When deciding as to whether a salary should be paid to a family member, or more specifically to one’s spouse, numerous questions arise. On one side, there is the question of the risk involved that the salary may be unreasonable and having the expense being disallowed. On the other side, there is the benefit of lower tax brackets, RRSP contribution room and unused credits. In a situation where the spouse contributes nothing to the business but is paid a salary which, if paid to an unrelated employee, would have been much lower based on the work performed, the risk mentioned above increases. However, there are numerous functions that can be performed by family members away from the business premises which are easily overlooked. These functions are summarised below:
Answering the telephone and taking messages,
Delivery and pickups, and
In rendering government decisions to accept salaries paid to family members easier, numerous aspects should be considered such as:
Having a written contract of employment between the corporation and a family member,
Salaries commensurate with duties performed,
The educational background of family members,
Not being overly aggressive in paying salaries to family members,
Keep copies of cancelled cheques, and
If payment is made in cash to family members, have them sign receipts.
The family members’ salaries would be reported on T4’s (Relevés 1 for Quebec) as they normally would if paid to an unrelated employee.
If you run your own business or you are self-employed, you may be tempted to report only part of your income to the tax authorities. Or you might consider suppressing information about your activities.
If you are audited by the Canada Revenue Agency (CRA) you should consider this. The CRA auditor has access to the Internet. What will show up if the auditor enters your name or your business name in Google or one of the other search engines? Will the auditor discover information about activities that you have failed to report?
A CRA auditor now routinely uses publicly available search engines, Google for example, to discover information about companies and individuals that are being audited. In one recent case, the CRA disallowed a Voluntary Disclosure application because the taxpayer submitted an incomplete disclosure. He failed to provide information about his involvement in certain business activities that showed up during a Web search.
So remember. Everyone is watching you on the Web including Big Brother!
If you owe money to any of the tax authorities because you failed to file a return for one or more years, you can make a voluntary disclosure. You will pay only the tax due plus interest. No penalties will be assessed. You have to make a complete disclosure. The information can be less than or more than a year old. Plus you must contact the Canada Revenue Agency prior to the start of an investigation or an audit.
Typical voluntary disclosures include; domestic business income never reported, failure to collect or remit GST/HST and/or source deductions, information returns not previously submitted, foreign wages and benefits not reported, and domestic and foreign dividends and interest never reported.
an employee who contributes to the Canada Pension Plan (CPP), whether you are just starting your career or you are planning to retire soon;
a self-employed person who contributes to the CPP;
between the ages of 60 and 70 and you work while receiving your CPP retirement pension (or if you work outside of Quebec while receiving a Quebec Pension Plan (QPP) retirement pension); or
an employer who contributes to the CPP on behalf of your employees.
You are not to be affected by these changes if you started receiving a CPP retirement pension before December 31, 2010, and you remain out of the work force.
The CPP operates throughout Canada, except in Quebec, where the Quebec Pension Plan (QPP) provides benefits. These changes do not apply to QPP.
What are the changes?
The following changes are being phased in gradually between 2011 and 2016. The first major change occurred in January 2011 for people retiring after age 65:
Your monthly CPP retirement pension amount will increase by a larger percentage if you take it after age 65 (gradually from 2011 to 2013).
Your monthly CPP retirement pension amount will decrease by a larger percentage if you take it before age 65 (gradually from 2012 to 2016).
The number of years of low or zero earnings that are automatically dropped from the CPP retirement pension calculation will increase (2012 and 2014).
You are now able to start receiving your CPP retirement pension without any work stoppage.
Now if you are under age 65 and you work while receiving your CPP retirement pension, you and your employer must make CPP contributions (or if you work outside of Quebec while receiving a QPP retirement). These contributions will increase your CPP retirement benefits starting the following year.
After January 1st, 2012, If you are age 65 to70 and you work while receiving your CPP retirement pension, you can choose to make CPP contributions (or if you work outside of Quebec while receiving a QPP retirement pension), these contributions will increase your CPP retirement benefits beginning in the following year.
These changes were designed to improve retirement flexibility for working individuals in Canada, enhance pension coverage, and improve equity in the CPP.
In general, every business starts out of someone’s home. Even if the business will eventually grow to a multi-million dollar business, it has to start somewhere. The home office is usually one or two rooms in the home that are used for record keeping, storage and meetings. The office typically has a desk, a few chairs, the computers and a closet full of stuff. If the business does meet with clients or suppliers, the home office is where they meet.
You can claim the home office as an expense in your business. To do this, you need to determine the total amounts that you spend for mortgage interest or rent, utilities, condo fees, insurance, property taxes and maintenance costs. Most of these can be determined pretty easily as they are the same amount every month for the year. Probably the most complex calculation is the utilities because you have to find all of those crazy utility bills. Not completely impossible but probably a bit of a pain to do.
Once you have done this, then you need to determine how much of these total costs you can claim. To do this, you calculate what percentage your office space is to the whole house. So if you have a room that is 10ft by 10ft, you then multiply these together to get 100 sq feet. You then need to divide this number by the size of the total house. The total house space would typically by the number provided to you by your real estate agent or landlord when you moved into the house. If the house is 1000 Sq. Ft, then you divide 100 by 1000 to arrive at .10 or 10%. Once you have this, you then multiply the total costs as described above by the percent that you have calculated to arrive at the total home office expense. That is then the business claim you can make.
You can have a home office right up to the time that you rent office space or shop space somewhere else. In other words, if you are not paying rent to someone else in the world for an office, then you can claim your home office expense. It’s when you rent outside space that the home office advantage is lost. You simply cannot have an outside office and a home office.
One of the more common expenses claimed by taxpayers are automobile expenses (applies to any motor vehicle such as a van, bus, pickup truck, station wagon, SUV, or other truck). Many individuals use their automobile for work or business and incur personal expenses in doing so. It is important to note that only expenses of a business nature are eligible as a deduction against their related income. As such, the Canada Revenue Agency (CRA) has strict requirements in ensuring that only business related expenses are claimed. As a result, the retention of automobile tax records becomes imperative for every taxpayer that uses an automobile for work or business.
Maintaining Automobile Expenses
The use of an automobile log provides one of the safest ways to substantiate and keep track of all your automobile expenses incurred that are deductible for income tax purposes and the kilometers driven on income earning activities. The type of expenses to keep track of can be broken down into two categories. They are operating and fixed expenses.
The types of operating expenses related to an automobile include gasoline, maintenance and repairs (such as oil changes and car washes), insurance, license and registration fees. Such expenses may vary in relation to the amount of kilometers driven.
Fixed expenses differ from operating expenses in that they relate to the automobile itself as opposed to the amount of kilometers driven. When an automobile is purchased, they would relate to the capital cost allowance and interest expense when financed. In the case of a leased automobile, such expenses would include the lease payments. It is important to note that there are special rules and restrictions which limit the portion of actual costs that can be included in your total expenses. You can consult with your Padgett Business Services representative to obtain more information on what these special rules and limitations are.
Because your automobile will most likely be utilized for both business and personal reasons, it is essential that the total automobile expenses be allocated between these two uses on a reasonable basis in order to arrive at only the deductible portion for income tax purposes. The best method to achieve this will involve the distance traveled calculated by taking total kilometers driven for business purposes divided by total kilometers driven for both business and personal purposes. Certain expenses such as parking expenses incurred while on a business trip and car repairs made as a result of an accident while on a business trip do not have to be prorated. However, such expenses incurred resulting from a personal trip made are not deductible.
The Canada Learning Bond (CLB) is part of the Canadian RESP program. Actually the CLB is a grant. The big difference between this grant and the regular RESP grants is that no contribution is required. Once you qualify, you apply, and you can receive up to $2,000 deposited in your RESP account per child. The family net income must be below $43,561, in 2013 ($42,707 for 2012). An RESP account can be set up at a financial institution. This grant will provide more low income families the opportunity to get their children started in advancing their education. Go to www.canlearn.ca for more details.
A RESP is a savings plan for post-secondary education which allows funds to accumulate on a tax-deferred basis up to certain limits. There is no annual limit for contributions. For each beneficiary the lifetime limit on contributions is $50,000. Although there is no tax deduction, the interest and income earned within the plan is sheltered, which means that the tax is only payable on the funds withdrawn to fund the student’s education. And it is taxed at the student’s low rate.
If you think that paying for your employee’s disability premiums is always a good thing, think again. If you provide your employees disability as a nontaxable fringe benefit, payments they receive upon their disability will be, in most cases, FULLY taxable to them!
Payments received due to disability are not taxable if:
Your employees paid the premiums on the policy with after-tax funds, OR,
You paid the premiums but deducted the amount from their income.
The cost of disability insurance – even over a good amount of time – can be far less than the tax due on the income received under the policy. Like all insurance, it all depends on whether you actually collect under the policy.