bare trust.
  2. Bank and Investment Accounts: As parents age, they often add their children to their bank and investment accounts for ease of financial management and estate planning purposes. These accounts can be considered bare trusts as the children hold legal title to the account but are not the beneficial owners until the parents' passing. The only exemption to filing in this scenario would be if you meet the exemption of $50,000 as outlined below.
  3. Holding in Trust For Accounts: Trust arrangements where assets are held in trust for children, grandchildren, or other beneficiaries until they reach a certain age also fall under the category of bare trusts. These accounts are commonly used to protect and manage assets for minors until they become adults. The only exemption to filing in this scenario would also be if you meet the exemption of $50,000 as outlined below.
  4. Real Estate Financing: In some cases, a child may add a parent to the title of their real estate to obtain financing or other financial benefits. This arrangement creates a bare trust, with the parent acting as the trustee and the child as the beneficiary.
  5. Real Estate Transactions: It is common in real estate investments for a nominee corporation to hold the legal title of the property in trust for the beneficial owner for commercial reasons.
  6. Corporate Reorganizations: During corporate reorganizations, it is common to transfer the beneficial ownership of real estate from one taxpayer to a corporation. This arrangement can be structured as a bare trust, allowing for the transfer of ownership without triggering taxes or fees.
  7. Joint Ventures and Partnerships: Legal title for real estate or other assets held on behalf of a group of owners in a joint venture or partnership can be considered a bare trust, as the beneficiaries have the full beneficial ownership and control. The trustee acts as a custodian, holding the assets for the benefit of the individuals involved in the joint venture or partnership.

It is important to note that these examples are not exhaustive, and there may be other scenarios where a bare trust exists and requires reporting.

Understanding the New Trust Reporting Requirements

Previously, a trust was only obligated to file a T3 trust return if the trust owed income tax for the year, or if the trust realized a capital gain or disposed of capital property during the year. This meant a lot of informal trusts such as bare trusts that were created were not required to file as the trust would not owe any tax during the year.

Under the new rules, all express and bare trusts are now required to submit a T3 trust return. This means that even if a trust is inactive or has not generated income in a particular tax year, it must still fulfill the filing obligations. This expands the scope of trust reporting and aims to capture all formal and informal trusts that may have previously gone unnoticed or were exempt from filing.

In addition to the new requirement to file, detailed information is required and should be reported for each trustee, beneficiary, settlor, and any other person who can exert control or override trustee decisions concerning the allocation of the trust's income or capital (i.e advisor). This information should include:

  • Full name and address
  • Date of birth
  • Country/jurisdiction of residence
  • Taxpayer identification, for example, SIN, trust account number, business number, or a taxpayer ID used in a foreign jurisdiction

The due date for filing the trust tax return is 90 days after the end of the trust's year-end. For most trusts with a December 31st fiscal year-end, the due date for the 2023 tax year is March 30, 2024. For 2023 tax year only, the deadline has been extended to April 2, 2024.

Exemptions from Reporting Requirements

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While the new trust reporting requirements apply to many bare trusts, there are certain exceptions outlined by the Canada Revenue Agency (CRA). The following types of trusts are not required to provide additional information:

  1. Trusts governed by registered plans (i.e., deferred profit sharing plans, pooled registered pension plans, registered disability savings plans, registered education savings plans, registered pension plans, registered retirement income funds, registered retirement savings plans, registered supplementary unemployment benefit plans and tax-free savings accounts) 
  2. Mutual fund trusts, segregated funds and master trusts.
  3. Lawyers' general trust accounts: Funds held in trust accounts by lawyers that are required under the professional conduct rules for a purpose that is regulated under these rules. However, if they are client-specific trust accounts (i.e client funds held in trust such as real estate proceeds, retainers, trust settlement amounts, investment funds that are administered by the lawyer on behalf of clients, withholding taxes kept in trust until the CRA provides a compliance certificate etc.), they would not meet this exemption and would fall under the new trust reporting rules. The only exception to this would be if the trust has been in existence for less than three months or it it holds less than $50,000 fair market value in assets. The new trust reporting requirements do not require the disclosure of information that is subject to solicitor-client privilege. 
  4. Graduated rate estates and qualified disability trusts: Trusts created for the benefit of individuals who have passed away or individuals with disabilities.
  5. Non-profit organizations or registered charities: Trusts that qualify as non-profit organizations or registered charities are exempt from the new reporting requirements.
  6. Trusts in existence for less than three months: Trusts that have been in existence for less than three months at the end of the year are not required to provide additional information.
  7. Trusts with assets below $50,000: Trusts that hold assets with a total fair market value of less than $50,000 throughout the taxation year are exempt from the filing requirements. The assets being held are limited to cash, government debt obligations, and listed securities such as public company shares, mutual funds and segregated funds.

It is essential to consult with a tax professional or legal advisor to determine if your trust falls within any of these exceptions and is not subject to the new reporting obligations.

Penalties for Non-Compliance

The CRA imposes penalties for late filing or non-filing of trust tax returns. The penalties can be significant and may vary depending on the circumstances. Here are some key penalties to be aware of:

  1. Late filing penalty: If the trust tax return is filed after the specified due date, a late filing penalty may apply. The penalty is generally calculated at $25 per day late, up to a maximum of $2,500 per year.
  2. Penalty for gross negligence: In cases of gross negligence, where there is a willful disregard for the reporting requirements, a penalty equal to the greater of $2,500 or 5% of the highest fair value of the trust's assets during the year may be imposed.

To avoid these penalties, it is essential to file the trust tax return on time and ensure all required information is accurately reported.

Future Planning and Considerations

To minimize future reporting obligations and streamline trust structures, there are some practical steps that can be taken:

  1. Review the purpose of the trust: Trustees should periodically review the purpose and necessity of the trust. If a trust no longer serves its intended purpose, consider winding it up or closing any in-trust accounts that are no longer necessary. By taking these steps, future reporting obligations can be reduced.
  2. Restructure existing trusts: If certain beneficiaries are no longer required or relevant, consider restructuring the trust to remove them. This can help avoid the need to disclose their information in future reporting. However, it is important to note that reporting obligations may still exist for periods during which beneficiaries were involved.

Engaging the services of a tax professional with expertise in trusts and tax planning can provide valuable guidance in ensuring proper trust structuring and compliance with reporting requirements.

Conclusion

The introduction of new trust reporting requirements in Canada has brought about significant changes in the landscape of trust administration and tax compliance. Trustees, beneficiaries, and settlors must be aware of their obligations under these new rules to ensure compliance, avoid penalties, and maintain the integrity of their trust structures.

This comprehensive guide has provided a thorough overview of the new trust reporting requirements, covering topics such as the definition and purpose of trusts, the concept of bare trusts, the detailed reporting requirements, exemptions, implications for different types of trusts, and future planning considerations.

By adhering to these requirements and maintaining ongoing compliance, trust beneficiaries and trustees can avoid penalties and ensure the smooth operation of their trusts. Trust filers are encouraged to seek professional advice to navigate the complexities of trust reporting and ensure compliance with the new rules.

If you are looking for a tax accountant to help file your trust returns under the new rules, contact us today. We are a full-service accounting firm in Hamilton that have experienced tax specialists to meet all your tax needs.

If you want to learn more about other tax and accounting topics, explore the rest of our blog!

Frequently Asked Questions

1. Is a trustee of a bare trust that owns legal title to a residential property in Canada required to also file an Underused Housing Tax (UHT) return?

Yes, the CRA interprets the word trust to include a bare trust and interprets the word trustee to include a trustee of a bare trust. Hence a trustee of a bare trust will need to file a UHT return.

2. If the trustee of a bare trust files the UHT return, do they also need to file a trust return?

Yes. Per CRA, the UHT-2900 Underused Housing Tax Return is separate from the new trust reporting regulations. Filing a UHT-2900 does not fulfill the requirement to submit a T3 Return and Schedule 15. Hence, the trust remains obligated to adhere to the new trust reporting rules.


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

How to Fix a Mistake on Your Tax Return in Canada?

Tax season can be a stressful time for many individuals and business owners. Filing your tax return accurately is crucial to avoid penalties and maximize your tax savings. However, mistakes can happen, and it's important to know how to fix a mistake on your tax return. In this article, we will walk you through the process of fixing errors on your Canadian tax return and provide a brief preview of common mistakes when filing your income tax returns.

Common Mistakes on Tax Returns

Here are some of the most common mistakes people make on their Canadian tax returns:

  • Forgetting to Claim Deductions or Credits

One common mistake is forgetting to claim all eligible deductions and credits. It can be challenging to keep track of the numerous tax deductions and credits available, especially with changing tax rules. To avoid missing out on potential tax savings, consider consulting with a professional tax accountant who can help identify applicable deductions and credits. Utilizing tax software can also assist in identifying eligible deductions and credits.

  • Failure to Transfer Unused Tax Credits

Tax credits can often be transferred to a spouse who may have insufficient income or taxes to utilize them fully. For example, unused tuition tax credits can be transferred to a parent or grandparent. Maximizing available tax credits can result in significant tax savings for families. Consulting with a tax professional can help navigate the intricacies of transferring unused tax credits.

  • Claiming Ineligible Expenses

On the flip side, some individuals mistakenly claim deductions or tax credits that are not allowed. It's crucial to understand the eligibility criteria for each deduction and credit before claiming them. For example, the Home Accessibility Tax Credit is only available for individuals who have made eligible renovations to improve accessibility in their homes.

Similarly, the deduction for student loan interest is often mistakenly claimed. Some students claim the student loan interest tax credit for payments made on personal loans, student credit, or foreign student loans, even though these expenses are not eligible. Hence, familiarize yourself with the requirements for each deduction and credit to ensure you are claiming them correctly. Ensuring accuracy and compliance with tax regulations is essential to avoid potential penalties and CRA audit triggers.

  • Inaccurate Reporting of Marital Status

Accurately reporting your marital status is crucial for determining eligibility for certain benefits and credits. If you're living with your partner in a conjugal relationship for at least 12 consecutive months or are sharing a child, you're considered common-law for tax purposes. Its important to report your marital status correctly as your marital status directly affects the benefits and credits you may be entitled to. The Canada Revenue Agency (CRA) calculates benefits such as the Canada Child Benefits, GST/HST credit, and the Working Income Tax Benefit based on your combined family income.

Reporting incorrect marital status can potentially result in the repayment of benefits received. To learn more about marital status changes, read our blog article "Importance of Informing CRA of Marital Status Change".

  • Missing the Tax Filing Deadline

Missing the tax filing deadline can have various consequences, including delayed refunds, late penalties, and interest charges. It's crucial to be aware of the deadline specific to your situation. For employed individuals, the deadline is typically April 30th, while self-employed individuals have until June 15th to file their taxes. To ensure you don't miss any 2024 tax deadlines, be sure to read our article on the various deadlines for individuals and businesses.

  • Not Filing Electronically

If you have never submitted your taxes electronically, you are overlooking numerous advantages. Firstly, it is significantly quicker and simpler compared to filing on paper. Importantly, it also offers greater accuracy. The CRA handles electronic filings with much greater speed and efficiency than paper ones, reducing the likelihood of errors that could potentially delay your refund.

How to Fix a Mistake on Your Tax Return in Canada?

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When it comes to correcting errors on your Canadian tax return, there are several methods you can use. Let's explore the different ways to request changes:

1. Online via CRA MyAccount

If you filed your tax return electronically using NETFILE or EFILE, you can make changes through the CRA MyAccount portal. Logging into your account and selecting the "Change my return" option allows you to enter the necessary adjustments. The online tool allows you to select the tax year you wish to modify and input the line numbers and corresponding figures to rectify or include information.

You cannot use the "Change my return" feature to request changes for the following:

  • Tax returns that have not been assessed yet
  • Tax returns that have been reassessed 8 times in the same tax year
  • Bankruptcy returns
  • Returns filed prior to a bankruptcy return
  • Returns filed for international or non-resident clients, even if they are considered Canadian Residents, newcomers to Canada, or individuals who left Canada during the year

You must request a change of return by mail for any of the above situations.

2. ReFile

ReFile is a service available to taxpayers who filed their returns electronically through certified software. It allows for changes to assessed returns within the last four years. However, there are exceptions to the eligibility for using ReFile. Detailed information about ReFile can be found on the CRA's website.

3. Mail

For those who prefer traditional methods, requesting changes by mail is an option. Fill out Form T1-ADJ, T1 Adjustment Request, and mail it to your local tax center. Ensure that you include copies of all supporting documents, such as receipts and slips, related to the adjustments being made. The processing time for mail-in adjustments is typically longer than online requests, ranging from several weeks to a couple of months.

The CRA Voluntary Disclosure Program (VDP)

In situations where errors or omissions on your tax return may result in penalties, the CRA has established the Voluntary Disclosure Program (VDP). This program allows taxpayers to rectify mistakes made on previously filed returns or file overdue returns without facing penalties or prosecution.

To be eligible for the Voluntary Disclosure Program, certain criteria must be met. The CRA under the new Voluntary Disclosure Program sets out the following five conditions

  1. The disclosure must be voluntary, meaning that the CRA should have no prior knowledge of the tax issue being disclosed.
  2. The disclosure must be complete, including all relevant information for the tax years affected by the error or omission.
  3. The taxpayer must owe taxes as a result of inaccurate or missing tax filings. The VDP does not apply to situations where a taxpayer is eligible for tax refunds.
  4. The tax returns being disclosed must be at least one year past the filing due date, unless part of a broader disclosure for older years.
  5. The taxpayer is required to estimate and pay the tax owing upfront as part of the disclosure process.

If you are uncertain about whether this program is suitable for you, NBG Chartered Professional Accountants can provide guidance on submitting your application under the CRA's voluntary disclosure program.

Conclusion

In conclusion, while errors on tax returns can be stressful, the Canadian tax system provides avenues for correction. Whether it's through online tools, mail-in requests, or the CRA's Voluntary Disclosure Program, taxpayers have opportunities to rectify mistakes and ensure compliance. By understanding common errors, seeking professional assistance when needed, and staying informed, you can navigate the tax filing process with confidence and peace of mind.

If you are looking for an accountant in Hamilton for professional guidance on filing your tax returns and ensuring that you are properly claiming all deductions and credits you are entitled to, contact us today. We are a full-service accounting firm in Hamilton that have experienced tax accountants to handle all your tax needs.

If you want to learn more about other tax and accounting topics, explore the rest of our blog!


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

2024 Tax Deadlines in Canada: Important Dates for Filing Your Taxes

As we step into the new year, it's crucial for individuals and businesses in Canada to stay on top of their 2024 tax deadlines. Filing taxes and meeting the deadlines set by the Canada Revenue Agency (CRA) is essential to avoid penalties and hefty interest charges. In this article, we'll walk you through the key 2024 tax deadlines for both personal and corporate taxes.

Penalties and Interest Rates for Late Tax Filings

Before we delve into the specific personal and corporate tax deadlines, we want to highlight the following:

  • Even if a taxpayer is unable to pay their balance by the due date, they should ensure to at least file their tax return by the due date. This will help you to avoid late filing penalties, which are based on the balance payable and you will only be subject to interest on the balance owing. Currently, the late filing penalty is calculated as 5% of your outstanding balance plus an additional 1% for each full month your payment is late, up to a maximum of 12 months.
  • Due to the increase in interest rates, the amount of interest charged on late or overdue balances by CRA is 10% in 2024, which is significantly higher compared to prior years. It's important to note that interest charges are not a tax-deductible expense.

2024 Tax Deadlines - Personal

Tax Deadlines for Individuals

For the calendar year 2023, the deadline to file your individual tax return (those who are not self-employed) and make payment is April 30, 2024. This deadline applies to individuals who don't report business income on their tax return. It's crucial to ensure that your tax return is filed and any balance owing is paid by this date to avoid penalties and interest charges.

Tax Deadlines for Sole Proprietors

If you or your spouse or common-law partner is a sole proprietor and reports business income on your tax return, the deadline for filing your 2023 income tax return is June 15, 2024. However, since June 15th, 2024 falls on a Saturday, the deadline to file your tax return is June 17, 2024 but any taxes owing must still be paid by April 30, 2024. This means that even if you don't have your tax return ready by April 30, 2024, you should estimate the amount of taxes owing and make the payment to avoid interest charges.

Tax instalments for Individuals

Tax instalments are another important aspect to consider when managing your tax obligations. If you are required to make tax instalments, the due dates for individuals for the 2024 tax year are:

  • March 15
  • June 15
  • September 15
  • December 15.

As a sole proprietor, if you need to make instalment payments, you will receive guidance on the payment amounts and deadlines from the Revenue Canada through mail or by accessing "my account" online.

2024 Tax Deadlines - Corporate

For small businesses operating as corporations, it's crucial to be aware of the specific 2024 tax deadlines

The deadline for filing corporate tax returns is generally 6 months after the corporation's year-end. For example, if your corporation has a year-end of December 31, 2023, the tax return filing deadline would be June 30, 2024. However, it's important to note that the filing deadline may vary based on the specific year-end date of your corporation.

In cases where the last day of the tax year is not the last day of a month, the tax return is due on the same day of the 6th month after the year-end. For instance, if your corporation's year-end is July 15, 2023, the tax return would be due on January 15, 2024.

Corporate Taxes Owing

The due dates for corporate taxes owing are earlier than the filing deadlines for tax returns. Generally, corporate taxes are due 2 months after the year-end. However, there is an exception that applies to many Canadian Controlled Private Corporation (CCPCs). If your corporation meets certain criteria, the taxes owing are due 3 months after the year-end. The criteria for the exception are as follows:

  1. The corporation is a Canadian Controlled Private Corporation.
  2. The corporation claimed the small business deduction for the current or previous year.
  3. The corporation and all associated corporations (if applicable) had taxable income less than $500,000 in the previous year.

Hence, a corporation that is a non-CCPC with a December 31st, 2023 year-end, would have to pay any balance owing on or before February 29, 2024 to avoid interest charges. If you are a CCPC, you would need to pay any balance on or before March 31st. It's important to consult with your tax accountant to ensure that you comply with the specific deadlines for your corporation's tax returns and tax payments.

Instalments for Corporations

For corporations, instalment payments are typically required if your taxes payable exceed a certain threshold. The due dates for instalment payments will depend on your filing status and previous year's tax liability. It's important to consult with your accountant or tax advisor to determine the specific instalment due dates and amounts for your corporation.

2024 Tax Deadlines - GST/HST

If your business is registered for Goods and Services Tax (GST) or Harmonized Sales Tax (HST), the specific deadlines for filing your returns and making payments will depend on whether you are a monthly, quarterly, or annual filer. The following chart illustrates the filing and payment deadlines for different types of filers.

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Instalments for GST/HST Annual Filers

If your business is an annual filer for GST/HST and your net GST/HST payable for the previous fiscal year was $3,000 or more, you may be required to make quarterly instalment payments for the current fiscal year. The specific due dates and amounts will depend on your individual tax situation. It's crucial to ensure that you make these instalment payments on time to fulfill your GST/HST obligations.

Note: Monthly and quarterly GST/HST filers do not need to make instalment payments for GST/HST.

Other Tax Deadlines

RRSP Contribution Deadline

For individuals looking to contribute to their Registered Retirement Savings Plan (RRSP) for the 2023 tax year, the deadline is February 29, 2024. It's important to note that exceeding the maximum allowable contribution amount may result in penalties. Therefore, it's crucial to review your contribution limits and ensure that you stay within the prescribed limits.

T4 and T5 Deadline

For sole proprietors and corporations who pay employees via payroll, a T4 slip must be filed by February 29, 2024. For corporations who paid a dividend to their shareholder, a T5 slip must be filed by February 29, 2024. Late filing T4 or T5 slips or failing to file them all together is a $100 penalty per slip up to a maximum of $7,500.

Conclusion

Navigating the world of tax deadlines can be complex, but with the right information, you can stay on top of your obligations and avoid penalties. Whether you're an individual taxpayer or a small business owner, understanding the specific 2024 tax deadlines is crucial for maintaining compliance with the CRA. Be sure to mark these dates on your calendar and consult with a tax professional to ensure that you meet all your tax obligations.

If you are looking for an accountant in Hamilton to provide professional guidance on your filing and payment obligations, contact us.

To learn more about other tax and accounting topics, explore the rest of our blog!


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

How Do I Pay CPP and EI When Self-Employed?

‍How do I pay CPP and EI when self-employed? This is a common question often asked by self-employed individuals. Generally, two areas where self-employed individuals differ from regular employees are contributions to the Canada Pension Plan (CPP) and Employment Insurance (EI). In this article, we will walk you through the process of paying CPP and EI as a self-employed individual. We'll cover everything from who is considered self-employed to the specific contribution rates and deadlines. So, whether you're a sole proprietor, freelancer, or independent contractor, this article will provide you with the information you need to navigate the complexities of CPP and EI.

Who is Considered Self-Employed?

The Canada Revenue Agency (CRA) recognizes several types of self-employed individuals, including sole proprietors, business partners, freelancers, independent contractors, and those involved in direct sales. Essentially, if you earn income on your own outside of traditional employment, you are considered self-employed by the CRA. To determine employee vs self-employed status, its important to look at the various factors that CRA considers. If you are still unsure about your employment status, you have the option to ask CRA for a ruling, so they can determine whether you are an employee or self-employed and whether your employment is pensionable or insurable.

CPP for Self-Employed Individuals

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CPP is a mandatory program that provides retirement income to individuals working in Canada. The amount you receive as a CPP retirement benefit when you retire is a function of how much you paid into the program during your working years. As a self-employed individual, it's important to understand your responsibilities and contributions to the CPP.

Who Needs to Contribute to CPP?

If you're between the ages of 18 and 70 and earn more than $3,500 per year, you are required to contribute to the CPP. This applies to both regular employees and self-employed individuals.

CPP Contributions - Key Differences for Self-Employed

For CPP, the key difference for self-employed individuals is the contribution rate (and corresponding contribution amount). For regular employees, CPP contributions are shared between the employee and the employer. However, as a self-employed individual, you have the responsibility of both the employee and employer contributions to the CPP. This means you'll need to contribute twice the annual percentage up to the yearly maximum.

The CPP contribution rates for self-employed individuals are subject to annual adjustments. It's essential to check the CRA website for the most up-to-date rates. For example, for the year 2023, the yearly maximum pensionable earnings (YMPE) is $66,600, and the self-employment contribution rate is 11.9%. This means that as a self-employed individual, you will contribute 11.9% of your net self-employment income, up to the maximum contribution amount of $7,508.90. To calculate your annual CPP contributions at tax time, you will need to refer to Form 5000 – Schedule 8 (CPP Contributions on Self-Employment and Other Earnings to calculate your annual contributions. Quebec residents should use Form 5005 – Schedule 8 – Quebec Pension Plan Contributions.

Please note if you are still unsure of the amount you should be contributing to your CPP, we recommend contacting a professional tax accountant.

Benefits of CPP Contributions

Contributing to the CPP has several advantages for self-employed individuals. First and foremost, it helps build a foundation for your retirement income. By making regular CPP contributions, you are securing a portion of your income for your retirement years. Additionally, contributing to the CPP has several benefits:

  1. Tax deduction: When you complete your tax return, you can claim a deduction for the "employer half" of the CPP contribution. This deduction can help reduce your overall taxable income.
  2. Federal tax credit: You are also eligible for a 15% federal tax credit for the "employee half" of the CPP contribution. This credit further reduces your tax liability.

Other Options for CPP

Self-employed individuals have some flexibility when it comes to CPP contributions. Here are some alternatives to consider:

  1. Incorporation: If you're a sole proprietor, incorporating your business provides the option to pay yourself a salary or dividends. By paying yourself a lower salary and taking the remaining income as dividends, you can reduce your CPP premiums.
  2. Pension plans: Incorporated individuals can participate in pension plans, allowing them to save for retirement while potentially reducing CPP premiums. However, it's important to note that sole proprietors do not have these options and must pay CPP premiums based on their net self-employment income.
  3. Alternative investments: Consider taking out a dividend or T4 income annually to max our your TFSA (tax-free savings account), and then use the TFSA as a replacement for your CPP. Another option is to use a corporate owned insurance policy to grow cash value on a tax-sheltered basis.

It's essential to evaluate these alternatives based on your business structure, financial goals, and long-term plans. Refer to our article that answers the question Should I Incorporate My Business that can further provide more guidance on whether incorporating is the right decision for you.

EI for Self-Employed Individuals

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While regular employees are required to pay EI premiums, self-employed individuals have the option to opt in or out of the EI benefits program. If they opt into the EI benefits program for self-employed, they have access to certain EI benefits in the event of interruption of their income. Some of these benefits include:

  1. Maternity benefits: For individuals away from work due to pregnancy or recent childbirth.
  2. Parental benefits: Available to parents on leave to care for their newborn or newly adopted child.
  3. Sickness benefits: Intended for those unable to work due to medical reasons.
  4. Family caregiver benefits for children: Available to caregivers supporting critically ill or injured individuals under 18.
  5. Family caregiver benefits for adults: Offered to caregivers aiding critically ill or injured individuals aged 18 or over.
  6. Compassionate care benefits: Reserved for caregivers tending to individuals requiring end-of-life care.

Each type of special benefit has its own maximum weekly rates of pay, as well as the maximum number of weeks you can collect the benefit. It’s important to know these maximums and you can find an easy to read chart outlining them here. Please note that the regular benefits are not availble through the self-employed program under Employment Insurance.

If you choose to opt into the EI program, you will need to register through your My Service Canada Account and pay the same EI premium rate as regular employees. EI premiums for self-employed individuals are paid annually when you file your annual Income Tax and Benefit Return using Schedule 13 (Employment Insurance Premiums on Self-Employment and Other Eligible Earnings). It's important to note that self-employed workers are exempt from paying the employer's portion of EI premiums, unlike regular employees.

Eligibility and Payment of EI Premiums

To be eligible for EI benefits as a self-employed individual, you must meet certain criteria. You must:

Another thing to keep in mind is that if you've never claimed benefits, you can opt out of the program at the end of any tax year. However, once you've claimed benefits, you'll need to continue contributing to the program as long as you're self-employed. Further, it's also crucial to note that if your business fails after paying into the system for 12 months, you will be ineligible for any benefits.

Conclusion

As a self-employed individual, understanding how to pay into the CPP and EI programs is crucial for small businesses. By contributing to the CPP, you are securing a portion of your income for retirement. Opting into the EI program provides access to specialized benefits, but it's important to weigh the benefits against the potential pitfalls and consider alternatives that align with your business and financial goals. Further, by properly calculating and remitting CPP/EI contributions, self-employed individuals can ensure compliance with their payroll remittances and maximize their benefits.

Remember, this guide is intended to provide general information and should not replace personalized advice from a qualified tax professional. If you’re still unsure and are looking for an accountant in Hamilton to provide professional guidance, contact us.

If you want to learn more about other tax and accounting topics, explore the rest of our blog!


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

How to Incorporate a Company in Ontario?

Starting a business is an exciting endeavor, but one of the most crucial decisions you'll need to make is the legal structure of your company. Incorporating your business in Ontario can provide numerous benefits, such as separating your personal and business finances and protecting your personal assets from liability. However, the process of incorporation can be complex and time-consuming. In this comprehensive guide, we will break down the steps you need to follow to incorporate a company in Ontario successfully.

Understanding Incorporation

Incorporation is a legal process that establishes a separate legal entity for your business. Unlike sole proprietorship or partnership, a corporation exists as a distinct entity from its owners, known as shareholders. When incorporating, the ownership of the business is represented by shares, and each owner receives ownership shares proportionate to their percentage of ownership. This allows for flexibility in transferring ownership in the future.

Corporations can be classified as either public or private. Public corporations trade their shares on stock exchanges, while private corporations do not have this obligation. Incorporation provides various benefits, including limited liability, tax advantages, access to capital, and the ability to have continuous existence. The question of "Should I incorporate my business", needs to be carefully considered after weighing the benefits and disadvantages of incorporation. In addition, the tax advantages of incorporating a private corporation that is a Canadian Controlled Private Corporation should also be considered.

Should I Incorporate Federally or Provincially?

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When deciding to incorporate your business, you have the choice of incorporating at the federal level or provincial level. Let's look at some of the differences between the two:

Provincial Incorporation

If you plan to operate your business solely within Ontario, incorporating provincially is the most common choice. By incorporating provincially, your business is bound by the legal regulations specific to that provincial jurisdiction, and your corporation's name is protected only within the province of incorporation. If you later decide to do business out of another province, you will need to incorporate in that province separately.

When incorporating your business provincially, you can find all the forms required from the associated provincial business registry, such as the Ontario Business Registry. Alternatively, you can also seek our professional business incorporation services in Hamilton, to ensure that you meet all the legal requirements.

Federal Incorporation

If you intend to operate your business in multiple provinces or have plans for international expansion, incorporating federally may be more suitable. Federal incorporation grants national protection for your business name and allows you to operate in any province. However, the process of federal incorporation is generally more time-consuming than provincial incorporation. For federal incorporation, you can submit the required information to incorporate through the Online Filing Centre with Corporations Canada.

How Much Does it Cost to Incorporate a Company in Ontario?

The cost to incorporate a company in Ontario depends on the method you choose. Incorporating by mail or online incorporation through the Ontario Business Registry incurs a fee of $300. However online applications can also be facilitated through a service provider that operates under contract with the Ontario Ministry of Government and Consumer Services. Additional costs will be imposed by service providers for their online services. The two service providers used by the Ministry to incorporate a company in Ontario are:

How Long Does it Take to Incorporate a Company in Ontario?

The timeframe to incorporate a company in Ontario varies depending on the method chosen. Incorporating online through the Ontario Business Registry can be completed in as little as a few hours. By mail, the process may take up to 15 business days. Federal incorporations generally take longer, with a processing time of 1-2 days. The reason for this is that when going through the Federal corporation process, an examiner carefully assesses the application, with a specific focus on the NUANS report. The aim is to verify that there are no conflicting business names.

Steps to Incorporate a Company in Ontario

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There are several steps and requirements to incorporate a company in Ontario. Here is a general outline of the process:

Step 1: Choose a Business Name

  • You must first determine if you prefer to use a company name, like Angel's Cakes., or a numbered company, such as 1234567 Ontario Inc. Often, a numbered company is preferred when the name of the business will not be advertised, such as a real estate holding company.
  • If you prefer having a named company for advertising purposes or name protection purposes, you will need to conduct a name search or order a NUANS report. The purpose of the NUANS report is to ensure your desired name is available and distinguishable from other businesses in Ontario. The NUANS report is provided to the provincial examiner within the Ministry of Government and Consumer Services for review along with the incorporation documents. Please note that as mentioned above, the name is only protected within the same jurisdiction. Unlike federal incorporation, when you incorporate a company in Ontario, name protection is not available Canada-wide. The name search has to be done using the services of a NUANS name search provider.

Step 2: Create the Articles of Incorporation

  • Generally, individuals seek the assistance of a lawyer to navigate through this process. This document outlines the regulations and purpose of the corporation. It includes information such as the corporation's name, registered office address, share structure, and the rights and responsibilities of shareholders and directors. The share structure also specifies the number of shares within the organization, including whether there is only one category of shares or if there are separate classes for voting and non-voting shares. By utilizing the services of a lawyer, you can ensure that the incorporation of your small business complies with the Business Corporations Act and any additional regulations specific to your industry.

Step 3: Submit the Application

  • Once you have the completed Articles of Incorporation, file them with the Ontario Ministry along with the required fees. If choosing to incorporate online, submit the application electronically through the Ontario Business Registry or service provider. When the incorporation is approved, you will receive the Certificate of Incorporation as part of the finalized incorporation documents.

Step 4: Create an Online Account with Service Ontario

  • Set up a One-key account and a ServiceOntario account to facilitate the registration process of your business. This will allow you to link your business to your Service Ontario account and thereby allow you to access the Ontario Business Registry, which is used to update your company information with the Ministry, file your annual returns etc,

Step 5: File Initial Notice

  • Once your account is set up with the Ontario Business Registry, use the online services to file your Initial Notice, which is required within 60 days after the completion of the incorporation. If the filing is not completed within the required 60-day time frame, the Province of Ontario can cancel the incorporation for non-compliance. Please note that the initial notice is a one-time filing requirement for an Ontario corporation but going forward, there will be a requirement to file an Annual Return for your corporation. This can also be done online through your Ontario Business Registry and must be filed within six months of your fiscal year-end. Alternatively, you can also use the private sector service providers listed above to file your Initial Notice and Annual Return. Typically the service providers will charge a fee for filing these returns.

After the incorporation of the Ontario company, there are a few other things required. These include preparing a minute book and tax account set ups with Canada Revenue Agency.

Conclusion

In conclusion, to incorporate a company in Ontario or Canada, understanding the process and following the necessary steps is crucial for a successful incorporation. Whether you choose provincial or federal incorporation, ensure compliance with the relevant laws and regulations. Consulting with professionals, such as tax accountants or lawyers, can provide valuable guidance throughout the process.

If you are looking for an accountant in Hamilton for professional guidance on incorporating your business in Ontario, contact us today. We are a full-service accounting firm in Hamilton that provides professional incorporation services to ensure your company is set up properly.

If you want to learn more about other tax and accounting topics, explore the rest of our blog!


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

When to Use CRA Voluntary Disclosure Program?

In the complex world of taxes, mistakes can happen. Whether it's a simple oversight or a deliberate omission, the consequences of inaccurate tax filings can be daunting. However, the Canada Revenue Agency (CRA) offers a solution through its Voluntary Disclosure Program. This program allows taxpayers to correct their past tax errors without facing criminal prosecution and in some cases, penalties. In this article, we will explore the benefits, eligibility criteria, and other important aspects of the Voluntary Disclosure Program.

What is the Voluntary Disclosure Program?

The Voluntary Disclosure Program, commonly known as VDP, is a program offered by the Canada Revenue Agency to allow taxpayers to correct errors or omissions in their tax returns. This program is designed to encourage taxpayers to come forward voluntarily and rectify their mistakes, providing prosecution relief and in certain cases, penalty and interest relief.

Benefits of the Voluntary Disclosure Program

Participating in the Voluntary Disclosure Program can offer several benefits to taxpayers. Firstly, as mentioned above, it provides relief from penalties that would typically apply to errors for failing to file or filing incorrectly or other omissions. This can result in significant savings for taxpayers who may have otherwise faced substantial penalties.

Secondly, the VDP allows taxpayers to correct their tax filings and become compliant with the tax laws. By voluntarily coming forward and rectifying their errors, taxpayers can avoid the stress and uncertainty of potential CRA audits or investigations. It provides an opportunity to start with a clean slate and ensure future tax compliance.

Additionally, under the VDP, taxpayers may be eligible for some interest relief on the taxes owing. The relief is typically half of the total interest owed, providing further financial benefits to participants.

Furthermore, by participating in the Voluntary Disclosure Program, taxpayers can avoid criminal prosecution related to the disclosed information. The CRA agrees not to pursue criminal charges for the disclosed tax matters, providing peace of mind and legal protection.

However, it should be noted that the purpose of the program is not to grant taxpayers an opportunity to avoid paying the taxes they owe but rather to offer relief for mistakes that would likely attract a penalty. As such, CRA offers a higher level of relief to those who are correcting an error that is made unintentionally rather than to taxpayers who intentionally avoid paying their tax obligations. The VDP is available for various types of tax disclosures, including income taxes, import duties, GST/HST, excise taxes, and source deductions.

Limited Relief vs. General Relief (Changes as of March 1, 2018)

On March 1, 2018, the CRA modified its policies to narrow the eligibility and to ensure taxpayers who were intentionally avoiding their tax obligations are not provided relief under the VDP. Hence the CRA introduced two streams: Limited Relief and General Relief. These streams determine the level of tax relief available to taxpayers based on their specific circumstances. Let's explore the key differences between the two streams:

  • Limited Relief: The Limited Relief stream is reserved for taxpayers, where CRA has reason to believe that the non-compliance was a result of the taxpayers intentionally avoiding their tax obligations. Under this stream, taxpayers are eligible for relief from criminal prosecution charges and gross negligence penalties. However, there is no interest relief or other penalty relief beyond gross negligence penalties.
  • General Relief: The General Relief stream applies to all other taxpayers who do not fall within the Limited Relief category. This stream offers relief from penalties, including gross negligence penalties, and provides some interest relief on taxes. The interest relief is typically half of the total interest owed.

Once you file the application, which program the taxpayer qualifies under depends on a number of factors set out by the CRA such as the dollar amounts involved, the number of years of non-compliance, the sophistication of the taxpayer, and how long it ultimately took the taxpayer to correct their error.

Tax Situations That Can Benefit From Applying

The Voluntary Disclosure Program can be used to correct errors under a wide range of tax situations. Some common examples include where, a taxpayer:

  • failed to report taxable income accurately,
  • claimed ineligible expenses on a tax return,
  • did not file tax returns for previous years,
  • did not report income from foreign sources that is taxable in Canada on the tax return, and
  • did not file required information returns, such as the Foreign Income Verification Statement (Form T1135).

These errors can occur due to various reasons, such as oversight, misunderstanding of tax laws, or intentional non-compliance. In many cases, if a taxpayer hasn't filed for the previous year or several previous years, filing a form or return late can result in an automatic penalty. In those cases, it is beneficial to go through the VDP to seek relief on some penalties and interest.

Eligibility for the Voluntary Disclosure Program

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To be eligible for the Voluntary Disclosure Program, certain criteria must be met. The CRA under the new Voluntary Disclosure Program sets out the following five conditions:

  1. The disclosure must be voluntary, meaning that the CRA should have no prior knowledge of the tax issue being disclosed.
  2. The disclosure must be complete, including all relevant information for the tax years affected by the error or omission. It is crucial to provide accurate facts and documentation to support the disclosure.
  3. The taxpayer must owe taxes as a result of inaccurate or missing tax filings. The VDP does not apply to situations where a taxpayer is eligible for tax refunds.
  4. The tax returns being disclosed must be at least one year past the filing due date, unless part of a broader disclosure for older years.
  5. The taxpayer is required to estimate and pay the tax owing upfront as part of the disclosure process.

It is important to note that the CRA has the discretion to accept or reject voluntary disclosures. Therefore, it is essential to ensure that all eligibility criteria are met and that the disclosure is prepared accurately and thoroughly.

Seeking Professionals: Lawyers and Accountants

While taxpayers can prepare and submit their voluntary disclosure applications independently, it is advisable to seek professional assistance, especially in complex cases. Lawyers and tax accountants can provide valuable guidance throughout the process and ensure that the application meets the requirements of the CRA.

In straightforward cases, where no significant sums or complex issues are involved, a chartered professional accountant (CPA) can handle the VDP application on behalf of the taxpayer. However, in cases where significant amounts or risks are at stake, involving an experienced lawyer specialized in tax disputes can be beneficial. The lawyer can act as the primary adviser, communicate with the CRA, and engage the CPA to prepare the necessary filings.

It is important to involve professionals early in the process to assess the eligibility for the program, evaluate the potential risks and benefits, and provide strategic advice to ensure a successful outcome.

Conclusion

The Canada Revenue Agency's Voluntary Disclosure Program offers taxpayers a lifeline to rectify their tax errors and omissions. By voluntarily coming forward and correcting their past tax filings, taxpayers can avoid penalties, criminal prosecution, and the stress of potential audits or investigations. The program provides relief from penalties, interest, and potential legal consequences, allowing taxpayers to start fresh and ensure compliance with the tax laws. However, it is important to meet the eligibility criteria, prepare a comprehensive disclosure, and consider involving professionals to navigate the complexities of the process. By taking advantage of the Voluntary Disclosure Program, taxpayers can correct their tax mistakes and enjoy peace of mind in their tax affairs.

If you are looking for an accountant in Hamilton for professional guidance on submitting your application under the CRA's voluntary disclosure program, contact us today. We are a full-service accounting firm in Hamilton that have experienced tax accountants that can ensure your disclosure is handled correctly.

If you want to learn more about other tax and accounting topics, explore the rest of our blog!


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

What Is A Minute Book and Why Your Corporation Needs One?

What is a minute book? As a business owner, you may have heard of a minute book, but do you know what it is and why it's important for your business? In this article, we will dive into the details of what a minute book is, its purpose, and why every corporation should have one. We will explore the key components of a minute book, the legal requirements surrounding it, and the benefits it provides.

What is a minute book?

A minute book is essentially a collection of corporate documents that track the activities of an incorporated company. It serves as a repository for important records and decisions made by the company, including dividend payouts, share issuances, loans, shareholder agreements, financial transactions, and bonuses paid to officers and directors. A minute book provides a comprehensive historical record of a company's actions and is essential for maintaining compliance with legal requirements.

With respect to why your corporation needs one, the answer to that is simply that a corporation is required by law to maintain records that comprise the contents of its minute book. This is the case whether the corporation is incorporated federally pursuant to the Canada Business Corporations Act or provincially pursuant to the Business Corporations Act (Ontario) or another jurisdiction.

What is included in a minute book?

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A properly maintained minute book should include various documents that are essential for the smooth operation and legal compliance of a corporation. Some of the key documents that should be included in a minute book are:

  1. Articles of Incorporation: These legal documents outline the fundamental details of the corporation, such as its name, registered office address, number of directors, share structure, and the rights and responsibilities of shareholders and directors.
  2. General By-Laws and Amendments: By-laws specify the rules and procedures that govern the corporation's operations. They define the structure and procedures for conducting meetings, electing directors, appointing officers, and making corporate decisions.  Amendments to the by-laws should also be recorded. By-laws are crucial for ensuring the smooth functioning of your corporation, and they should be included in your minute book.
  3. Resolutions and Annual Shareholder Meeting Minutes: Resolutions document important decisions made by the board of directors and shareholders, while meeting minutes provide a record of discussions and actions taken during meetings. These documents record important matters such as the appointment or removal of directors, approval of financial statements, declaration of dividends, and major corporate transactions. Resolutions and meeting minutes provide a clear record of the decision-making process and the rationale behind each decision.
  4. Share Certificates and Share Transfer Registers: These documents track the ownership and transfer of shares within the corporation, including details such as the shareholder's name, share class, and number of shares held. This information is vital for maintaining accurate ownership records and facilitating communication with shareholders.
  5. Board of Directors Register: This register contains the names and contact information of the directors serving on the board.
  6. Officers Register: Similar to the board of directors register, this register contains the names and contact information of the officers appointed by the corporation.
  7. Financial Statements: Financial statements and reports, including annual reports and audited financial statements, should be included in the minute book. These documents provide a snapshot of the corporation's financial health, performance, and compliance with accounting standards. They are essential for demonstrating the company's financial viability and meeting reporting requirements.
  8. Shareholder Agreements (if any): Any unanimous shareholder agreements signed by the shareholder should be included in the minute book.
  9. Notices Filed: Any notices or filings made with government agencies, such as changes in directors, changes in registered office addresses, shareholder agreements, or other important corporate events, should be included in the minute book.

What are the benefits of maintaining a minute book?

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Maintaining a minute book is not only a legal requirement but also a crucial practice for the smooth operation and protection of a corporation. Here are several reasons why having an up-to-date minute book is important:

One of the primary benefits of maintaining a minute book is ensuring legal compliance. By keeping accurate and up-to-date records of corporate activities, a business can demonstrate its adherence to the requirements of the CBCA or other relevant jurisdictions. This helps minimize the risk of fines, penalties, or legal disputes arising from non-compliance.

Facilitates Audits and Reviews

Government agencies, lawyers, and accountants may request access to a corporation's minute book for audits, reviews, or to provide specific advice. Having an organized and up-to-date minute book ensures that the necessary information can be readily provided, saving time and potential legal complications.

Establishes Credibility for Financing and Transactions

When seeking financing, potential lenders and investors may request access to the minute book to assess the corporation's financial health and compliance. A well-maintained minute book enhances the corporation's credibility and increases the likelihood of securing favorable financing terms.

Protects Shareholder Interests

Minute books play a crucial role in protecting shareholder interests. Accurate and complete records of share issuances, dividends, and shareholder agreements help prevent disputes and ensure fair treatment of shareholders.

Facilitates Business Transitions and Changes

During business transitions, such as selling the company or transferring ownership, the minute book becomes essential. Prospective buyers, lawyers, and accountants will review the minute book to assess the corporation's history and legal compliance, facilitating a smoother transition process.

Minimizes Tax Risks

Properly recording dividends, management fees, and bonuses in the minute book helps ensure accurate tax reporting. Failing to document these transactions can result in higher taxes, penalties, and fines.

When can a minute book be requested?

There are various situations where the minute book might be requested by government agencies, professionals, or parties involved in financial transactions. Some common scenarios include:

  • Your corporation wants to obtain financing
  • A tax audit by the Canada Revenue Agency (CRA)
  • A tax audit by the Workplace Safety and Insurance Board
  • A tax specialist requires access to the minute book for tax advice or corporate tax planning.
  • A shareholder(s) wants to sell their shares or make ownership changes
  • At the death of a shareholder
  • You and another corporation want to unite to form one corporation
  • A request to amend the articles of incorporation of your corporation
  • Ownership transfer of the corporation’s shares or assets to potential buyers
  • Real estate transactions that require proof of ownership

If you neglect to keep your minute book in good condition, you could face significant tax implications. In the event that any of the aforementioned scenarios arise and a demand is made to review your outdated minute book, your company may lose out on important business deals or crucial financing opportunities. The potential tax burden could amount to thousands of dollars, depending on your specific circumstances.

Conclusion

Incorporated businesses in Canada have a legal obligation to maintain a minute book, which serves as a comprehensive record of the company's activities, decisions, and compliance with legal requirements. Having an up-to-date and well-organized minute book is crucial for demonstrating compliance, facilitating audits, protecting shareholder interests, and enabling smooth business transitions.

If you have been managing the minute book for your corporation and are struggling to stay organized, consider delegating this task to your lawyer or accountant. The cost of maintaining a minute book is well worth the relief it brings, allowing you to focus on other pressing matters. Additionally, entrusting professionals ensures that your minute book will always be kept up-to-date, eliminating any unexpected requests or surprises. If you are looking for an accountant in Hamilton for professional guidance on maintaining your minute book, contact us today. We are a full-service accounting firm in Hamilton that have experienced accountants who can handle the complexities of minute book maintenance, annual filings, and more.

If you want to learn more about other tax and accounting topics, explore the rest of our blog!


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

Can I Claim Home Office Expense Deduction?

In recent years, there has been a significant increase in the number of Canadians working from home. With the rise of remote work and self-employment, many Canadians are utilizing their homes as their primary place of business. This shift in the work landscape has led to an increased interest in the tax implications of having a home office. The Canada Revenue Agency (CRA) recognizes that individuals incur additional expenses when working from home and allows you to claim a home office expense deduction on your tax return to reduce taxable income. However, it is important to understand the rules and guidelines set by the CRA to ensure that your claim is valid and avoid any potential issues

In this article, we will provide valuable information and insights to help you navigate the process of claiming a home office expense deduction on your tax return. We will cover the eligibility criteria, eligible expenses, specific guidelines for self-employed individuals and employees, and the common mistakes to avoid.

Home Office Expense Deduction for Self-Employed Individuals

To be eligible to claim a home office expense deduction, you must meet certain criteria set by the CRA. These criteria are designed to ensure that the home office is used for business purposes and that the expenses claimed are reasonable and justifiable. If you are self-employed, you can deduct home office expenses if you meet one of the following conditions:

  • Principal Place of Business

The first criterion is that the home office must be your principal place of business. This means that you use your home office more than 50% of the time for business-related activities. It should be the primary location where you carry out your work and conduct the majority of your business operations.

  • Regular and Continuous Use

In addition to being your principal place of business, the home office must be used on a regular and continuous basis for meeting clients, customers, or patients. This requirement applies to individuals who use their home office to meet with external parties as part of their business activities. Regular and continuous use implies that the home office is an essential and ongoing component of your business operations.

It is important to note that occasional or sporadic use of a home office may not meet the criteria for claiming the home office expense deduction. The CRA expects the home office to be actively and consistently used for business purposes.

Calculating the Home Office Deduction

Once you have determined that your home office meets the eligibility criteria, you can proceed with calculating the home office expense deduction. The deduction is based on a proportionate calculation method that considers the size of your home office relative to your entire home.

Proportionate Calculation Method

The proportionate calculation method allows you to deduct a reasonable portion of your household expenses that are directly related to the operation of your home office. The deduction is calculated by determining the percentage of your home's square footage that is used for your home office.

To calculate the percentage, divide the square footage of your home office by the total square footage of your home (including areas such as bathrooms, kitchens, and hallways). For example, if your home office occupies 200 square feet in a 1000 square foot home, the calculation would be as follows:

200 / 1000 = 0.20 or 20%

This means that you can deduct 20% of your eligible home office expenses from your business income.

Eligible Expenses for Self-Employed Individuals

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If you are self-employed, the CRA allows you to deduct a variety of eligible expenses that are directly related to the operation of your home office. Some common eligible expenses include:

  • Mortgage interest: You can deduct the portion of your mortgage interest that corresponds to the size of your home office.
  • Utilities: Expenses such as water, heat, electricity, and internet can be deducted based on the proportionate calculation method.
  • Property taxes: The portion of your property taxes that applies to your home office can be claimed as an expense.
  • Maintenance: Costs associated with repairs and maintenance of your home office are eligible for deduction. This may include cleaning services for your office.
  • Rent: If you are renting your home, a portion of your rent can be claimed as an expense.
  • Insurance: Expenses related to home insurance coverage can be deducted based on the proportionate calculation method.

It is important to note that the expenses claimed must be directly related to the operation of your home office. Expenses that are unrelated to your home office or are considered personal expenses cannot be claimed as deductions. In addition, based on CRA guidelines, certain expenses that have been incurred on account of capital should not be fully deducted as home expenses. These can include items such as computers, printers, filing cabinets, chairs, desks, lamps etc. Since these are capital expenses, they should be deducted over a period of several years through the Capital Cost Allowance mechanism.

Lastly, note that one cannot use home expenses to create or increase a loss for the year. You do have the option to carry it forward to another taxation year. Furthermore, it is essential to accurately maintain records and documentation to support your claim in case of an audit.

Home Office Expense Deduction for Employees

Employees who work from home may also be eligible to claim a home office expense deduction from their taxable income, but the rules and restrictions are more stringent compared to self-employed individuals. To claim home office expenses as an employee, you must meet specific requirements outlined by the CRA.

Restrictions and Requirements

Whether you are a salaried employee or a commission-based employee, you can only claim home office expenses if you are required to pay for them yourself and your employer does not reimburse you. This means that if your employer provides a designated workspace or reimburses you for home office expenses, you cannot claim these expenses on your tax return.

To support your claim, your employer must complete Form T2200, Declaration of Conditions of Employment. This form certifies that you are required to use part of your home as a workspace for employment purposes and that you are not reimbursed for your expenses.

It is important to understand that the expenses you can claim as an employee are more limited compared to self-employed individuals. You cannot claim expenses such as mortgage interest or property taxes. However, you may be eligible to claim other eligible expenses, such as office supplies or phone and internet expenses, if they are not reimbursed by your employer.

Common Mistakes to Avoid

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When claiming a home office expense deduction, it is crucial to avoid common CRA audit triggers that could raise red flags with the CRA or result in the denial of your claim. By understanding these mistakes, you can ensure that your claim is accurate, reasonable, and in compliance with the CRA guidelines.

1. Inflated Home Office Expenses

One common mistake is claiming inflated home office expenses. It is important to be realistic and reasonable when determining the size and expenses of your home office. Claiming excessive expenses could trigger an audit from the CRA and result in further scrutiny of your other deductions and expenses.

2. Misclassifying Expenses

Another mistake to avoid is misclassifying expenses. It is essential to correctly categorize your expenses as either eligible or ineligible for deduction. Capital expenses, such as furniture or equipment purchases, are generally not deductible as home office expenses. These expenses may be subject to separate depreciation rules and should be handled accordingly. Similarly, the principal portion of your mortgage is not deductible.

3. Rounding Up Home Office Expenses

Rounding up your home office expenses is another mistake to be cautious of. While it may be tempting to simplify your calculations by rounding up, it is best to provide accurate and detailed figures. Rounding up may draw additional attention to your claim and could lead to further scrutiny from the CRA.

4. Failure to Break Down Expenses

Failing to break down your home office expenses into different categories can also raise concerns with the CRA. It is important to provide a clear breakdown of your expenses, separating them into relevant categories such as utilities, insurance, and maintenance. This level of detail helps to validate your claim and demonstrate that the expenses are directly related to your home office.

Conclusion

Claiming a home office expense deduction on your tax return can provide significant tax benefits for self-employed individuals and eligible employees. By understanding the eligibility criteria, calculating the deduction accurately, and avoiding common mistakes, you can maximize your tax savings and ensure compliance with the CRA guidelines.

It is recommended that you work with qualified tax accountants, to ensure that you can deduct all your home office expenses that you are entitled to claim. If you are looking for an accountant in Hamilton for professional guidance, contact us today. We are a full service accounting firm in hamilton that has experienced tax experts to cater to all your tax needs.

If you want to learn more about other tax and accounting topics, explore the rest of our blog!


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

How Alternative Minimum Tax Changes Could Impact You

The alternative minimum tax (AMT) is a tax system that ensures high-income individuals pay a minimum amount of tax, especially those who benefit from certain tax incentives and deductions that reduce the tax they owe to very low levels.

The Canadian federal government has proposed significant alternative minimum tax changes in the 2023 Federal Budget. These changes could have implications for high-income individuals who receive income from tax-preferential sources or have significant deductions that reduce their tax liability under ordinary tax rules.

In this article, we will explore the key changes proposed in the 2023 Federal Budget regarding the alternative minimum tax and how they could impact individuals. We will delve into the details of these changes, discuss who they will affect, and provide insights on how individuals can navigate the new AMT rules. For purposes of this article, we will only focus on the federal alternative minimum tax but some provinces also impose a provincial AMT, which could increase the tax payable under AMT even further.

 

What is the Alternative Minimum Tax?

The alternative minimum tax is an alternative tax calculation system designed to ensure that high-income individuals pay a minimum amount of tax. The AMT is calculated on "adjusted taxable income," which is determined by making specific adjustments to the taxpayer's regular taxable income. As such, a parallel tax calculation is used that allows fewer tax deductions, exemptions, and credits than under the regular income tax calculation. As a result, it can result in a potentially higher tax liability for individuals subject to its provisions.

Generally, if the tax calculated under the AMT system is more than the amount calculated under the regular tax system, the difference is the alternative minimum tax owing for the tax year. If the AMT surpasses the regular income tax, any extra tax paid can be carried forward for up to seven years to offset regular tax to the extent that regular tax exceeds AMT in the carryforward period. Essentially, this allows individuals to view the AMT as an advance payment of taxes that can be recovered within a seven-year timeframe.

Under the current alternative minimum tax system, the tax rate is a flat 15%, and individuals are granted a standard exemption of $40,000.

Proposed Changes to the Alternative Minimum Tax

The 2023 Federal Budget proposes significant changes to the alternative minimum tax regime. These changes aim to address perceived inequities and ensure a fairer taxation system for high-income individuals. Let's explore some of the key changes proposed in the budget and their potential impact:

Increase in AMT Exemption and AMT Rate

The budget proposes increasing the AMT exemption from $40,000 to $165,430 for 2023 and $173,000 for the 2024 taxation year. The exemption would also be indexed to inflation. Due to the increase in the exemption amount, very few Canadians will pay AMT and even high-income Canadians may not pay AMT if their only source of income is fully taxable employment, professional, or business income.

However, despite the increase in the exemption, the budget also proposes raising the AMT rate from 15% to 20.5% of adjusted taxable income. These changes aim to strike a balance between providing relief for some taxpayers while ensuring a fairer tax system overall.

Broadening the AMT base

Several revisions are proposed in order to expand the AMT base by placing additional restrictions on tax preferences such as exemptions, deductions, and credits. The key changes include:

1. Changes to Capital Gains and Losses - under the proposed changes, the capital gains inclusion rate has increased from 80% to 100% for purposes of calculating AMT adjusted taxable income. This change could result in a higher AMT liability for individuals who receive a significant portion of their income from these sources.

At the same time, capital loss carry-forwards and allowable business investment losses have been decreased from 80% to 50% deductible for AMT purposes. This change would limit the offsetting of AMT liability through the utilization of capital losses and business investment losses. Let's look at an example to see how these changed would impact the AMT calculation from current to proposed rules.

Example:

In the following example, let's assume an individual will sell qualifying small business shares in 2024, that will qualify for the lifetime capital gains exemption (LCGE). The fair market value of the private company shares is $900,000 with a nominal adjusted cost base. In addition, the taxpayer will also sell other capital property with a fair market value of $600,000 with an adjusted cost base of $200,000, resulting in a capital gain of $400,000. In addition, the taxpayer has a net capital loss carryforward of $100,000 from a prior year.

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As shown above, under the current rules, the taxpayer's minimum tax is $40,935 (amount in excess of regular tax) but the new AMT rules increase the taxpayer's minimum tax to $63,820.

2. Employee Stock Options Benefits - the proposed changes include 100% of employee stock option benefits in the calculation of adjusted taxable income for AMT purposes. Currently, only 50% of employee stock option benefits are included.

Example:

Let's assume that an employee exercises options to acquire publicly listed shares at an exercise price of $100,000 when the fair market value of the shares is $500,000, which means the stock option benefit is $400,000. Further, let's assume that these options qualify for the stock option deduction.

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As shown above, under the current rules, the taxpayer's minimum tax is nil as the tax calculated under the regular tax is higher. However, under the new rules, AMT is $2,302.

3. Donations of Publicly Listed Securities - for donors making in-kind donations to registered charities of shares, the proposed changes will include 30% of the capital gains on these shares in the calculation of the adjusted taxable income for AMT. Currently, there is zero inclusion of these gains in the calculation of the AMT.

4. Deductibility of Non-Refundable Tax Credits - most non-refundable tax credits, which are currently fully deductible, would become 50% deductible. These changes could result in a higher AMT liability for individuals who rely on non-refundable tax credits to reduce their tax liability.

5. Disallowing Various Deductions - currently, most deductions are allowed in the calculation of the adjusted taxable income for AMT. The new rules under alternative minimum tax propose that the following deductions would be 50% disallowed. These include:

  • interest and carrying charges incurred to earn property income;
  • deduction for limited partnership losses of other years;
  • non-capital loss carryovers;
  • employment expenses (other than those to earn commission income);
  • moving expenses; and
  • childcare expenses.

For a complete list of deductions that are now disallowed at 50%, refer to the link at CRA's website.

Who Will Be Affected by the Alternative Minimum Tax Changes?

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The proposed changes to the alternative minimum tax will primarily affect high-income individuals who receive income from tax-preferential sources or have significant deductions that reduce their tax liability under ordinary tax rules. Individuals who fall into the following categories may be particularly impacted:

  1. High-income individuals: Those with substantial income from capital gains, employee stock options, or dividends may experience an increase in their AMT liability due to the proposed changes. The revised AMT regulations lead to a higher federal rate applicable to capital gains, which might come as a surprise to individuals who experience substantial gains on their investments in a given year, especially considering that any AMT owed may become permanent if not recovered within the following seven years.
  2. Taxpayers with significant deductions: Individuals who rely on deductions such as capital loss carry-forwards, allowable business investment losses, or non-refundable tax credits to reduce their tax liability may see a reduction in their ability to offset AMT liability under the proposed changes. While all capital gains are fully taken into consideration when calculating the proposed AMT, only half of any carried-forward losses from previous years will be accounted for. As a result, there may still be residual income subject to AMT requirements when the prior year's investment losses are used to offset current-year capital gains. Individuals who have unused net capital losses from earlier years should consider utilizing those losses this year (i.e., before the new AMT regulations take effect).
  3. Donors of publicly listed shares: The regular tax rules currently allow for the elimination of capital gains on donations of publicly listed securities. This promotes the donation of easily convertible securities by the recipient. However, under the proposed computation rules for AMT, 30% of capital gains from such donations would be considered in the AMT computation. This could lead to unexpected outcomes when donating publicly listed securities, especially since only 50% of charitable tax credits may be taken into account. These changes might discourage individuals from making such donations.

As noted above, the proposed changes to the alternative minimum tax system will have various implications for affected individuals. Hence, it is essential for taxpayers to assess their potential AMT liability under the proposed changes to ensure accurate tax planning and compliance. For example, business owners who are considering tax planning strategies to generate a significant capital gain after 2023 should carefully evaluate the potential consequences of these proposals with their tax advisor. Likewise, individuals who are contemplating making substantial donations to registered charities need to assess how this will affect the AMT under both the current regulations and the proposed changes.

The proposed changes to the AMT computation rules would come into force for taxation years beginning in 2024.

Conclusion

The proposed changes to the alternative minimum tax in the 2023 Federal Budget aim to ensure a fairer taxation system for high-income individuals. The inclusion of additional income sources and deductions, along with changes to the exemption and rate, could result in a higher AMT liability for some taxpayers.

It is crucial for individuals who may be affected by the new AMT rules to stay informed and seek professional advice to understand the implications and plan their tax strategies accordingly. By working with qualified tax accountants, individuals can navigate the changes effectively and optimize their tax positions. If you are looking for an accountant in Hamilton for professional guidance, contact us today. We are a full service accounting firm in Hamilton that has experienced tax experts to cater to all your tax needs.

If you want to learn more about other tax and accounting topics, explore the rest of our blog!


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

Importance of Informing CRA of Marital Status Change

When it comes to your taxes, your marital status plays a crucial role in determining the benefits and credits you may be eligible for. It's essential to inform the Canada Revenue Agency (CRA) when you have a marital status change. Whether you're getting married, living common-law, separated, divorced, or widowed, updating your marital status ensures that you receive the correct benefits and avoids any potential issues with the CRA. In this article, we'll discuss why it's important to update your marital status with CRA and how it can impact your tax situation.

Understanding the Impact on Benefits and Credits

Your marital status directly affects the benefits and credits you may be entitled to. The CRA calculates benefits such as the Canada Child Benefits, GST/HST credit, and the Working Income Tax Benefit based on your combined family income. When you get married or live common-law, your combined income increases, which can result in a decrease in these benefits. Conversely, if you're going through a separation, divorce, or widowhood, your benefits may increase as your combined income decreases.

To ensure that you receive the correct amount of benefits and credits, it's crucial to inform the CRA of any marital status changes promptly. Failing to do so can result in incorrect benefit payments, potential overpayments, or underpayments. If you receive benefits or credits that you're no longer eligible for due to a marital status change, the CRA may require you to repay the amount owed. By staying proactive and updating your marital status as soon as possible, you can avoid these unnecessary complications.

When to Inform the CRA of Your Marital Status Change

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Generally, taxpayers are required to let CRA know about marital status changes by the end of the following month, except in the case of separation as noted below. Hence if you get married in February, you must notify CRA by the end of March. Generally, the following situations require a taxpayer to inform CRA of their marital status change.

Common-Law Relationships

If you're living with your partner in a conjugal relationship for at least 12 consecutive months, you're considered common-law for tax purposes. However, there are exceptions to this rule. If you have a child together or have custody and control of a child who depends on your partner for support, the 12-month requirement is waived. In that case, you are considered common-law as soon as you begin living together. It's important to determine the start date of your common-law relationship accurately to ensure that you report your marital status change correctly.

Marriage

If you have recently tied the knot, whether in a civil or religious ceremony in Canada or another country, you're considered married for tax purposes. Even if your spouse lives in another country, you should report your marital status as married on your tax return. When it comes to marriage or common-law relationships, there are added benefits for filing tax returns together.

Married couples are able to enjoy certain tax benefits, such as transferring credits and combining certain credits to enjoy increased tax savings. For example, if you file as a couple, you can transfer certain credits to your spouse as long as you don't need them. These include tuition amounts, disability amounts, age amount, and pension income amount.

Additionally, certain credits can be pooled together so one spouse can claim the total credit such as medical expenses and charitable donations. Combining these credits allows couples to maximize the credit they receive. The biggest benefit resides with couples that receive pension income as there are income splitting opportunities available when tax returns are filed together. It's important to note that these benefits are only available when filing taxes jointly - meaning that both spouses must file a joint return in order for these benefits to apply. That's why it's so important to inform the CRA of any marital status changes promptly - you don't want to miss out on potential savings!

Separation

If you have separated from your spouse or partner due to a breakdown in the relationship, the CRA considers you separated. To be officially recognized as separated, you must have lived separate and apart for at least 90 days. Hence if you recently got separated, you will have to wait until the separation lasts for at least 90 days before letting the CRA know. It's important to note that simply living in separate quarters within the same household or continuing to share parenting and financial responsibilities may not meet the criteria for separation in the eyes of the CRA. To ensure that the CRA recognizes your separation, make sure to have separate living arrangements and financial responsibilities.

Divorce or Separation followed by a New Relationship

If you have gone through a divorce or separation and have entered into a new relationship, it's important to understand how your tax filing status may change. While you may be legally separated or divorced from your previous partner, you may be considered common-law with your new partner if you have been living together for at least 12 consecutive months or have children together.

Widowhood

If you have lost your spouse, whether you were legally married or in a common-law relationship, you should report your status as widowed. This marital status change can impact your tax situation and the benefits you may be eligible for.

How to Update Your Marital Status with the CRA

To update your marital status with the CRA, you have several options:

  1. RC65 Marital Status Change Form: Complete the RC65 form and mail it to your local tax center. The RC65 form is specifically designed for notifying the CRA of a change in marital status.
  2. My Account: If you have registered for the CRA's My Account service, you can update your marital status online. My Account provides a convenient and secure way to manage your tax information.
  3. Calling the CRA: If you prefer a more traditional approach, you can contact the CRA directly to update your marital status over the phone. Be prepared to provide the necessary information and answer any questions they may have.

Remember, when updating your marital status with the CRA, it's essential to review and update your bank account information as well. Ensuring that your money is deposited into the correct account will prevent any delays in receiving your benefits or credits.

Conclusion

Keeping the CRA informed of any marital status changes is essential for ensuring that you receive the correct benefits and credits. Whether you're getting married, living common-law, separated, divorced, or widowed, updating your marital status promptly can help you avoid any issues with the CRA and optimize your tax situation. By understanding the impact of marital status changes and adhering to the CRA's guidelines, you can navigate your tax obligations with confidence and peace of mind.

Remember, it's always a good idea to consult with a tax accountant or seek professional advice for personalized guidance based on your specific situation. If you are looking for an accountant in Hamilton for professional guidance, contact us today. We are a full service accounting firm in Hamilton that has experienced tax experts to cater to all your tax needs.

If you want to learn more about other tax and accounting topics, explore the rest of our blog!


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

Top CRA Audit Triggers To Avoid

The Canada Revenue Agency (CRA) is responsible for ensuring that individuals and businesses in Canada comply with tax laws. While most taxpayers strive to file accurate and honest tax returns, there are certain triggers that may increase the likelihood of being selected for a CRA audit. A tax audit can be a time-consuming and stressful process, potentially resulting in penalties, interest, or even criminal charges if non-compliance is found.

To protect yourself from a potential CRA audit, it's important to be aware of the top CRA audit triggers and take steps to avoid them. In this article, we will explore the top CRA audit triggers to avoid and provide actionable tips to keep yourself in good standing.

1. Accurate Reporting of Income

One of the fundamental requirements of filing a tax return is accurately reporting your income. Neglecting to report income, whether intentionally or unintentionally, is a surefire way to attract the CRA audit triggers and catch attention of the CRA. It is crucial to include all income earned from T-slips, such as T4 slips received from employers, as the CRA receives copies of these slips directly. Failing to report all income will raise red flags and increase the likelihood of being audited. To avoid this trigger, maintain thorough records of all income transactions, including cash payments, and ensure that they are properly reported on your tax return.

2. Consistency in Credits and Deductions

Consistency in reporting credits and deductions is another key factor that the CRA considers when reviewing tax returns. Any sudden and significant changes in your credits or deductions from one year to another may raise suspicions and trigger a review or audit. It is important to document all activities and transactions thoroughly to support your claims. Whether you are self-employed, a small business owner, or an individual taxpayer, maintaining detailed records and providing accurate documentation will help you avoid unnecessary scrutiny.

3. Claiming Unreasonable Expenses

Claiming unusually high expenses can raise red flags for the CRA and increase the likelihood of a tax audit. While it's essential to deduct eligible business expenses, it's equally important to ensure that your claims are reasonable and supported by proper documentation. The CRA compares the expenses claimed by taxpayers within the same industry, and significant deviations may attract their attention. Another basic CRA review technique is to compare expenses claimed to the amount deducted in previous years. If you are claiming a large amount of expenses in one year, it's important to be able to justify a valid reason for the increase.

For example, if you purchased expensive equipment or incurred higher costs due to an expansion of your business, you should have the necessary documentation to back up your claims. Also, it's important to ensure that all your expenses are related to your business operations and not personal in nature. Always keep accurate records and receipts for all business expenses as they can help support your claims in case of an audit. Finally, if you are unsure about any deductions or have questions regarding CRA regulations, don't hesitate to seek professional advice from a qualified tax accountant.

4. Failure to Provide Requested Information

If the CRA has questions or concerns about your tax return, they may send you a request for information. It is crucial to cooperate fully and respond promptly to these requests. Failure to provide the requested information can escalate the situation and potentially lead to an audit. By promptly addressing the CRA's concerns and providing the necessary documentation, you can help alleviate any doubts and prevent further action from being taken.

5. Reasonable Home Office Deductions

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For self-employed individuals or those who work from home, claiming a home office expense deduction is a common practice. However, it is important to ensure that your home office deductions are reasonable and in compliance with the CRA's guidelines. Claiming an excessive percentage of your home's floor space as a home office may raise suspicions and result in attracting the CRA audit triggers. Only claim a dedicated space used primarily for business purposes and avoid including personal spaces like kitchens or bedrooms.

It's essential to accurately calculate the proportion of your home used for business and ensure your claims are reasonable and supported by documentation. Be precise, reasonable, and follow the CRA's home office deductions guidelines when calculating and claiming home office deductions to avoid triggering an audit.

6. Vehicle-Related Expenses

Vehicle expenses are another area where taxpayers need to be cautious to avoid attracting the attention of the CRA. If you use a vehicle for business purposes, it is essential to accurately claim vehicle expenses on your tax return. Writing off 100% of your vehicle expenses without proper documentation or justification may raise concerns for the CRA. To avoid triggering an audit, it's crucial to maintain accurate records of your business-related vehicle use and follow the CRA's guidelines for claiming these expenses. Keep a log of each trip, including the date, destination, purpose, and mileage. Utilizing automated vehicle mileage record apps can simplify this process and provide concrete evidence to support your claims.

7. Repeated Losses from Business and Rental Properties

Consistently reporting business losses year after year can raise concerns for the CRA and potentially attract CRA audit triggers. While it's not uncommon for new businesses to experience initial start-up losses, it's essential to demonstrate a reasonable expectation of profit. If your business shows repeated losses without a clear plan for improvement, the CRA may question the legitimacy of your business and disallow your expenses. In order to avoid an audit, it is necessary for you to show that you had a "reasonable expectation of profit." Failing to do so may result in the denial of your expenses.

The same logic applies to reporting losses year after year from rental properties. While it is reasonable to claim a loss in a particular year due to repairs or vacancies, consecutive losses may raise suspicions. To ensure you don't trigger an audit from CRA, be prepared to provide well-documented records of your rental property expenses and demonstrate that your rental activities are conducted with the intention of making a profit.

8. Industry Averages and Industry-Specific Risks

This is also one of the common CRA audit triggers that one doesn't think about often. The CRA compares tax returns to industry to identify inconsistencies that may indicate potential non-compliance. If your reported income significantly deviates from the average for your industry and location, it may trigger an audit. It is important to ensure that your reported income aligns with industry standards and the economic realities of your location.

In addition, certain industries are more likely to attract the attention of the CRA due to specific risks associated with their operations. Sectors with a high volume of cash transactions, such as restaurants and construction, are particularly susceptible to audits. If your business operates in a high-risk industry, it's important to be diligent in your tax reporting and ensure compliance with industry-specific regulations.

9. Prior Audit History

Having a history of previous tax audits or facing issues in previous audits can increase the likelihood of being selected for future audits. The CRA may consider taxpayers who have been audited before as higher risk factors due to errors or omissions in their tax returns. If you have faced a tax audit in the past, it's important to review and address any issues identified during the audit. By taking proactive measures to correct previous errors and ensuring accurate reporting in subsequent tax returns, you can minimize the risk of being audited again.

Tips For Avoiding The CRA Audit Triggers

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Conclusion

In conclusion, understanding the top CRA audit triggers is crucial for protecting your business. By accurately reporting income, maintaining consistency in credits and deductions, promptly responding to requests for information, and claiming reasonable expenses, you can minimize the risk of triggering a CRA audit. It's important to understand that a tax audit doesn't necessarily mean that you have done something wrong; it simply means that the CRA wants to verify the information provided on your return. If errors are identified during the audit, it's important that they are addressed promptly in order to minimize penalties or interest charges.

If you are currently going through a CRA audit and are looking for an accountant in Hamilton for professional guidance, contact us today. We are a full service accounting firm in Hamilton that has experienced tax experts to cater to all your tax needs.

If you want to learn more about other tax and accounting topics, explore the rest of our blog!


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

Are Moving Expenses Tax Deductible?

Moving can be an exciting and challenging experience, and it often comes with a price tag. However, did you know that in certain circumstances, you may be able to deduct your moving expenses on your tax return? In this article, we will answer the question that many clients have - Are moving expenses tax deductible in Canada? We will go through the eligibility criteria, types of moving expenses that can be claimed, and how to properly claim them on your tax return.

Who Can Claim Moving Expenses?

To be eligible to claim moving expenses, you must meet certain criteria. First and foremost, you must have moved and established a new home to be employed or run a business at a new location. Whether you have moved within Canada, from outside of Canada to a new work location in Canada, or from Canada to a new work location outside of Canada, you may be eligible for the deduction. Additionally, you must be a deemed or factual resident of Canada.

It's important to note that the move must bring you at least 40 kilometers closer to your new place of work than your previous location. This ensures that the deduction is only available for moves that significantly reduce your commuting distance.

Full-time students in post-secondary programs may also qualify to deduct eligible moving expenses from part of their scholarships, fellowships, bursaries, and research grants that are required to be included in their income. However, the 40-kilometer rule would still apply.

Are Moving Expenses Tax Deductible?

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Yes there are several types of eligible moving expenses that you can claim on your tax return. Let's take a closer look at each of them:

1. Transportation and Storage Costs

Transportation and storage costs are the most common moving expenses that can be deducted. This includes expenses related to hiring movers, in-transit storage, packing, and insurance. If you drove your own vehicle to the new location, you can also claim vehicle expenses such as gas, maintenance, and parking fees. Keep in mind that to claim vehicle or meal expenses, you must use either the detailed or simplified method accepted by Canada Revenue Agency (CRA).

2. Travel Expenses

When you move, you may incur travel expenses to reach your new location. These expenses include the cost of transportation, meals, and accommodations for you and your family members. Whether you choose to fly, take a train, or drive to your new home, these expenses can be claimed.

3. Temporary Living Expenses

If you need temporary accommodations for up to a maximum of 15 days while you are in the process of moving, you can deduct the cost of meals and accommodations for you and your family members. This can provide some relief during the transition period.

4. Lease Cancellation and Maintenance Costs

If you had to cancel the lease of your old residence due to the move, you can deduct the costs associated with the cancellation. Additionally, if your old residence remained vacant after you moved, you can claim the costs to maintain it, up to a maximum of $5,000. This includes interest, property taxes, insurance premiums, and utilities.

5. Incidental Costs

There are various incidental costs that can be deducted as long as they are related to the move. This includes changing your address on legal documents, replacing driver licenses, vehicle permits, and utility hookups and disconnections.

6. Selling Costs

If you bought or sold property as part of the move, you can deduct the associated selling costs. This includes expenses such as advertising, legal fees, real estate commission, and mortgage penalties, if applicable.

What Moving Expenses Are Not Tax Deductible?

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In addition to the types of expenses that can be claimed, it is also important to understand what types of expenses are not tax deductible. Any moving expenses incurred for a move that does not meet the eligibility criteria outlined above will not be allowed as a deduction. This includes:

  • Expenses incurred in preparing your old home for sale or your new home for occupancy;
  • Losses resulting from the sale of your previous residence;
  • Travel costs associated with trips to search for a house in the new location prior to relocation;
  • Expenses to clean or repair a rental property in order to meet the landlord's requirements;
  • The expense of mortgage default insurance;
  • Costs incurred in replacing personal belongings that were not moved, such as curtains, carpets, and tool sheds;
  • Expenses related to installing household items in a new residence;
  • The additional cost of the new home compared to the previous one;
  • Expenses associated with items that could not be taken along during relocation or were refused by movers;
  • Costs of mail forwarding services.

How to Claim Moving Expenses on Your Tax Return?

Now that you understand the eligibility criteria and types of expenses that can be claimed, let's discuss how to properly claim moving expenses on your tax return.

To calculate the moving expenses you are eligible to claim, you will need to use form T1-M, Moving Expenses Deduction. On this form, you can deduct moving expenses only if you’ve earned employment or self-employment income at the new location. You cannot deduct any moving expenses from any other form of income, such as investment or employment insurance benefits, even if you received them while at your new location.

Please note that if you have received a reimbursement or allowance for your moving expenses, you can only claim these expenses:

  • if you either include the amount received in your income or
  • if you reduce your moving expenses by that same amount

In order to claim your moving expenses, it is necessary to enter your net eligible income on the moving expenses form. If you are an employee, this means taking the amounts reported on your T4 or T4A slips from your new work location and subtracting any deductions (such as RPP, union dues, employment expenses, CPP, clergy residence costs, or repaid income amounts.

If you are self-employed, deduct any union and professional dues as well as CPP/QPP contributions from the net self-employment income earned at the new work location when calculating net eligible income for tax purposes.

It's important to note that you do not need to attach the T1-M form or your receipts and documents to your tax return. However, you must keep these receipts and documents in case the CRA requests them for verification.

Carrying forward your moving expenses

If you are unable to claim all of your moving expenses in one year, you may be able to carry forward the remaining amount and claim it in a subsequent year. Be sure to keep records of all receipts and documents related to your move so that you can prove the eligibility of any claimed expenses.

Conclusion

Moving expenses can be a significant financial burden, but in certain situations, they may be tax-deductible. If you have recently moved and established a new home for employment or business purposes, you may be eligible to claim eligible moving expenses on your tax return. By carefully documenting your expenses and following the guidelines provided by the CRA, you can take advantage of this deduction and potentially reduce your tax liability.

Remember to consult with a tax professional or visit the CRA website for the most up-to-date information and requirements related to moving expense deductions. If you have additional questions on moving expenses and are looking for an accountant in Hamilton for professional guidance, contact us today. We are here to help!

If you want to learn more about other tax and accounting topics, explore the rest of our blog!


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

 

Using a Holding Company to Buy Real Estate in Canada

Investing in rental properties can be a lucrative venture, providing a steady stream of income and potential long-term wealth. A common question that often arises with clients is how best to structure their real estate investments. Though there are a few different structures available to hold your real estate investment, but for the purposes of this article, we will focus on holding real estate personally or through a corporation.

Within a corporation, the real estate properties can be held either in an existing operating company, a holding company, or a property company. Ultimately, which structure is best for you depends on your individual situation and long-term goals for your real estate investments. Most investors prefer using a holding company to buy real estate in Canada; the reasons of which will become apparent below.

In this article, we will explore the advantages and potential drawbacks of holding real estate personally and through a corporation via a holding or operating company. In addition, we will also discuss other important considerations that need to be taken into account before making a decision on which structure is best for you.

Holding Real Estate Personally

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Holding real estate personally can be quite beneficial for those who are looking to keep their investments simple.

If your objective is to own a few real estate properties, the simplest structure for you would be hold the property personally. In this situation, you would purchase the property in your name or in joint ownership with your spouse and obtain financing personally. You would report the gross rental income on your personal tax return and claim the corresponding eligible rental expenses to arrive at your net profit from the rental property. To get a full list of eligible expenses that can be claimed against your rental income, see our article, Tax on Rental Income in Canada: A Comprehensive Guide.

In addition, when you own the rental property personally, the other tax obligation you need to be aware of is the capital gain tax in the year you dispose of the property, which would get taxed based on your personal marginal tax rate.

The main advantage of holding real estate personally is that it allows you to keep costs low as you won't have to pay for the setup, filing, and maintenance costs associated with a corporation. Additionally, you will have more control over your investment decisions and can manage it yourself or hire a property manager if desired. Furthermore, if you are looking to quickly liquidate your investment and move on to another opportunity, then holding real estate personally may be the best option for you. Finally, holding real estate personally can provide you with more flexibility in obtaining financing and in certain cases may be more tax advantageous as rental losses can be used to offset your other taxable income.

On the other hand, there are some potential drawbacks to consider. For instance, holding real estate personally exposes you to a greater risk of liability if any legal issues arise. This means that your personal assets are at risk in the event of a lawsuit or other legal issue. Additionally, if you have multiple properties, then the income from each property will be reported on your personal tax return and can result in a higher overall tax burden than if they were held through an entity.

Overall, there are both advantages and disadvantages to holding real estate personally so it is important to carefully consider all of your options before making a decision. It is always best to consult with a qualified tax professional who can help you determine the best structure for your specific situation.

Holding Real Estate Within a Corporation

If you plan to be in the business of real estate investing by purchasing multiple properties in the future, you’ll want to consider holding the properties within a corporation. The most important benefit of holding real estate within a corporation is liability protection. Furthermore, as your investment portfolio grows, having a corporation allows for greater flexibility when it comes to tax planning and tax savings, helping you maximize your profits. Below we will compare the advantages and disadvantages of holding real estate through an investment holding company vs an operating company.

1. Using a Holding Company to Buy Real Estate in Canada

A holding company is a separate legal entity that does not carry on any business activities. It does not participate in the selling of goods or the provision of services. Instead, its main function is to maintain investments, which can include real estate properties or shares in both public and private companies. In the context of private companies, a holding company is usually introduced to hold shares in an operating company for tax planning purposes.

An operating company is an active company used to run the day-to-day business operations of a business. If an operating company is under the control of a holding company, it is classified as a subsidiary.  The main advantage of such a structure, where the holding company owns the operating company, is that it allows you to shift residual income from the operating company up into the holding company on a tax-deferred basis via dividends. This provides the holding company with enough cash to acquire passive assets or flow the funds to the individual shareholder(s).

Though this type of structure can provide many tax benefits but the most important is that it allows you to defer personal liability until you withdraw the funds for personal use from the holding company. For the purpose of this article, we will be analyzing the advantages and disadvantages of a holding company that owns only investment property such as real estate, shares of publicly traded shares etc, rather than shares of an operating company.

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Advantages

1. Limited Liability Protection

One of the key advantages of holding a rental property through an investment holding company is the limited liability protection it provides. When you hold property in a holding company, your personal assets are safeguarded in the event of a lawsuit or other legal issues. This means that in the case of a legal dispute such as a tenant suffering an injury on your property, your personal possessions like your house, car, and other belongings would be safe from any potential risk in the lawsuit. However, it is essential to note that severe negligence or illegal activities may still expose you to personal liability.

For some investors, limited liability protection alone would be the guiding factor of whether they should incorporate a holding company to hold their real estate investments. For example, for commercial real estate investors, having limited liability protection on commercial property that is rented out is even more important as they have a higher risk liability compared to a residential rental property.

2. Estate Freeze

Another advantage of incorporating an investment holding company is the ability to do an estate freeze as part of a tax planning strategy. This strategy allows you to “freeze” a company’s value at a point in time for the original shareholders while ensuring that any future appreciation on the assets held in the holding company are passed to the next generation or desired family members. If your goal is to expand a substantial investment portfolio and would like to reduce your estate taxes while transferring property to your family, utilizing an investment holding company structure can provide maximum flexibility.

Disadvantages

1. Increased Costs and Administrative Responsibilities

Holding companies are simply expensive to set up and have ongoing administrative responsibilities. This includes the initial setup of a corporation, such as incorporation fees, name search fees, and professional fees.  Once the holding company is established, there are ongoing annual fees for maintaining corporate records and filing corporate tax returns. These costs can vary depending on the complexity of your rental property and the specific services required.

Regardless of whether you choose to incorporate or not, it is essential to maintain accurate financial records and properly report rental property income and expenses on your tax return. While accounting for a corporation can be more complex, consulting with a corporate tax accountant can ensure compliance and optimize tax strategies.

2. Tax Implications of owning property in an investment holding corporation

When it comes to tax implications, owning a rental property in a corporation does not always provide significant tax benefits. Unlike personal taxes, there are no graduated tax rates or brackets applied to an investment holding company. In Canada, passive income earned by corporations is subject to a single high tax rate. For example, in Ontario, the corporate tax rate on passive income such as rents, interest, and dividends is 50.2%. This tax rate often aligns with the personal marginal tax rate for individuals in the highest bracket.

However, when the holding company distributes taxable dividends to its shareholders, a portion of the taxes paid can be refunded through a mechanism called Refundable Dividend Tax On Hand (RDTOH). Once the dividend is declared, it reduces the corporate tax rate (to the extent of the dividend) to 20% which is relatively low. Therefore, it is advisable for an investment holding company to distribute its income to shareholders in the same fiscal year it was earned in order to minimize the overall amount of corporate taxes paid for that year. Let's look at an example to see how taxable income is taxed in an investment holding corporation.  

Example

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Assume the corporation is a Canadian Controlled Private Corporation (CCPC) and earned $10,000 of rental profit in the year. The corporate tax rate for a CCPC on passive income is 50.2% in Ontario compared to only 12.2% on active business income.

Taxation of investment income (rental) within an investment holding company

Taxable income$10,000
Corporate Tax payable (50.2%) - A$5,020
After-tax cash available$4,980

Calculation of RDTOH

Taxable income$10,000
RDTOH (30.67% of taxable income)$3,067

In order for the corporation to receive part of the corporate tax paid back through the RDTOH, the corporation has to pay the shareholder a dividend. To get the full $3,067 back, the total dividends paid must be $8,001 based on the refundable dividend tax rate of 38.33% for CCPC's.

Dividends paid to shareholder$8,001
Refundable Tax ($8,001 *38.33%) - B$3,067
Net tax at the corporate level (A-B)$1,953

Personal tax paid on dividends flowed out to the shareholder

Assuming that the shareholder is in the highest personal tax bracket, the non-eligible dividend rate for Ontario is 47.74%.

Taxable dividend$8,001
Personal tax payable (47.74%) (C)$3,820
After-tax cash available to shareholder$4,181
TOTAL PERSONAL AND CORPORATE  TAX – 57.73% (A-B+C)$5,773

As the example above shows, you will generally pay a higher tax on passive income earned through an investment holding company than if you earn such income personally. Therefore, owning a rental property personally rather than corporately is a better option for many people. This approach allows them to pay lower taxes while avoiding the complexities and expenses associated with managing a corporate structure.

However, certain strategies can help minimize the tax burden associated with owning rental properties in a corporation.  One such strategy is depreciation, also referred to as capital cost allowance. This allows for a deduction of a percentage of the building's cost annually, which helps defer the tax consequences associated with rental income. By carefully calculating and claiming capital cost allowance, it is possible to lower yearly income tax until the property is eventually sold. To learn more about how capital cost allowance works in the context of rental properties, read our blog article, Tax on Rental Income in Canada: A Comprehensive Guide.

3. Lifetime Capital Gains Exemption

The Lifetime Capital Gains Exemption (“LCGE”) allows every eligible individual to claim a capital gains deduction of up to $971,190 realized on the disposition of their qualified small business corporation shares (“QSBCS”). In order to qualify for this deduction, the small business corporation must meet certain criteria. It must be considered a Canadian-controlled private company and generate its income primarily through active business activities within Canada.

An investment holding company that is only used to hold passive assets will not qualify for the enhanced capital gains deduction when its shares are sold. Unfortunately, this is a common misconception among real estate investors that they can take advantage of the lifetime capital gains exemption on the disposition of the investment holding company’s shares.

2. Using an Operating Company to Buy Real Estate in Canada

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Advantages

1. Cost Savings

The main advantage of owning real estate within an operating company is the potential cost savings that come from not having to establish and maintain a second separate entity. This could be particularly significant for smaller, less complex businesses. However, if a business has substantial size or growth prospects, it may be worthwhile to consider this investment.

Disadvantages

1. Asset Protection/Limited Liability Protection

Owning real estate in an operating company may seem like a convenient option, but it actually comes with some risks. Unlike holding companies, operating companies are exposed to various risks through their everyday business activities. This means that if something unfortunate happens to the operating company, the assets, including the real estate, could be vulnerable to creditors.

By transferring some of the assets from the operating company to a holding company, you can create a protective layer for those assets. This means that even if your operating entity gets sued, the real estate assets will remain separate and protected from any legal proceedings. Hence from the perspective of limited liability protection, owning real estate in an operating company carries far more liability.

2. Ease of Exit

Generally, when you go to sell your business, buyers are more interested in the primary operating portion of your business than its investments. However, complications may arise if both are housed within the same company and a potential buyer expresses interest in only the operating portion. In such cases, transferring the real estate or passive assets to another entity becomes necessary, which requires tax planning and takes considerable time. 

Also, it is important to note that having passive assets in an operating company could make you ineligible in meeting the criteria for the capital gains exemption on the sale of the operating company’s shares. Hence proper tax planning and the right structure is imperative to ensure you can utilize the capital gains exemption and other benefits when you're ready to exit the business.

Other considerations

Mortgage Financing

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Before incorporating your rental property, it is crucial to verify the criteria for financing properties owned by corporations. It may be more difficult to secure mortgage financing for a corporation compared to buying a property personally. Additionally, when applying for a mortgage as a corporation, banks may require personal guarantees from the property owners, particularly if the business is not well-established. This negates the purpose of setting up a holding company for limited liability protection. Understanding these restrictions and requirements is vital to ensure a smooth purchasing process.

Principal Residence Exemption

One of the primary considerations when deciding whether to incorporate your rental property is the potential impact on the principal residence exemption. This exemption allows individuals to sell their primary residence without incurring capital gains tax. If your rental property is part of your principal residence, incorporating may jeopardize your eligibility for this exemption. Unless you have sophisticated tax planning strategies in place, it is generally not advisable to incorporate a rental property that is part of your existing home.

Conclusion

In conclusion, deciding whether using a holding company to buy real estate or investing in real estate personally will ultimately depend on your long-term investing goals. It is important to understand the implications of each structure and how it affects your overall tax liability. Understanding the specific circumstances of your rental property and seeking professional advice from accountants and lawyers specializing in real estate tax planning is crucial in making an informed decision.

With proper research and careful consideration, you can make an informed decision that best fits your financial goals. If you have additional questions on how best to structure your real estate investments and are looking for an accountant in Hamilton for professional guidance, contact us today. We are here to help!

If you want to learn more about other tax and accounting topics, explore the rest of our blog!


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

Employee vs Contractor: Understanding the Differences

Are you unsure whether you should classify someone as an employee or a contractor? The Canada Revenue Agency (CRA) has specific guidelines that determine the distinction between the two. Understanding these guidelines is crucial for businesses to ensure compliance and avoid potential penalties. In this article, we will delve into the differences between an employee and a contractor and the key factors used by the CRA to determine employee vs contractor status. By the end, you will have a clear understanding of the factors that determine a worker's employment status, the rights and responsibilities associated with each, and the implications for both employers and workers.

Whether you're an employer looking to hire or a worker seeking clarity on your employment status, this article will provide you with valuable insights to navigate the complex world of worker classification in Canada. So, let's dive in and unravel the intricacies of employee vs contractor differences!

Definition and differences between an employee vs contractor

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You are probably familiar with the terms "employees" and "contractors," but you may not fully understand the distinctions between them. These two categories of workers are mutually exclusive, which means that an individual cannot simultaneously be both an employee and a contractor for the same employer. Moreover, there are significant practical differences between these two worker classifications that have implications for both the worker and the business. We will look at the differences between employee vs contractor from both the worker's perspective and also the employer's perspective.

Contractor

In contrast to employees, contractors are individuals who provide services to clients under a contract for services. Contractors are considered to be in business for themselves and as such they are responsible for their own taxes, income reporting, and expenses.

The advantages of being a contractor include:

  • Contractors have more autonomy and control over how the work is carried out.
  • They also have more freedom in setting their own rates, hours worked, and job tasks than employees do.
  • Contractors do have an opportunity to make more profit.

The disadvantages of being a contractor include:

  • Contractors do not receive benefits or are protected by employment standards legislation.
  • Contractors assume greater financial risk.

From the employer's perspective, as contractors are not entitled to benefits, the employer is not responsible for payroll deductions such as income tax, CPP contributions, and EI premiums. Additionally, the employer is not required to provide vacation pay or statutory holidays to contractors. For these reasons. employers sometimes prefer hiring contractors instead of employees as they can save costs associated with these obligations. Contractors also provide employers with a more flexible workforce, as they are able to hire and terminate contracts easily compared to employees.

Employee

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An employee, as defined by the CRA, is an individual who performs services for an employer under a contract of service.

The advantages of being an employee include:

  • Employees typically have a long-term relationship with the employer and are entitled to benefits such as vacation pay, sick leave, and pension contributions.
  • Employees are protected by Employment Standards Legislation, which includes minimum wage laws, overtime pay, and protections against wrongful dismissal.
  • Employees are entitled to the employer portion of the Canada Pension Plan (CPP) and Employment Insurance (EI) benefits.

The disadvantages of being an employee include:

  • The employer has a great deal of control over the employee's work, including how, and when the work is performed.
  • Employees are typically expected to work a specific number of hours per week and adhere to established policies and procedures set by their employers.
  • Employees don't have an opportunity to share in the profits of the business and instead are paid based on a fixed salary.

In the context of an employer-employee relationship, the employer has an obligation to deduct the appropriate payroll deductions from the gross pay of the employee. This includes income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums. In order to comply with regulations, employers are required to send both the deducted amounts and the employer's portion of CPP contributions and EI premiums to the CRA. The employer is also responsible for providing vacation pay and statutory holidays, as well as any other benefits specified in the contract of employment.

Factors to determine employee vs contractor status

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Determining whether someone is an employee vs contractor is not always a straightforward task. It involves considering several factors that contribute to the nature of the work relationship.

Based on CRA guide on Employee or Self-employed, the first step in determining whether a person is an employee or a self-employed individual is the intention of the parties. While the actual working arrangements may differ from the initial intent, understanding the intentions at the outset can provide valuable insights. According to CRA, both parties should have a clear understanding from the onset of whether they intended to establish an employer-employee relationship or a business relationship.

The parties' intentions can be determined through either a written contract or a verbal agreement. In some cases, the intention is evident and both parties are in consensus, thus establishing a shared intent. However, there are instances where the two parties have differing interpretations regarding the nature of their working relationship, resulting in the absence of a common intent.

The second step is to evaluate the relationship between the parties. Hence the central question CRA addresses in this step is:

Is the person performing services as an independent contractor or as an employee?

The purpose of this step is to determine if the actual relationship is consistent with the intent. To answer this question, CRA looks at the following key factors to determine whether you are an employee or an independent contractor:

Control

This factor looks at the degree of control held by the payer and the payer’s right to exercise control over how and when the work is performed. For an employee, the payer has direct control of how and when the work is performed. For example, they may dictate the methods, provide detailed instructions, and closely monitor the progress.

In contrast, contractors have more autonomy and independence in deciding how and when to carry out their work. In addition, they have the ability to accept or refuse work from the payer as well as the right to provide their services to different payers at the same time.

Ownership of tools and equipment

This factor considers the significance of the investment in the tools and equipment by the worker or the payer to accomplish the work. Employers usually provide employees with the necessary tools and equipment to perform their job while retaining the right of use over the tools and equipment.   In certain cases, the employee may have to provide their own tools but courts have acknowledged that this itself does not mean the worker is self-employed.

Contractors on the other hand are responsible for providing their own tools and equipment, and they retain ownership and control over them. They are also responsible for the repair, maintenance and insurance.

Degree of financial risk

This factor primarily focuses on the degree of financial risk taken by the employee. As an employee, you typically do not bear the financial risk associated with the business. Employees receive a fixed salary or wages and are not directly responsible for any operating expenses or losses the employer may incur. Lastly, the working relationship between an employee and employer is continuous.

Contractors, on the other hand, take on significant financial risk and bear the risk of losses. Their income may vary as they have fixed operating costs relating to the operation of their workspace and hiring third parties to help with the work.   Compared to an employee, the working relationship between a payer and contractor is limited to a specific job rather than being an ongoing relationship.   

Opportunity for profit

An evaluation of the level at which an employee can control his or her income and expenses.  Employees generally have limited opportunities to earn more than their fixed salary or wages. They don’t share in the profits or incur the losses associated with the business.

Contractors, on the other hand, often have the opportunity for increased profit. Their income may vary based on the success of their work, and they are able to negotiate higher fees for certain tasks or projects if they are successful in delivering them. This provides them with a greater incentive to perform well.

Degree of responsibility for investment and management

This factor considers the degree of responsibility for investment held by the worker. Generally, employees do not have to make any investment to provide the services to the employer.      

In contrast, contractors typically have to make significant investments to provide the services. This could entail hiring staff and paying third parties to provide the business.  

Subcontracting work 

This factor looks at whether the worker has the authority to subcontract work or hire assistants. Employees typically cannot subcontract their work or hire assistants and thus have to perform the services personally.

Contractors have the freedom to hire other parties to do the work and the payer has no control over who they hire.  This gives contractors more flexibility in managing their own business operations and allows them to expand their services without relying on the employer.

Ultimately, it is important to consider all relevant factors in order to determine if an individual is an employee vs contractor. Based on CRA guidance, the significance of each factor will vary based on the specific facts and circumstances of each case. No single factor can singularly define the employment connection. Instead, CRA analyzes each factor as part of the larger scenario to ascertain the overall nature of the relationship between the worker and the payer.

Frequently Asked Questions

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Are subcontractors considered self-employed in Canada?

Yes, subcontractors in Canada are considered self-employed. As a result, they are required to remit their own taxes, such as income tax and HST. In addition, they need to file their T1 personal tax return and report their income on Form T2125 and claim all their eligible business expenses.

How to pay taxes as an independent contractor in Canada?

As an independent contractor, it is your responsibility to self-manage your taxes. This includes:

  • Keeping track of your income and expenses throughout the year to ensure accurate tax filing.
  • Registering for a GST/HST number if you are earning more than $30,000 CAD in one year.
  • Calculating and remitting your taxes on a quarterly or annual basis depending on the type of income you are earning.
  • Filing your T1 personal tax return and reporting your income on Form T2125, as well as claiming all eligible business expenses you incurred throughout the year.

Do contractors have the same rights as employees?

No, contractors do not have the same rights as employees. Generally, contractors are considered to be self-employed and are not subject to the same labour laws as employees. This means that they do not have access to the same benefits such as vacation pay or parental leave, nor are they entitled to certain workplace protections like minimum wage or overtime pay. Furthermore, employers are not responsible for withholding payroll taxes such as CPP or EI on behalf of their contractors.

Why is it important to determine whether a worker is an employee or self-employed?

It is important to determine whether a worker is an employee vs contractor because there are different legal and tax implications for each type of work arrangement. For example, employers are required to withhold payroll taxes such as CPP and EI on behalf of their employees, whereas they do not need to do so for contractors. Additionally, employees are entitled to certain workplace protections that contractors may not have access to. Therefore, it is essential that businesses take the time to accurately evaluate the working relationship in order to correctly classify individuals.

Conclusion

In conclusion, understanding the distinction between employee vs contractor is crucial for businesses operating in Canada. By correctly classifying individuals, employers can ensure compliance with tax laws, avoid legal and financial consequences, and provide fair treatment to their workers. It is essential to consider the key factors used by the CRA, such as control, financial risk, subcontracting work, intentions of the parties etc.

Seeking professional advice when needed can provide clarity and guidance. Businesses should regularly review their working relationships and contracts to ensure they accurately reflect the nature of the engagement. By prioritizing proper classification, businesses can maintain a healthy and compliant workforce. If you are looking for an accountant in Hamilton, that can provide clarity between employee vs contractor relationships for your business, contact us today.  We are here to help!

If you want to learn more about other tax and accounting topics, explore the rest of our blog!


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

Tax on Rental Income in Canada: A Comprehensive Guide

‍Renting out properties can be a lucrative venture, but it also comes with tax implications that every landlord should be aware of. Understanding how tax on rental income works in Canada is crucial for both new and experienced landlords. In this comprehensive guide, we will delve into the various aspects of tax on rental income, including what is considered rental income, how rental income is taxed, deductions that can be claimed, and tips that can be used to minimize tax on rental income. By the end of this guide, you will have a clear understanding of how to navigate the complexities of tax on rental income in Canada.

What is rental income?

Rental income refers to the revenue generated from renting out properties that you own. It includes the rent received from various types of properties such as apartments, condos, houses, office spaces, or even a single room in your own home. Rental income is considered taxable income by the Canada Revenue Agency (CRA), and landlords are required to report it on their tax returns.

How do you calculate tax on rental Income?

Calculating tax on rental income involves determining the gross rental income and deducting eligible expenses. Gross rental income includes all rent payments received in cash, by cheque, or via money transfer. It is essential to keep track of all rental payments and maintain proper documentation to support your calculations. The CRA provides guidelines on eligible rental expenses that landlords can claim to reduce their taxable income. By accurately calculating your rental income and expenses, you can minimize your tax liability.

How is rental income taxed in Canada?

The tax implications of rental income depend on the type of ownership structure you have. The most common ownership structures include:

  1. Personal ownership
  2. Partnerships
  3. Corporations
  4. Trusts
  5. Real estate investment trusts (REITs)

Each structure has its own tax rules and regulations, and it is important to understand how rental income is taxed in each scenario. In this section, we will focus on the tax implications for personal ownership.

If you own rental properties personally, your rental income will be taxed based on your personal marginal tax rate. As a self-managing landlord, you are required to report your rental income on your personal tax return using the form T776 Statement of Real Estate Rentals. This form summarizes your rental revenues and deductions and helps determine your taxable income.

What are eligible rental property expenses?

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Generally, any reasonable expenses incurred to earn rental income are deductible for tax. The two basic types of expenses are:

  • Current expenses are those that are incurred in the current tax year and are deductible in full when calculating taxable rental income.
  • Capital expenses are those that provide a lasting benefit or extend the useful life of the property. One of the key criteria outlined by CRA to determine whether it's a capital expense is whether the expense maintains or improves the condition of the property. When the cost of a repair improves the property beyond its original condition, the expense is likely capital. For example, capital expenses may include the cost of improvements or renovations such as new windows or a new roof that provide a lasting benefit. For tax purposes, capital expenses must be amortized over several years by claiming Capital Cost Allowance (CCA). Hence, unlike current expenses, capital expenses are not fully deductible for tax in the year the expense is incurred.

Some of the deductible current expenses include:

  • Mortgage interest
  • Property taxes
  • Insurance premiums
  • Interest and bank changes
  • Repairs and maintenance
  • Advertising and promotion for rentals
  • Legal and accounting fees
  • Cleaning services
  • Utilities
  • Management fees
  • Office expenses
  • Salaries, wages, and benefits
  • Travel
  • Vehicle expenses (not including CCA) - only when reasonable and necessary
  • Other expenses such as landscaping costs, lease cancellation payments, condo fees etc
  • Prepaid expenses (only available if using the accrual method of accounting)

Expenses that are not deductible

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In addition to the eligible rental property expenses, there are also certain expenses that are not deductible. These include:

  • Land transfer taxes paid when you purchased the property
  • The principal portion of your mortgage balance
  • Costs incurred for the personal use of the rental property
  • Fines and penalties imposed by government authorities on your notice of assessment(s).
  • The market value of your own labor.

It is important to keep accurate records and receipts for all rental-related expenses and transactions in order to support your claims when filing your taxes.

Understanding capital cost allowance for rental property

Capital Cost Allowance (CCA) is a deduction available for rental property owners to reduce their taxable income. CCA or depreciation allows you to deduct a percentage of the cost of capital purchases, such as furniture and appliances that are purchased for the rental property, over several years. This helps reduce taxable income by allowing landlords to spread out the deductions over time.

However, please note that the CRA has specific guidelines for claiming the CCA on rental properties. For example, you cannot claim CCA to increase your net rental loss.

For tax purposes, CCA is calculated based on the specific CCA rate for the asset and the date it was acquired. The CCA rate for most residential rental buildings acquired after 1987 is 4% per year and common depreciable assets such as furniture and appliances are depreciated at a rate of 20% per year. Other types of depreciable properties may have different CCA rates, so it's important to check with your accountant or tax advisor to make sure you are claiming the correct amount. CRA has a list of depreciable properties with their rates on its website.

Tax implications of renting your principal residence

In addition to understanding the tax implications of rental properties, it is also important to understand the tax implications of renting out your principal residence. When you start renting out personal property, it is considered a change in the use of that property for income tax purposes. For a better understanding of the income tax consequences, read our article, Airbnb Income Tax in Canada: What You Need to Know.

How to report capital gains tax on sale of rental property?

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When selling a rental property, there will likely be either a capital gain or loss. In addition, the recapture of capital cost allowance claimed and terminal loss on the sale of a rental property would also need to be considered in the calculation of the final tax liability. While capital gains are subject to a 50% tax rate, the recapture of capital cost allowance is 100% taxable. In certain circumstances, the sale of a residential rental property could be taxed as business income which is 100% taxable instead of a capital gain. The Federal Budget 2022 outlined some of these new anti-flipping tax rules.

To calculate the gain (or loss), use the step-by-step approach outlined in our blog article, Understanding Capital Gains Tax In Canada.

Recapture and terminal loss on rental property

Recapture

Recapture of capital cost allowance may result when you sell a rental property. In simple terms, CRA requires landlords to report all or a portion of the CCA claimed in previous years as taxable income in the year of disposition of the property. This usually happens when the proceeds from the sale of your property exceed the remaining undepreciated capital cost or UCC. UCC is a tax term used to describe the amount of capital cost that is left of your depreciable property that has not yet been claimed.

For example, if you purchased a residential building for $100,000 and claimed CCA at a rate of 4%. If you claimed CCA of $20,000 over the years and now you are ready to sell your rental property for $150,000, the UCC remaining on the building is $80,000 ($100,000 - $20,000). Hence the recapture on the sale would be:

UCC minus 1 ) lesser of cost or 2) Proceeds of disposition

UCC = $80,000 Cost = $100,000 Proceeds of disposition = $150,000

Recapture = $20,000 ($80,000 - $100,000)

In addition, you will also have a capital gain. The capital gain is $50,000 ($150,000- $100,000), which will be taxed at an inclusion rate of 50% or $25,000.

Terminal Loss

Alternatively, terminal loss may be incurred when the sale price allocated to the building of a rental property is less than the total capital cost allowance claimed during ownership.

Using the same example above, if everything else remains the same but your selling price is $70,000, the terminal loss on the disposition would be:

UCC minus 1 ) lesser of cost or 2) Proceeds of disposition

UCC = $80,000 Cost = $100,000 Proceeds of disposition = $70,000

Terminal Loss = 10,000 ($80,000- 70,000)

When you have a terminal loss, the terminal loss is similar to that of a net rental loss. This means, that the terminal loss can be used to offset against other income. Note that when you have a terminal loss, no capital loss can be claimed on the depreciable property.

As demonstrated in the example above, there are advantages and disadvantages to claiming CCA. On the positive side, CCA helps to decrease your taxable income, resulting in a lower tax obligation. However, on the downside, any previous CCA claimed will be recaptured and treated as taxable income when you sell the property, resulting in an increase in your tax liability in the year of disposition. It's important for landlords to understand how these two concepts work when selling their rental property in order to minimize their tax liability and maximize their profits.

As there is complexity in calculating the recapture or terminal loss amounts, it is recommended to seek professional advice to ensure you are compliant and minimizing your tax liability.

Tips for optimizing tax on rental income

Optimizing tax on rental income requires careful planning and consideration of various factors. Here are some tips to help landlords minimize their tax liability:

  • Keep accurate records: Maintain thorough documentation of all rental income and expenses to support your tax calculations and deductions.
  • Stay informed: Stay up-to-date with the latest tax regulations and guidelines provided by the CRA to ensure compliance.
  • Plan for deductions: Identify eligible expenses and plan your deductions to maximize tax benefits.
  • Consider professional advice: Consult with a tax professional or accountant specializing in real estate to navigate the complexities of tax on rental income and optimize your tax strategy.
  • Use technology: Utilize accounting software or property management tools to streamline your record-keeping and simplify tax calculations.

Frequently asked questions

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How to split rental income between spouses in Canada?

If you and your spouse are co-owners or partners, it is important for both of you to report your portion of the rental income (or loss) for the entire year based on your ownership percentage and pay tax according to their own marginal tax rate.  It is essential to note that unless the proportion of ownership changes, you must consistently report your rental income in the same proportion each year.

What is the penalty for not reporting rental income in Canada?

Failure to report rental income can result in significant penalties from the CRA. Generally, if you fail to report your rental income, you may be subject to a negligent penalty. The CRA regularly audits taxpayers if they suspect any discrepancies or irregularities in their reported income. To avoid penalties and ensure compliance with tax regulations, landlords should familiarize themselves with the latest CRA guidelines and take advantage of available technology to simplify their record-keeping. Furthermore, it is recommended to seek professional advice from a tax specialist or accountant to ensure that rental income is being reported accurately and efficiently.

Can you claim a loss on rental property?

In certain circumstances, landlords may be able to claim a loss on their rental property. Any losses claimed must be reported as part of your net income and will offset any other sources of income you have during that period. In order to claim a loss on your rental property, it is important that you rent it out at fair market value. For example, if your rental unit usually goes for $2,000 per month, but you rent it to your family member for $1,000 per month, you will not be able to claim a rental loss in this case. In addition, as mentioned above, CCA cannot be claimed to increase your net rental loss.

How to claim capital expenses on rental properties?

Capital expenses on rental properties may be claimed through deductions such as Capital Cost Allowance. The CRA allows landlords to claim capital expenses over several years, depending on the type of expense. CCA is calculated based on the type of property and its class. Each class has its own depreciating rate.

Conclusion

Understanding the tax implications of rental income is essential for landlords in Canada. By accurately calculating rental income, deducting eligible expenses, and complying with tax regulations, landlords can optimize their tax liability and ensure compliance with the CRA. It is recommended to seek professional advice and stay informed about changes in tax laws to effectively manage tax on rental income. With proper planning and record-keeping, landlords can navigate the complexities of tax on rental income and maximize their financial returns. If you have any questions or concerns about tax on rental income, please contact us.  We are here to help!

If you want to learn more about other tax and accounting topics, explore the rest of our blog!


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

Airbnb Income Tax In Canada: What Every Host Should Know

As the sharing economy continues to thrive, many Canadians are turning to platforms like Airbnb to earn extra income by renting out their properties. However, with this additional income comes the responsibility of understanding and complying with the tax obligations as an Airbnb host. In this comprehensive guide, we will explore the ins and outs of Airbnb income tax in Canada, including what needs to be reported, eligible expenses, GST/HST considerations, and more.

How to Report Tax on Airbnb Income on Tax Return in Canada?

Reporting your Airbnb income correctly on your tax return is crucial to avoid penalties and potential audits. The Canada Revenue Agency (CRA) considers income earned from short-term rentals, such as those facilitated through Airbnb, as taxable income. This means that you are required to report your Airbnb income on your personal tax return and pay taxes on the profits generated. Having said that, when it comes to reporting your Airbnb income, you have two options: reporting it as rental income or business income.

The CRA determines the classification based on the services you provide to your guests. If you simply rent out your space and offer basic amenities like heat, light, parking, and laundry facilities, your income will be considered rental income. On the other hand, if you provide additional services such as cleaning, meals, and security, you may be classified as carrying on a business.

Thus, to determine your tax obligations, you need to assess whether you are operating your Airbnb rental as a business or as a rental. If you regularly rent out your property and provide services similar to those offered by traditional accommodations, the CRA may consider it a business. However, if you are occasionally renting out your property and only providing minimal services, it will be considered rental income. 

To report your rental income on your tax return, you will need to fill out form T776 Statement of Real Estate Rentals. If you operate it as a business, you will report the income as business income on your personal tax return, using Form T2125 Statement of Business or Professional Activities.

Eligible Expenses for Airbnb Hosts

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One of the benefits of reporting your Airbnb income is that you can deduct eligible expenses to offset the income you earned. However, it is crucial to understand which expenses are deductible and keep accurate records to support your claims in case of a CRA audit.

Some common deductible expenses for Airbnb hosts include:

  1. Mortgage Interest: If you have a mortgage on your rental property, you can deduct the interest portion of your mortgage payments.
  2. Property Taxes: The property taxes paid on your rental property can be deducted as an expense.
  3. Condo Fees: If you're making money from renting out a condo, you can deduct the condo fees that cover your portion of the expenses for maintaining, repairing, and upkeeping the shared areas and facilities.
  4. Home Insurance Premiums: The insurance premiums you pay to protect your rental property can be claimed as a deduction.
  5. Maintenance and Repairs: Expenses for repairs, maintenance, and general upkeep of your rental property are deductible.
  6. Utilities: You can deduct a portion of your utility bills, such as electricity, water, and heating, directly related to your Airbnb rental.
  7. Cable and Internet: You can deduct a portion of these if provided to your guests during their stay.
  8. Advertising and Marketing: Costs associated with promoting your Airbnb listing, such as professional photography, online advertisements, and listing fees, are deductible.
  9. Furniture and Supplies: Any expenses for furnishing the rental space, including bedding, towels, kitchen utensils, and toiletries, can be claimed.
  10. Cleaning Services: If you hire cleaning services to prepare the rental space for guests or to clean between bookings, these costs are eligible for deduction.

It's important to note that only the portion of these expenses that relates to the rental activity can be claimed. The eligible portion depends on the percentage of your property that is used for earning rental income, as well as the length of time it is available and used for that purpose (such as the number of days per year). For example, if you rent out a portion of your house, you can only deduct expenses related to that specific area for the number of nights the area was rented.

Capital Expenses and Depreciation

In addition to current expenses, you may also have capital expenses associated with your rental property. Capital expenses are generally costs incurred to improve the property or extend its useful life. Examples include renovations, additions, or substantial repairs that enhance the property beyond its original condition.

Unlike current expenses, capital expenses cannot be deducted all at once. Instead, they are deducted over a period of several years as capital cost allowance (CCA). The CCA allows you to deduct a percentage of the property's capital cost each year. The specific CCA rate depends on the type of rental property and the date it was acquired.

It's important to keep track of both current and capital expenses, as they can have an impact on your taxable income and the amount of tax you owe.

Calculating Airbnb Expenses for Tax Purposes

To calculate the eligible expenses for tax purposes, you need to prorate them based on the portion of your property that is used for rental purposes. Let's look at some examples:

Scenario 1: When you rent your entire home

When renting your entire home, you need to calculate the number of days or weeks that you rented as a percentage of the total time you owned the home. This percentage is then applied to your eligible expenses to earn the Airbnb income to determine the deductible amount. For example, if you incurred $10,000 in eligible expenses related to the rental income for the year but you only rented the property for 80 days of the year. This means that you can only claim 22% or $2,200 of your annual expenses.

Scenario 2: When you rent a portion of your home

If you rent out part of your property for the year, you can claim only the expenses that relate to the rented area. For example, if you rent out 25% of your house, you can only deduct 25% of the eligible expenses for that area.

Using the example above, if you only rent out your house for 80 days, this means you can deduct 25% of the eligible expenses already prorated at 22%. This means the eligible expense deduction would be $550 ($2,200*25%).

Please note that you can calculate the eligible expenses using square footage, the number of rooms rented, or any other reasonable method.

Do I Need to Charge GST/HST as an Airbnb Host?

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Another important aspect of Airbnb income tax in Canada is the Goods and Services Tax (GST) or Harmonized Sales Tax (HST).  GST/HST applies to short-term housing rentals for periods less than 30 consecutive days while long-term residential rentals are exempt from GST/HST. If your total annual revenue from your Airbnb activities exceeds $30,000 in a 12-month period, you are required to register for and collect GST/HST from your guests.

Failure to do so can result in penalties and interest charges. If you are a self-employed individual or a business owner in Canada, it is important to be aware that if you are already GST/HST registrant, you are required to collect sales tax on Airbnb rentals, regardless of your income.

Please note that Airbnb does not handle the collection of GST/HST from customers. As a host, it is your responsibility to include the appropriate GST/HST in the rate you charge for your space and submit the tax to the government. It's important to track, charge, collect, report, and remit the GST/HST as required by the CRA.

Even if you don't meet the $30,000 threshold in a 12-month period, it is still beneficial to register for GST/HST voluntarily. It allows you to claim input tax credits for the GST/HST you pay on your business expenses such as advertising, maintenance, cleaning services, utilities, etc. This allows you to recover the GST/HST paid on expenses related to setting up your property for rental purposes and any other eligible operating costs. Please note that the recovery on your GST/HST will depend on the rental usage of your home.

Capital Gains Tax Implications for Airbnb Hosts

One of the key considerations for Airbnb hosts in Canada is the potential capital gains tax implications when you sell your principal residence or house. Capital gains tax is a tax imposed on the profit made from the sale of an asset, such as a property. When you start renting out personal property such as your principal residence, it is considered a change in the use of that property for income tax purposes.

This means that if you decide to convert your house into a rental property, you will be treated as if you have sold your property at its fair market value (FMV). This can result in a capital gain that is subject to tax.  The capital gain tax will be calculated on the difference between the FMV at the time of the change and its adjusted cost base (ACB).

However, there are certain exemptions and exclusions that can help reduce or eliminate the capital gains tax. The principal residence exemption, for example, allows you to exclude any capital gains from the sale of your primary residence. If you rent out a portion of your home on Airbnb, you may still be eligible for a partial exemption.

There is also a tax election available that will allow one to avoid reporting any capital gain from the deemed disposition of the rental property in the year of the change in use. However, there are specific guidelines for making this election, and it's important to be cautious in order to avoid unintentionally revoking it. It is recommended to speak to a tax professional that can provide expert guidance to ensure you are compliant with all the rules and regulations.

In addition to the income tax implications, we also should not overlook the important GST/HST implications that can arise when renting out your home. If your home is rented out for at least 90% of the time in rental periods shorter than 60 days, it may no longer be considered a "residential complex". This means that any future sale could be subject to GST/HST, which might come as a surprise to potential buyers who have to pay additional taxes on their purchase.

Related: Understanding Capital Gains Tax In Canada

Other Considerations  -  Home Insurance and Liability

Renting out your property on Airbnb may have implications for your home insurance coverage. It's crucial to review your insurance policy and speak with your insurance provider to ensure that you have appropriate coverage. Not all insurance policies cover short-term rentals, and you may need to make adjustments or obtain additional coverage to protect your property and liability.

By obtaining the right insurance coverage, you can mitigate risks and protect yourself financially.

Tips for Minimizing Your Airbnb Income Tax Liability as an Airbnb Host

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While it is important to meet your tax obligations as an Airbnb host, there are strategies you can employ to minimize your tax liability. Here are some tips to consider:

  1. Take advantage of deductions: Familiarize yourself with the eligible deductions and ensure you claim all applicable expenses to reduce your taxable income.
  2. Consider incorporation: Explore the option of incorporating and operating your Airbnb as a business rather than simply earning passive income. This way, you may be eligible to take advantage of Canada's lower small business rate and access other tax benefits. Having said that, if you are thinking of incorporating, it's imperative to ensure that your Airbnb complies with local regulations. This typically entails obtaining the necessary permits and licenses and ensuring that your vacation rental meets the appropriate zoning requirements.
  3. Seek professional advice: Consult with a tax professional who specializes in Airbnb income tax or short-term rental properties, to ensure you are maximizing your tax benefits and complying with the regulations. A tax professional can also provide valuable advice on how to structure your Airbnb business to minimize your tax liability. Remember that tax planning is an integral part of managing your Airbnb income tax and seeking professional advice can help you navigate the complexities of the Canadian tax system.

Record-Keeping and Documentation Requirements

As an Airbnb host, you are required to maintain proper records and documentation to support your income and expense claims. The CRA may request these records in case of an audit or review, so it is essential to keep them organized and accessible.

Some key records and documents you should keep include:

  1. Income Reports from Airbnb: Maintain copies of the income reports generated by Airbnb, which detail the amount of income earned from each guest.
  2. Expense Receipts: Keep receipts for all expenses related to your Airbnb rental, including mortgage interest, property taxes, repairs, and advertising.
  3. Bank Statements: Retain your bank statements that show the deposits received from Airbnb guests and any related expenses paid from your rental property account.
  4. Travel Logs: If you use your personal vehicle for Airbnb-related activities, maintain a travel log to track the mileage and expenses incurred.

By keeping accurate records and documentation, you can easily substantiate your income and expenses, ensuring compliance with CRA's requirements.

Common Misconceptions About Airbnb Income Tax in Canada

There are several misconceptions surrounding Airbnb income tax in Canada. It is crucial to separate fact from fiction to avoid potential pitfalls and non-compliance. Here are some common misconceptions debunked:

1. Misconception: Airbnb income is not taxable if it falls below a certain threshold.
Fact: All income earned from Airbnb rentals, regardless of the amount, is considered taxable income which needs to be reported on your personal return.
2. Misconception: Only full-time Airbnb hosts need to report their income.
Fact: Whether you rent out your property occasionally or on a regular basis, you are required to report your Airbnb income.  
3. Misconception: Airbnb income is exempt from GST/HST.
Fact: Depending on your rental income, you may be required to register for and remit GST/HST on your Airbnb rentals.  
4. Misconception: The CRA does not actively pursue Airbnb hosts for tax compliance.
Fact: The CRA has been increasing its efforts to ensure Airbnb hosts comply with tax regulations, including audits and penalties for non-compliance. The CRA takes non-compliance seriously and has the authority to impose penalties and interest on unpaid taxes.  

By understanding the facts and dispelling these misconceptions, you can ensure you meet your tax obligations and avoid unnecessary penalties or audits. If you have not been declaring Airbnb income- please talk to us about a Voluntary Disclosure to CRA which can potentially eliminate the associated penalties.

Conclusion

In conclusion, understanding and complying with Airbnb income tax regulations in Canada is crucial for hosts to avoid penalties and unnecessary tax burdens. By properly reporting your income, documenting your expenses, and seeking professional advice when needed, you can navigate the world of Airbnb income tax in Canada with confidence. So, enjoy the benefits of being an Airbnb host while fulfilling your tax obligations responsibly. If you have any questions or concerns about Airbnb income tax, please contact us.  We are here to help!

If you want to learn more about other tax and accounting topics, explore the rest of our blog!


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

Understanding Capital Gains Tax In Canada

Capital gains tax is a crucial aspect of the Canadian tax system that every individual and business owner needs to understand. In Canada, the capital gains tax is levied on the realized gain or profit you make from selling your investments. The tax rate varies depending on your income level and the type of investment you hold, and it can have a significant impact on your bottom line.

In this article, we'll explore the ins and outs of capital gains tax in Canada, and share some tips and strategies for minimizing your tax liability while still making the most of your investment opportunities. Whether you're a seasoned investor or just getting started, this guide will help you navigate the complex world of capital gains tax and make the most of your investment portfolio.

What are capital gains?

A capital gain is the profit you make from selling an asset or a capital property, for more than its adjusted cost base. There are various types of capital property that generate capital gains upon their sale. The most common include:

  • stocks and bonds and units of a mutual fund trust
  • land
  • building
  • equipment you use in a business
  • antiques
  • cottages

Capital gains are taxed differently from other forms of income, such as wages or salaries. Instead of being taxed at your regular income tax rate, capital gains are subject to a separate tax rate known as the capital gains tax. The tax rate you pay on your capital gains depends on your income level and the type of investment you hold.

What are capital losses and their impact on capital gains tax?

Along with capital gains, investors may also experience capital losses. Capital losses occur when an asset decreases in value and is sold for less than its original purchase price. For example, if you buy a stock for $10 and sell it for $5, your capital loss would be $5. Capital losses can offset any capital gains that you make in the same year, thus reducing your total tax liability.

It's important to note that capital losses can not be used to offset other types of income you've received. Further, If your capital losses exceed capital gains, the Canada Revenue Agency (CRA) permits you to carry forward the losses to future tax years. Additionally, you may apply the losses to capital gains from the previous three tax years.

What is a realized vs. unrealized capital gain or loss?

Realized gains and losses refer to profits or losses from investments that have been sold. Unrealized gains and losses refer to profits or losses from investments that have not yet been sold.

In simple terms, a capital gain that has been realized means that it has happened for real. On the other hand, an unrealized capital gain is just an estimate of the potential gains or losses. This means that your obligation to pay capital gains tax is only triggered when a realized gain has occurred via a sale transaction. Once you sell your stocks, you no longer own them and any profit you made from the sale is your realized capital gains.

When do you pay capital gains tax in Canada?

As indicated in the section above, a capital gain is generally triggered when you sell an investment that has gone up in value. In simple cases, this is when your obligation to pay capital gains tax occurs on your tax return. However, there are other circumstances where you might be required to pay capital gains when filing your tax return. To understand when this happens, one needs to remember the term "deemed disposition".

Capital gains can be triggered in a situation called a "deemed disposition." This occurs when the nature of an asset changes in the eyes of the Canadian tax authorities due to certain life events, even if the asset remains in your possession. Examples of such events include:

  • emigration
  • ceasing to be a Canadian tax resident
  • change of use of property from principal residence to income-earning property
  • death of the taxpayer

If a deemed disposition occurs, any profits are considered as if the properties were sold at the current market value and then instantly re-bought at the same value.

It's important to keep detailed records of all capital gains and losses to ensure that you can accurately report them on your tax return. Failure to report capital gains and losses can result in penalties and interest charges.

Related: Leaving Canada: Know the Tax Implications

What is the capital gains tax rate in Canada?

In Canada, capital gains are taxed at a rate of 50% of your marginal tax rate. This means that if you sell an investment, 50% of your gain is considered taxable and will be taxed at your marginal tax rate based on your income. The only exception to this is if the CRA considers you a day trader. In such cases, all of your profits will be considered business income, and you will be taxed at your current tax rate.

Your marginal tax rate is the rate at which your last dollar of income is taxed. The total tax payable varies based on several factors, such as the amount of your income and your place of residence. This means that if you have a high income, you'll pay a higher capital gains tax rate than someone with a lower income.

How to calculate capital gains and losses?

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Calculating your capital gains tax in Canada can be a complex process. To calculate your tax liability, you'll need to know the cost of your investment, the proceeds from the sale of the investment, and any expenses related to the sale. You'll also need to know your marginal tax rate and the length of time you held the investment.

To calculate capital gains or losses in Canada, you need to know the following three amounts:

1. Proceeds of disposition: this is the amount of money you received when you sold or disposed of the asset.

2. Adjusted cost base (ACB): the ACB is the original cost of the asset plus any additional costs you incurred to acquire it (like legal fees or commissions). It also includes any capital improvements you made to the asset.

3. Outlays and expenses: these include any selling costs to sell your investment such as commissions, fixing-up expenses, brokers' fees, maintenance expenses, legal fees, and finder's fees.

When you have these amounts, here’s the calculation to figure out your capital gain:

Proceeds of disposition – Adjusted Cost Base - Outlays and expenses = CAPITAL GAIN or LOSS

This will give you the capital gain or loss. If the result is positive, you have a capital gain. If it's negative, you have a capital loss.

To further calculate how much tax is payable on that capital gain, you need to follow the following steps:

1. Apply the 50% inclusion rate: In Canada, only 50% of the capital gain is subject to taxation. Multiply the capital gain by 50% to calculate the taxable capital gain.

For example, if you sold an asset with an ACB of $5,000 and Proceeds of disposition of $15,000, and zero capital outlays, your capital gain would be $10,000. The taxable capital gain based on a 50% inclusion rate is $5,000.

2. Determine your marginal tax rate: Your marginal tax rate depends on your income level. Using the same example as above, the 2023 federal and provincial brackets for someone in the highest tax bracket is 33% in federal tax and 13.16% provincially if they live in Ontario, thus making a combined marginal rate of 46.16%.

Thus, on a taxable capital gain of $5,000 with a marginal tax rate of 46.16%, the tax payable on the capital gains would be $2,308.

It's important to note that this is a simplified explanation of how to calculate capital gains and losses in Canada. The actual calculation may be more complex depending on the specific circumstances. It's always recommended to consult with a tax professional or refer to the CRA for more detailed information.

Capital gains tax exemptions and deductions

In Canada, there are several tax exemptions and deductions available that can help reduce your capital gains tax liability. The most common exemptions and deductions include the following:

1. Principal residence exemption

The principal residence exemption allows you to avoid paying capital gains tax on the sale of your primary residence. If you sell your home and it qualifies as your principal residence, you won't have to pay any tax on the capital gains you make from the sale. To qualify for the exemption, you must have lived in the property as your primary residence for the entire time you owned it.

If you've only lived in the property for part of the time you owned it, you may still be eligible for a partial exemption. The amount of the exemption will depend on the length of time you lived in the property compared to the length of time you owned it.

It's important to note that if you're selling a rental property or a vacation home, you won't be eligible for the principal residence exemption and will be subject to capital gains tax.

2. Lifetime capital gains exemption

The lifetime capital gains exemption allows you to avoid paying tax on a portion of your capital gains. The exemption applies to qualified small business corporation shares, qualified farm property, and qualified fishing property. For 2023, the lifetime capital gains exemption is $971,190. This means that you can sell qualifying assets and avoid paying tax on up to $971,190 of the capital gains you make.

To qualify for this exemption, you must have owned the shares for at least 24 months and the company must meet certain criteria.

How to avoid or minimize capital gains? tax in Canada?

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Now that you understand how capital gains tax works in Canada and the impact it can have on your investment returns, let's look at some strategies you can use to minimize your tax liability.

1. Hold investments for the long term

One of the easiest ways to minimize your capital gains tax liability is to hold your investments for the long term. If you hold an investment for more than a year, you'll be subject to the capital gains tax rate of 50% of your marginal tax rate, which is generally lower than your regular income tax rate.

2. Tax-loss harvesting

Tax-loss harvesting is a strategy that involves selling investments that have decreased in value to offset gains from other investments. This can help reduce your tax liability by offsetting your capital gains with capital losses. However, it's important to be aware of the "superficial loss" rule, which prevents you from claiming a capital loss if you buy the same investment within 30 days of selling it.

Related: Year-End Tax Planning Tips - 2022

3. Utilize tax-advantaged accounts

Contributing to tax-advantaged accounts, such as Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs), can also help minimize your capital gains tax liability. These registered accounts allow you to grow your investments tax-free or defer taxes until retirement, helping to minimize your capital gains tax liability. For example, holders of a Tax-Free Savings Account (TFSA) pay no tax of any kind whether growing or withdrawing their investment, while any investment income earned in a Registered Retirement Savings Plan (RRSP) is not taxed until it is withdrawn.  

Related: What is Non-Taxable Income in Canada?

4. Donating investments

Transferring investments, such as gifts of shares or units of a mutual fund is another way to reduce or eliminate your capital gains tax. Investments donated to a registered charity or other qualifying donee are not subject to capital gains tax or are required to be included as income on your tax return.

To be eligible to receive the tax rate of zero on any donated investments, it is essential that there is no advantage gained from donating the asset. The Canada Revenue Agency (CRA) defines an advantage as any benefit, compensation, property, service, or use that you receive as a partial expression of gratitude or consideration for the gift.

If the CRA determines that you have gained an advantage through your investment donation, only a portion of your investment will qualify for a zero capital gains tax rate. The remaining gain will be subject to a 50% tax rate, similar to a regular investment.

These are just a few strategies to consider when trying to minimize capital gains tax in Canada. It's always recommended to consult with a tax professional to fully understand the tax implications and determine the best strategy for your specific circumstances.

Common mistakes to avoid when dealing with capital gains tax

Dealing with capital gains tax can be a complicated and confusing process. Here are some common mistakes to avoid when dealing with capital gains tax:

Forgetting to include capital gains on your tax return

It's important to report all capital gains on your tax return, even if you think they may be exempt or if you only made a small profit. Failing to report your capital gains can result in penalties and interest charges.

Failing to keep accurate records

It's important to keep accurate records of all your investment transactions, including the cost of your investments, the proceeds from the sale of your investments, and any expenses related to the sale. This information will be necessary when calculating your capital gains tax liability.

Ignoring tax-advantaged accounts

Tax-advantaged accounts, such as RRSPs and TFSAs, can be a valuable tool for minimizing your capital gains tax liability. Ignoring these accounts can result in unnecessary tax payments.

Conclusion

Investing in the financial markets can be a great way to grow your wealth over time. However, it's important to understand the impact of capital gains tax on your investment returns. By understanding the basics of how capital gains are taxed, as well as the different exemptions, deductions, and strategies available, you can make informed decisions and maximize your returns. Whether you're a seasoned investor or a first-time seller, working with a tax professional can help ensure that you're maximizing your tax benefits while minimizing your tax liability. If you have any questions or concerns about capital gains tax, please contact us.  We are here to help!

If you want to learn more about other tax and accounting topics, explore the rest of our blog!


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

Top 5 Reasons You Need an Accounting Firm For Your Business

Running a business often involves managing numerous financial and administrative tasks, from bookkeeping to filing taxes. While it can be tempting for busy business owners to handle these obligations themselves, partnering with an experienced accounting firm can make a world of difference in your bottom line.

Yes, working with an accounting firm can make all the difference. Your hired professionals will handle all the bookkeeping jobs for your business.

If you're still on the fence about leveraging professional accounting services for your small or medium business, here are five reasons you need professionals to help guide your company's growth and success.

Receive Expert Advice and Guidance on the Best Financial Strategies for Your Business

A solid financial strategy is crucial for success and growth in the competitive business world. Expert advice and guidance from seasoned professionals can help you navigate the complex financial landscape and make informed decisions. They are well-versed in analyzing your business model, identifying potential risks, and providing tailored recommendations for your needs.

Furthermore, they can assist you in optimizing your cash flow, budgeting effectively, and utilizing the most favorable financing options. By tapping into the knowledge and experience of financial experts, you can ensure your business is on the right path and fully equipped to thrive in the ever-changing market.

Assistance With Complex Tax Matters & Tax Returns

Navigating the labyrinth of complex tax matters and tax returns can be daunting for individuals and businesses. With constantly changing tax laws and regulations, it is essential to have a reliable source of assistance to help you stay on top of these changes and avoid any costly pitfalls.

Expert tax advisors can provide invaluable guidance, ensuring you are well-informed and equipped to handle your tax obligations accurately and efficiently. Their in-depth knowledge and experience will help you maximize deductions and credits and provide tailored tax planning strategies to optimize your financial situation. By engaging a tax professional's services, you can minimize your tax liabilities, achieve full compliance, and gain peace of mind knowing your taxes are in capable hands.

Accurate Bookkeeping Services to Help You Manage Your Finances More Efficiently

Managing finances efficiently is crucial to achieving success and stability in today's fast-paced business landscape. Accurate bookkeeping services are designed to aid businesses in their financial management journey - from organizing financial records to ensuring compliance with the latest regulations.

By utilizing the expertise of seasoned professionals, you can save time and effort and gain a deeper understanding of your financial standing. These services provide invaluable insights into your cash flow and operational expenses, empowering you to make informed decisions and optimize your business's financial health.

Access to Specialized Resources to Help You Make Informed Decisions About Your Business Finances

When running a successful business, being informed about your finances is paramount. Fortunately, specialized resources are available to provide small-business owners with up-to-date advice and guidance when managing their money.

The helpful references equip small businesses with the knowledge to make decisions regarding their finances that are best suited for the future of their business. Moreover, such resources regularly review changing market trends to ensure that your financial choices remain relevant in light of shifting industry landscapes.

Peace of Mind Knowing That Your Business’s Financials Are Being Handled Professionally and Accurately

Owning and running a business can be an overwhelming and stressful experience. With the pressure of keeping up with clients, managing employees, and growing your business, financials can fall by the wayside. However, having peace of mind knowing that your business's financials are being accurately handled by a professional is essential.

Professional accounting services allow you-

Having an experienced accountant handle all these duties is often less expensive than trying to complete these tasks yourself. Once engaged with a professional accountant providing quality service, you will have greater peace of mind.

Are You Looking For A Trustworthy Accounting Firm In Hamilton?

Let NBG Chartered Professional Accountant Help

At NBG Chartered Professional Accountant, we understand the importance of having quality accounting services to help your business succeed. We are proud to be one of the most trusted accounting firms in Hamilton, with a wide range of services available to our clients. We are dedicated to providing the highest quality of service and support so that our clients can rest assured knowing their financials are taken care of.

We offer everything from bookkeeping, tax preparation, and estate planning services to financial reporting and assurance services. We have decades of combined experience in the field and are knowledgeable in all accounting-related areas. We will work with you to develop a unique plan tailored to your business’s needs so you can be confident that your finances are properly managed.

At NBG Chartered Professional Accountant, we strive to ensure our clients get the greatest value for their money. Our commitment to excellence ensures that our clients have access to the best advice possible while providing peace of mind knowing their finances are in good hands. Contact us to see how we can help your business reach its goals!

6 Reasons to Hire a Professional Accountant to Help With Your Tax Planning

Tax planning can be daunting and overwhelming, especially with the ever-changing laws that come into play. Making sure your taxes are filed accurately is important for not only avoiding potential penalties but also maximizing your deductions when it comes time for tax season. 

With these considerations in mind, hiring a professional accountant could be a great option if you’re looking to have the ultimate peace of mind when filing your taxes. In this post, we'll discuss 6 reasons why working with an experienced accountant is beneficial when it comes to managing and preparing your taxes.

Here’s why you should always work with a finance professional when handling accounting-related matters- 

Utilize a professional accountant’s expertise to ensure accuracy & compliance with the tax law.

Navigating the tax code can be a challenge for any individual or business. That's why it's important to rely on the expertise of a professional to ensure accuracy and compliance with tax law. 

With their knowledge of ever-changing tax regulations and years of experience, they can assist in preparing tax returns, identifying deductions and credits, and making timely payments. By utilizing the services of a professional accountant, individuals, and businesses can save time, reduce stress, and avoid costly mistakes.

Take advantage of their knowledge of tax breaks & deductions to maximize your savings.

Whether you're a seasoned taxpayer or a first-time filer, there's always more to learn about tax breaks and deductions. By taking advantage of the knowledge and expertise of tax professionals, you can maximize your savings and keep more money in your pocket. 

From education credits to home office deductions, there are countless ways to reduce your tax burden and lower your overall tax liability. Don't leave money on the table - speak to a tax expert today and take advantage of all the tax breaks and deductions available.

Enjoy peace of mind knowing that someone else is taking care of the complexities of taxes for you.

Taxes can be a major source of stress and frustration for many people. There are countless rules, regulations, and forms to navigate, and the consequences of making a mistake can be severe. That's why knowing you don't have to do it alone is a relief. 

By entrusting your tax preparation to a qualified professional, you can enjoy peace of mind knowing that someone else is taking care of your complexities. That means less time poring over spreadsheets and more time doing the things you love. Furthermore, with an expert handling your taxes, you can rest assured that you're not missing any potential deductions or credits. 

Get insight into your financial situation from an unbiased third party.

Getting an accurate picture of your financial situation alone can be difficult. That's where an unbiased third party can come in handy. By seeking the advice of a financial planner or advisor, you can get an objective assessment of your finances and a realistic plan for achieving your goals.

Feel free to seek out the guidance of a financial expert and get the insight you need to succeed. They can help you identify areas for improvement and suggest steps to take to get your finances on track. With their help, you can take control of your finances and make smart decisions for a secure future.

Have access to a trusted adviser who can answer any questions about filing your taxes.

Filing taxes can be daunting for many people, filled with seemingly endless paperwork and complex regulations that can be difficult to navigate. That's why having access to a trusted adviser who can answer your questions and provide guidance can be invaluable. 

Whether you're a first-time filer or an experienced taxpayer, having an expert on hand to offer insights and advice can help to ensure that you're making informed decisions and maximizing your returns. With the right adviser, you can feel confident and secure in navigating the often confusing and overwhelming world of tax preparation.

Receive help preparing for potential audits and appealing incorrect assessments.

As a business owner, a potential audit can be extremely stressful. It's important to not only be prepared but also to know how to appeal an incorrect assessment. That's where getting help from professionals can make a big difference. 

By working with experts who understand the audit process and how to navigate appeals, you can be better equipped to handle any surprises that may come your way. With their assistance, you can focus on running your business with peace of mind, knowing that you have a team supporting you every step. Don't let the fear of an audit hold you back - seek help today and be ready for whatever comes your way.

Choose NBG As Your Accounting Firm To Work With A Trusted Tax Accountant 

Are you looking for a trusted and reliable accountant in Hamilton? Look no further than NBG Chartered Professional. Our experienced tax accountants are ready to help you with all aspects of accounting services.

At NBG Chartered Professional, we offer various accounting services to meet your business needs, including tax preparation, bookkeeping, financial statement preparation, and more. With a wealth of knowledge and resources, our team can help you stay up-to-date with your finances, manage your cash flow, and maximize your profits.

When you choose NBG Chartered Professional as your accounting firm in Hamilton, you gain a partner who will work with you to help you achieve your financial goals. Whether you need to prepare your tax returns or plan your finances, we will provide personalized, proactive, and innovative solutions to help you grow and succeed.

We pride ourselves on delivering excellent customer service and building long-term relationships with our clients. Also, we believe in being transparent and open about our services, fees, and processes, ensuring that you always stay informed.
So, if you are seeking accounting services from an experienced and trusted accounting firm, look no further than NBG Chartered Professional. Contact us to schedule a consultation and discover how our accountants can help you with all your accounting needs.

2023 Tax Season: What You Need to Know

The 2023 tax season will bring some changes that taxpayers need to be aware of to make sure they are compliant with their filing obligations. You can file your 2022 tax return starting on February 20, 2023. The deadline for most Canadians to file their 2022 income tax and benefit returns is April 30, 2023 but you have until May 1 this year as April 30 falls on a Sunday. If you or your spouse or common-law partner had self-employment income in 2022, you have until June 15, 2023 to file your return(s). In either case, any taxes owing must be paid on or before May 1, 2023. Here are some key changes for the 2023 tax season that may have an impact on your situation, including new credits and deductions that you may be eligible for. We have summarized the most important changes for you below.

COVID-19 benefits

If you received COVID-19 benefits from the CRA in 2022, such as the Canada Recovery Sickness Benefit (CSRB), Canada Recovery Caregiving Benefit (CRCB), Canada Recovery Benefit (CRB) or Canada Worker Lockdown Benefit, you will receive a T4A slip with the information you need to fill out for your tax return.

In certain situations, you may end up owing additional tax on the COVID-19 benefits that were received as taxes withheld on the benefits may not have been enough. In addition, some benefits may need to be repaid if your net income is above a certain threshold. For example, if you received the CRB and your net income after certain adjustments is more than $38,000, then you may have to repay all or part of the benefits you received in 2022.

Work-from-home expenses

Similar to 2021, if you worked from home in 2022 due to COVID-19, you may be eligible to claim a deduction of up to $500 using the flat rate method, provided you worked more than 50% of the time from home for a period of at least four consecutive weeks due to Covid-19. If you have been keeping track of your expenses, you may be able to claim your actual expenses using the detailed method. To do this, you employer will need to provide you with a completed Form T2200 or Form T2200S.

Eligible expenses include utilities, home internet, rent, and maintenance and repair costs. Commission employees can also claim home insurance, property taxes, and the lease of electronics such as cellphone, laptop, tablet, etc.

Digital news subscription tax credit

For 2020 to 2024, if you paid for a digital newspaper app or website, you may be able to claim the digital news subscription tax credit which is worth 15 per cent on qualifying expenses up to $500. The amounts must have been paid to a qualified Canadian journalism organization for a digital news subscription with content that is primarily written news. A list of qualifying digital news subscriptions can be found here.

Rates and limits

To keep up with inflation and maintain the buying power of Canadians, several tax rates and limits have been changed in 2022.

  • Federal Tax Brackets: the new federal tax brackets have been adjusted. The adjustment upwards means that Canadians might find themselves shifted into a lower tax bracket and pay less taxes because of it. The new federal tax brackets for 2022 are as follows:
    • $0 to $50,197 of income (15%)
    • More than $50,197 to $100,392 (20.5%) 
    • More than $100,392 to $155,625 (26%)
    • More than $155,625 to $221,708 (29%)
    • $221,708.01 and higher (33%)
  • Basic Personal Amount (BPA): the government has increased the basic personal amount to $14,398. This means that all taxpayers can claim the BPA as a tax deduction up to this amount.
  • Employment Insurance: effective January 1, 2023, the maximum insurable earnings will increase from $60,300 to $61,500 for 2023. Employment Insurance (EI) premiums are also increasing from 1.58% to 1.65% in 2023.
  • Canada Pension Plan (CPP): the maximum pensionable earnings under the CPP for 2023 will be $66,600—up from $64,900 in 2022. The basic exemption amount for 2023 remains at $3,500. The employee and employer contribution rates for 2022 will be increasing to 5.95%, up from 5.70% in 2022 (6.4% for the Quebec Pension Plan), up from 5.70% in 2022. The employee’s and employer’s maximum contribution for CPP is $3,754.45 and $4,038.40 for QPP.
  • RRSP: The maximum RRSP contribution limit for 2022 is $29,210. For 2023, the limit has been increased to $30,780.
  • Old Age Security (OAS): If you receive OAS, the repayment threshold for 2022 and 2023 is $81,761 and $86,912 respectively, meaning your OAS will be reduced if your taxable income is above this amount.
  • Canada Child Benefit (CCB): CCB will continue to be indexed to inflation. For the 2022-2023 benefit year, the maximum a parent can receive is $6,997 for children under age 6 and $5,903 for children ages 6 to 17.
  • Child Disability Benefit: For parents of disabled children under the age of 18, the Child Disability Benefit has increased to $2,985 for the July 2022 to June 2023 benefit period.

Changes in Tax Credits

Below are some of the Federal and provincial (Ontario) tax credit changes for the 2022 tax year:

FederalOntario

Automobile Income Tax Deduction Limits: There is an increase in the Capital Cost Allowance (CCA) ceiling limits for zero-emission and passenger vehicles. The deductible monthly leasing costs have also increased by $100. In addition, the per kilometer rate paid by employers to employees who use their personal vehicle for work has increased by 2 cents per km from last year.
Ontario Staycation Credit: This is a one time tax credit for Ontarians who are able to claim 20% of their stay in an Ontario hotel, cottage or campground, during 2022 up to $1,000 individually or $2,000 as a family.  
Home Accessibility Tax Credit (HATC): The HATC is a non-refundable tax credit that is available for expenses incurred in connection with alteration of a home to make it more accessible for a qualifying individual, which includes an individual who is over 65 years old or one who is entitled to the disability tax credit. Starting in 2022 and subsequent taxation years, this credit has been increased to $20,000. This means that eligible individuals can receive a tax credit of up to $3,000 (previously $1,500).Ontario Seniors Care at Home Tax Credit: This is a refundable personal income tax credit to help low-income seniors with eligible medical expenses, including expenses that support aging at home. The credit is equal to 25% of your eligible medical expenses up to $6,000, for a maximum credit of $1,500. The credit is reduced when family net income is over $35,000 and eliminated at $65,000
Labor Mobility Deduction (LMD): For 2022 and subsequent years, a new deduction is available for certain tradespersons or apprentices (Eligible Workers (EW) who work in temporary work locations. This credit allows eligible workers to deduct certain travel and relocation expenses incurred  to earn income at a temporary work relocations.Seniors’ Home Safety Tax Credit: This is a new credit that supports seniors in making their homes safer and more accessible, with a credit of 25% up to a maximum of $10,000 in eligible expenses. The maximum credit is equal to $2,500 per year.
Air Quality Improvement Tax Credit: This is a refundable credit, where eligible entities that incurred expenditures between September 1, 2021 and December 31, 2022,  can claim up to 25% of their qualifying ventilation and air filtration system upgrades to a maximum of $10,000 per qualifying location and a maximum of $50,000 across all qualifying locations. The tax credit is available to sole-proprietors and Canadian-controlled private corporations(but not trusts), and members of a partnership that are qualifying corporations or individuals (other than trusts).   
Medical Expense Tax Credit for Surrogacy and Other Expenses: For 2022 and subsequent taxation years, medical expense credit has expanded to include a variety of expenses related to the areas of surrogacy, sperm, ova or embryo donations.   
Home Buyers’ Tax Credit: For 2022 and subsequent tax year, the non-refundable tax credit of $5,000 for first -time home buyers has been increased to $10,000. The enhanced credit will provide up to $1,500 in tax relief to eligible first-time home buyers. This measure will apply to homes purchased on or after January 1, 2022.   

The 2023 tax season is quickly approaching and it's important to be prepared for the changes that may come with filing your 2022 tax return. Reach out to our tax experts for help if you need assistance with filing your taxes this 2023 tax season. We will ensure that we maximize your refund or minimize your tax liability through the utilization of all applicable tax credits and deductions. If you require further information about any of the above credits or you would like to know whether you meet the eligibility criteria, please contact us.

If you want to learn more about other tax and accounting topics, explore the rest of our blog!


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.