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Can You Claim Medical Expenses on Your Taxes?

can you claim medical expenses on your taxes ontario
Many clients forget to claim medical expenses and that they can be a valuable tax credit which helps reduce the amount of federal tax you pay each year. In this article, we look at what can and cannot be included in this category and include some useful tips.Medical expenses incurred inside Canada get included in Line 332 on your tax return. Federal tax credits are applied to tax payable at the rate of 15% of the total credits. Therefore, if you have $1,000 of allowable medical expense you get a $150 federal tax reduction. The “Allowable” portion is calculated by taking the total of all medical expenses and deducting 3% (to a maximum of $2,237) of your net income (Line 236). Couples can add the expenses for the whole family and decide which individual will make the claim. In terms of who should claim the expenses for married or common-law couples it is a matter of trial and error.We have software that optimizes the claim but unless you use a professional tax preparer you must try various iterations to arrive at the best solution. Clearly, the lower income partner will have a smaller reduction of the total expenses (and therefore a higher tax credit) but they may not benefit as much as the partner who has more tax to pay.There is also an Ontario medical expense supplement which is not provided to persons who (or their spouse) earn more than $50,017.What Medical Expenses Can You Claim?CRA has an extensive list of the items that can be included. Just Google “CRA Medical Expenses”.  Items commonly forgotten include:· Crutches·Casts for broken bones· CPAP machines and supplies· Hearing aids and replacement batteries· Vision care – includes contact lenses and supplies for them·Ambulance fees· Health and out of country travel insurance premiums· Massage therapy (by RMTs only)Claiming Travel Expenses to Medical ServicesMileage to/from medical services may be claimed when there is no public transportation available AND where the taxpayer has to travel at least 40 km to the location where the required medical services are provided. This only applies as long as substantially equivalent medical services are not available in the taxpayer’s locality. If the taxpayer has been certified by a medical practitioner to be incapable of travelling without the assistance of an attendant, then the transportation service costs of the attendant may also be claimed. If the taxpayer must travel at least 80 km (one way) for the medical services, then reasonable travel expenses (meals, lodging, vehicle expenses including parking) may also be claimed. The travel costs can be calculated by keeping all receipts, or by using the CRA meal expense allowance and vehicle cost per kilometre amounts. General Guide RE: Medical PractitionersCRA has a detailed guide in the Income Tax Act on which practitioners qualify as a medical expense and which do not. The general rule is that if the speciality has a college in the province where the patient resides and seeks treatment then the practitioner qualifies for the medical expense claim. Medical matters are under provincial domain. For example, until recently, psychologists in Ontario did not have a college but they did in Alberta. Now psychologists are recognised professionals everywhere in Canada except the Yukon.TIP: If the bill from your practitioner includes HST then they are likely NOT a medical professional for income tax. Time-Period for ClaimThe maximum period for medical expenses is 12 months ending on any month in the tax year. You cannot claim any expenses in one year that were previously claimed the year before.TIP: If you have a period in any year where you incurred a high amount of expenses and they do not correspond to the calendar year, adjust the period for the claim to include the highest amount of expenses.Example: George is very ill from an infection and requires full-time attendant care and expensive drugs. This condition started in October of 2016 and continued until July of 2017. If he has not claimed the 2016 portion in 2016 he can choose his year period to be from August 1, 2016 to July 31, 2017 or whatever other period (so long as it ends in 2017) for his 2017 medical expense claim.You can follow and like us on Facebook as Mount Albert Tax Company or Holland Landing Tax Company, and you can connect with us on LinkedIn.   Until next time,   Ian

Over-contributing to an RRSP: Good Idea?

over-contributing to RRSPs
A question I’m commonly asked is ‘is over-contributing to an RRSP good or bad?  Did you know that the penalty is 1% per month on the full amount of the over-contribution. So be careful. First thing to understand about RRSPsThe contribution limit for the next year is detailed in the annual Notice of Assessment (NOA) that the CRA provides after you file your tax return. Do not exceed this limit when you make your RRSP contributions to your or your spouses’ RRSP account. The CRA wants to get away from mailing paper and encourages everyone to use My Account to access their NOA. They also want to get away from answering any phone calls, but that is another issue. Second thing to understand about RRSPsEarned Income is the only thing that increases your RRSP limit from year to year and Pension Adjustments from your employer (if you belong to a pension plan) reduce the limit. You can still use RRSP contributions and any “Unused Contributions carried forward” to reduce Passive Income (Income from interest, dividends and capital gains etc.) in your tax return. Third thing to understand about RRSPsYou can continue to contribute up to the time you are 70. After your 71st birthday you can no longer contribute. Fourth thing to understand re RRSPsYou may over-contribute up to $2,000 and this will not be taxed. This is no good to you after you pass 71. You can also leave an unused over-contribution in place one year if you know you will need it next year. For example, if you receive a lump sum of cash and want to top up your RRSPs now, you can contribute now so that compound interest starts right away and use up the over-contributions in subsequent years. Bear in mind, this is dangerous as you might end up without enough income to be able to use past contributions. Then you have an over-contribution to deal with. What to do if you retire and/or reach 70 and have an over-contribution outstanding.The first and most obvious answer is to get the money out of the RRSP. This will be taxed by the financial institution as a withdrawal. Although you can ask CRA to waive the interest before-hand, this can only be done in the year after you made the contribution. Just get it out as soon as possible and keep the withdrawal slip as evidence for CRA that you removed the over-contribution. The second is to report the over-contribution to CRA by completing form T1-OVP. This is the most complex piece of gobbledegook you are ever likely to encounter, but it must be done. You self assess the interest due on the over-contribution and have 90 days to send in the payment. If you want to ask CRA to waive this interest you can try if you have sufficient reason. The reasons are detailed in form RC 4288: click here.  The reasons that are considered adequate are extreme. “I was unaware” or “I did not understand” just do not cut it so do not waste time as interest continues to accrue. Pay close attention to your NOA and provide it to your tax preparer annually. You can follow and like us on Facebook as Mount Albert Tax Company or Holland Landing Tax Company, and you can connect with us on LinkedIn.   Until next time,   Ian

Do I Need to File a Tax Return in Ontario?

Do I Need to File a Tax Return in Ontario?  Do I need to file a tax return? Regardless of myths you may have heard, the short answer is yes, you do! Let’s look at why people of different circumstances should file their taxes annually. 1. SeniorsMany seniors are “low income” and pay no tax. They do receive several benefits which will stop if the annual tax return is not filed:·  Guaranteed Income Supplement is a payment which increases the monthly Old Age Security. Service Canada uses the annual tax return to review the continued eligibility and amount of this supplement.·  Ontario Senior h\Homeowner’s Property Tax Grant (OSHPTG) is a payment added to the Trillium benefit and is payable to lower income seniors who own a home.·  Trillium Benefit -This benefit is payable to seniors whether or not they own a home. It is income tested. The lower your income the more you get.·  GST Credit - If you do not file you do not get this.· Caregiver Credit - This credit is for the caregiver not the senior but it is dependant on the senior’s income. If the senior does not file the caregiver cannot receive the credit. 2. Children·  Children who work are required to report their income. If any tax or CPP have been deducted it is likely these will be refunded but not unless a return is filed.·  When a child is 18 a return should be filed so that they commence to receive the GST credit as soon as they turn 19. 3. Students·  Students at college and university must put their tuition receipt T2202 on their own tax return. An amount cannot be transferred to a parent unless this has been done.·  Parents can claim a student’s medical expenses if they have filed a return.·  Parents continue to claim a student as a dependant.·  Students will only get the GST and Trillium benefits if they file. 4. Single parents· Increased credits are available to single parents who care for a dependant child through the eligible dependant or equivalent to spouse credit.· Increased child benefits are paid to low income single parents as well as GST and Trillium benefits. 5. Spouse with No Income·  A spouse with no income can be available for pension income splitting with a spouse if they both file.·  A partner with no income can have their “personal amount” tax credit transferred to their spouse. 6. Maternity and Parental LeaveSome parents decide to stay at home to rear their children. Perhaps they have no income except for the non-taxable child benefit. They can apply for EI for the maternity period but after, unless they have a home-based business (such as day care) there is no income. Why then should they file? Here are some reasons:·  Transfer of their credit to their partner.· Accurate calculation of the child benefit amount.·  Potential receipt of GST or Trillium benefits.·  Accurate recording for CPP of period not working for child rearing. CPP will be adjusted for this period so that Canada Pension is not unduly reduced. There are many urban myths and much “conventional or received wisdom” surrounding tax matters. One of the worst is “you do not have to file”. The CRA Wants to Know: Where you are (current address)What you are doingWhat your status is (married/single/divorced/separated) What your employment status is  Filing an annual tax return is your way of complying with legal requirements.Note: you are required to notify CRA of change of status and change of address. You could be entitled to refunds and benefits you do not know about. The only way to get these is to file a return. TAX TIP: Get in the habit of filing annually, always and On-Time! You can follow and like us on Facebook as Mount Albert Tax Company or Holland Landing Tax Company, and you can connect with us on LinkedIn.   Until next time,    Ian

Taxes: Students at College and University

ontario tax information for students
Taxes: Students at College and UniversityWe frequently write on this topic but we continue to see parents and students (no surprise there – I remember my days at university) who have no clue about what is required or how to proceed. Most parents have never had to deal with this before. Let us start with the student. Taxes Owing by a Student: Actual cash receipts are provided for the payment of text books and tuition. Either the parent or student can get these but they are of NO USE for tax filing. You keep them. The only thing we need and the only thing that can be used for income tax is the official CRA tax receipt provided by the university or college. It is called a T2202. This form is made available by the institution on the student web site. They download and print their T2202. Now the decision is made as to whether any of the tuition is to be transferred to a parent or grandparent. The T2202 Form for the Student’s Tax ReturnThe T2202 is used first and always on the student tax return. The student files a return whether they have income or not. The T2202 must FIRST go on their tax return (on Schedules S11 and On S11) before it can transfer to mom or dad.  The schedules take the amount of tuition from T2202 and convert it to tax credits (Federal and Ontario) These tax credits are used – in combination with all other credits - to reduce the amount of tax payable.Regardless of who paid the tuition the receipt does the most good transferred to *the higher income earner. Students should always file tax returns so that they get their GST credits and Trillium benefit for rent paid in Ontario. Transferring or Carrying Over of Unused CreditsOnce the S11 and ON S11 credits has been used to reduce tax payable on income earned by a student (if any) there may be an unused balance of credits to transfer and/or carry forward to next year. The transferable amount is limited to $5,000* for federal tax and an equivalent amount for Ontario tax. If there is any unused amount of credits after:a.      The student, andb.      The parental transferthese unused amounts are carried forward to next year and CRA confirms the amount on the student’s notice of assessment (NOA). As always, the NOA is a vitally important document and must be provided with each year’s tax documents. Rent information by way of signed rent receipt for the Trillium Benefit must include:a.      Address(es) of property(ies) rented in the tax year, andb.      Months rented per location, andc.      Total amount(s) paid, andd.      Name of Landlord/lady.If the student is in residence in a property owned by the college or university the full benefit is not payable but we need to know this information.Students can also claim moving expenses and transit costs.  Parent’s Role in Preparing Student TaxesThis is a ‘welcome to the real world’ moment for children. It is all dark and mysterious stuff and generally holds little interest for them. However, they must get the T2202 and there is nothing you can do except explain to them why this is essential. If this is being done retroactively for prior years then the student’s web account may be closed in which case older T2202s can usually be obtained on request from the Bursar’s office. Transferring Unused Credits to the ParentParents must decide whether they want to have unused tuition credits in the current year transferred to them or not. The transfer can only happen in respect of years when the tuition was paid. EG a 2017 T2202 can only be used in a parental transfer for the parent’s 2017 taxes.Any unused amounts are carried forward ONLY for the benefit of the student in 2018 or subsequent years. This concept lies at the heart of the program. When the student leaves school and starts work they will have many expenses and may have student loans and interest to pay. The carried forward tuition credits help reduce tax burdens so they will have higher disposable income for a year or two. Transfers to parents diminish the future year credits available to their child.For a transfer to be effective, the available for transfer amount from the student’s S11 and ON S11 is to be added to the reverse of form T2202. The student writes the name of the transferee and their relationship to the child and signs the form, adding their printed name and SIN. The amounts from this form are transferred to the dependant schedule and increase the available tax credits of the parent/grandparent receiving the credit transfer. *TAX TIP: Put the transfer on the parent with the higher income.The parent can also claim allowable medical expenses of the student while they are in full-time education.See: CRA – Students (Note: The textbook amount has been eliminated)NOTE: Credits do not translate $ for $. e.g. Federal tax credits are multiplied by 15% so that a $5,000 federal tax credit is equivalent to a reduction in tax payable of $750.00You can struggle with doing all this yourself or you can get professional help. If you think it’s expensive to hire a professional, wait until you hire an amateur.You can follow and like us on Facebook as Mount Albert Tax Company or Holland Landing Tax Company, and you can connect with us on LinkedIn.    Until next time,   Ian

Income and Taxes in a Corporation

We look at the benefits of operating a business inside a corporate structure and explain the taxation rules of investment income and capital gains inside a corporation.Taxation of Active Business Income (Ontario 2017 rates) Canadian-controlled private corporations (CCPCs) have a tax rate of approximately 26.5% on annual active business income. As shown in the following chart, CCPCs benefit from a small business deduction that lowers their tax rate to 15.0% on the first $500,000 of annual active business income. Federal (A)Ontario Tax Rate (B)Combined Tax Rate (A+B)Active business income tax rate11.0%4.5%15.0% Active business income is income generated from the core business activities of a CCPC. Consider the hypothetical example of John, who owns a CCPC that operates a restaurant. The corporation’s business income derived from the restaurant is considered active business income. But if John’s corporation invested its retained earnings in a guaranteed investment certificate (GIC), income generated by these investments would be passive income and subject to a higher level of taxation.As shown on the following chart, the low active business income tax rate confers a significant advantage on the entrepreneur who operates his business within a corporation and does not need to withdraw all income for personal use. It allows the owner to defer personal taxation on the income until received from the corporation in the form of a dividend: Small Business Tax Rate on first $500 000 of income (A)Maximum Marginal Rate on personal income (B)Tax Deferral Available in Canada (B-A)Average Tax Rate15.0%53.5%38.5% Returning to the example of John, the corporation generates active business income of $100,000. He doesn’t need this income because he receives a salary that covers his cost of living expenses; he also has other sources of income. He can defer approximately $31,300 in taxes annually—money that can be invested to earn extra income.If he operated his restaurant personally John would be taxed at his personal maximum marginal tax rate on all income generated by the restaurant.Let’s now examine how passive income (investment income) is taxed inside a corporation.Taxation of Investment Income Within a Corporation Since there is a strong incentive for business owners to accumulate profits inside their corporation, business owners will accumulate investment assets within their corporations.The conundrum is that while active business income receives favorable tax treatment, the same cannot be said for investment income. As shown on the chart below, interest income and the taxable portion of capital gains earned within a corporation will be taxed at a rate of 50.2%. Federal Tax Rate (A)Provincial Rate (B)Combined Tax Rate (A+B)Tax Rate on Investment Income Earned inside a Corporation38.7%11.5%50.2% On the other hand, the 50% non-taxable portion of capital gains earned inside a corporation will be payable tax-free to shareholders through the corporation’s capital dividend account (CDA), while the taxable portion (50%) is taxed at the same rates that apply to interest income.Example: Land and buildings with an ACB of $500,000 are sold for $1,250,000. The gain is $750,000 but the taxable gain is 50% of the gain or $375,000. Tax at 50.2% = $188,250 leaving $186,750 of the taxable gain. The non-taxable half of the gain ($375,000) can be paid to the shareholder(s) tax free and the remaining $186,750 can be reinvested or paid out as a normal dividend taxable in the hands of shareholder(s). The effective corporate tax rate on the capital gain in the corporation is 26.1%.Note: If the building was used for the active business and a new building is purchased within the specified time limit (as when larger premises are needed) it may be possible to defer capital gains altogether through a rollover. Seek professional help before making such a move.You can follow and like us on Facebook as Mount Albert Tax Company or Holland Landing Tax Company, and you can connect with us on LinkedIn.     Until next time,      Ian

Fiddling with the Act – Changes to Taxes

changes to Ontario taxes
Plus ça change, plus c’est la même chose… Successive governments have made changes to the Income Tax to further ideological policy objectives. Harper’s Conservatives introduced several measures to give seniors a break – most notable being Pension Income Splitting. While this is very helpful to seniors it makes it impossible for them to file their own tax returns and get the proper amount to which they are entitled. As a side note, Trudeau was contemplating abolishing this measure until someone pointed out to him that seniors actually vote! Universal Child Care Benefit (UCCB) Conservatives also increased the UCCB and Trudeau campaigned hard on the fact that wealthy people got this benefit as well (including his family) but unaware that it was a taxable benefit so it got taxed away. It has been replaced by a much more lavish, non-taxable child benefit which is income-tested so only lower-income families fully benefit. Great in theory but a most powerful incentive for common-law couples to practice tax evasion (for which one can face prison) by claiming they are divorced or separated. What Else Changed – The Caregiver CreditThe Caregiver credit has been completely altered. The Federal 2017 Budget has eliminated the 3 existing caregiver credits, including the Caregiver Amount, Infirm Dependant Amount, and Family Caregiver Amount, with the new Canada Caregiver Credit, effective for 2017 and later years.  The elimination of this credit federally also eliminates it for BC, Ontario, Saskatchewan, and Yukon, because their legislation for this depends on the federal credit.  The other provinces and territories have legislation for this credit that does not depend on the federal credit.  BC, Ontario, Saskatchewan, and Yukon would have to revise their legislation to retain this tax credit.  If you or anyone else are able to claim the line 305 eligible dependant/equivalent to spouse credit for a person, then line 315 caregiver amount may not be claimed for that person.  However, if the line 315 amount would have been greater than the line 305 amount, the difference can be claimed as a line 305 additional amount.  If you understand this – congratulations! Book expense (a calculation based on months of study from T2202A) has been eliminated, reducing the credit from tuition expenses. Federal child fitness and arts amounts have been discontinued. The most notable change was the elimination of The Family Tax Cut. This Conservative measure was deemed to be too controversial for Harper’s own Finance Minister who quit over Harper’s insistence that the tax cut be introduced. "This is a plan, as (former finance minister) Jim Flaherty said, that will increase inequality in our society…"(CBC). It is true that for the full $2,000 cut in tax to operate there had to be a couple (married or Common Law) with:One party with a large salary/wage, andOne party with a much lower wage/salary plus children under 18.Therefor those with high family incomes benefited more than those with less. BUT it did force couples to file as couples, whether they were married or common law.The biggest single inequity we see - and we see it a lot - is couples who lie and cheat on their tax returns – stating they are single when they are in fact common law. The Trudeau measure pays the highest rewards to those who lie and cheat – thus encouraging the continuance of this behaviour through rewarding it.Has Anything Really Changed?The upshot is that there have been many changes but not much has changed. Each change adds complexity to the process of filing a tax return. This makes it more useful than ever to have your taxes prepared by a professional.If you think it is expensive to hire a professional, wait until you hire an amateur! You can follow and like us on Facebook as Mount Albert Tax Company or Holland Landing Tax Company, and you can connect with us on LinkedIn.      Until next time,     Ian

Self-Employed: Business Income and HST

Self-employed individuals are usually proficient at their trade but are rubbish at record keeping and accounting. Unfortunately, CRA expects you to keep a professional set of records (capable of audit) and they demand that you act as an unpaid tax collector. Many individuals feel inclined to play games. They do jobs for cash in order to win contracts from clients who do not wish to pay HST. If you do this, you are still legally responsible for paying the HST even though you did not collect it. Lying on your tax return to reduce your income below $30,000 in order to avoid reporting HST is Tax Evasion. The penalties for this are significant fines and/or prison time. Self-Employed Income – Form T2125 CRA requires completion of form T2125. For information on how to complete this form refer to the GUIDE. All numbers exclude HST. You claim the HST as an input tax credit (ITC) on your HST return. You cannot claim it twice. NOTE: Insurance does not have HST. It has the Ontario insurance tax. Your total cost of insurance is the premium plus the tax. Other items that do not have HST include bank charges (except for the cost of cheques purchased from your bank’s supplier) and Hwy 407 tolls. Remember that ALL invoices (yours and your suppliers’) MUST have the registrant’s HST number printed on the invoice/bill. T2125 does not have the gas for your vehicle included on it as a line item. All vehicle expenses are placed on a schedule and the total is carried forward to T2125. The schedule is PART 17 of the form T2125 above. Again, numbers should have HST removed. The whole basis of calculation is based on a percentage of business use of the vehicle versus personal use. We have written about this topic before. For CRA instructions see this posting. Business Use of Home If you work from home or use your house for a home-based office then you may be eligible for a deduction of a portion of the expenses. There are strict rules on how to do this. These are outlined in the guide (above) and the article in this link. You cannot claim any HST on home expenses as ITC on an HST return. You can however claim the full bill including the HST amount. Maintenance should be items like housecleaning and security and NOT major renovations. The way in which you calculate the amount to include is again based on percentages. If you have a dedicated office that is used only for business you can work off its measurements. If the office is 10ft. by 12 ft. it is 120 sq. ft. if the house is 2,000 sq. ft. the ratio is 120/2,000 or 6%. If you only use the room 50% of the time as an office and 50% as a bedroom, you reduce the amount by half and it is now 3%. TAX TIP – A common failing is to over-estimate the amount of time using the home office and the amount of space used. Being over aggressive on this deduction can and has resulted in a visit to your home by CRA to verify the facts. They will not only change your most recent return, they will apply the change they decide on to prior years as well. Cheating can be painful. Suggestions for Reducing Grief at Tax Season You must register for HST as soon as your sales in any 12-month period exceed $30,000. You must collect and remit HST to the government. It is NEVER your money. You are collecting it for the government. Open a separate savings account and keep all the HST in there until you do the HST return. Save money for income taxes and CPP. As a self-employed person you are responsible for collecting and paying your own income tax and your CPP. Remember for CPP you pay your portion PLUS the employer’s portion so it can be a large number. Do not get behind because it is hard to recover. Pay tax by quarterly instalment. You can do this at the bank or through internet banking through the “pay bills” function. Always pay your WSIB on time if this applies to you.File HST annually. Filing quarterly is extra grief by way of bookkeeping. Be aware that when your annual HST remittance is greater than $3,000, CRA will require you to pay HST by quarterly instalments in the following years. The amount to pay is one quarter of last year’s total payment. Any adjustment +/- is done with the annual filing.Keep neat folders for EACH expense category: purchases, insurance, bank charges, wages, office supplies etc. If you wish to reduce the bill from your tax accountant, get an adding machine with a tape roll. They are inexpensive at Staples. Add the folder and attach your tape. Tax accountants charge by the amount of time spent on your file. Reduce that time and reduce your fees. NOTE: Add the NET amount BEFORE HST!If you buy assets such as equipment or vehicles, include the invoice and any finance documents. If you keep tidy records, the tax and government stuff can be kept manageable by using professionals to handle all the stuff you hate. And remember – honesty is always the best policy as CRA will get you in the end if you cheat. You can follow and like us on Facebook as Mount Albert Tax Company or Holland Landing Tax Company, and you can connect with us on LinkedIn.     Until next time,     Ian

Tax Returns - Due Dates and Lateness

filing tax returns lateness and due dates
Individuals receiving any form of income are required by law to file an income tax return. Canadians report and pay tax on worldwide income.  Where a tax treaty exists, credit is given for the foreign tax paid. Individual returns must be filed and any tax due must be paid by April 30th. Self-employed individuals may file by no later than June 15th but any tax payable must be paid by April 30th.Individuals with no income do not have to file a return but certain credits and payments such as GST credit and Trillium Benefit are only paid when a return has been filed.Slips (T3, T4, T5 etc.)CRA gets a copy of every slip you are given or sent. They therefore know if you have failed to report all this type of income. After returns have been assessed, returns go to the Matching Section where they are reviewed to see if all slips have been included. A first mistake is forgiven but all subsequent failures are penalised. Self-employed generally do not have slips. Most of their income comes from a statement of income and expenses.CRA is increasingly auditing these returns to ensure that the expenses claimed are supported by invoices/receipts and that they pertain to the business. The taxpayer is responsible for filing accurate and honest returns. Tax cheats are being investigated and penalised.Another aspect is whether or not it is a real “business” or a means of reducing income from other sources (i.e. slips). CRA only allows expenses that are used to earn a business income. They consider the ‘acid test’ of a “business” to be an enterprise being carried on to earn a profit. If no profit is in evidence, the business may be a hobby and all expenses are disallowed. CRA does not approve of business losses being used to reduce other income. These will almost certainly be reviewed if not audited.Late filing/failing to fileThere are both penalties and interest for late returns. Penalties are typically 5% and 1% per month. After filing late for 4 years the penalties increase to 10% of the balance owing for the current year and 2% of the balance per month.  From May 1, 2017 CRA has been empowered to charge compound daily interest. Interest on overdue amounts has heretofore been charged at 5% per annum. CRA has been increasing its vigilance and diligence in its collection efforts. The         willingness to make payment plans and accommodations has gone. The new CRA is harsh and unyielding. Failure to pay will result in wages being garnisheed, bank accounts being swept and liens placed on houses. CRA will move quickly to obtain a judgment against tax debtors meaning credit ratings are ruined.The solutionThere is only one solution. File on time always. Once you get behind, the amount owing keeps mounting and it keeps attracting interest and penalties. Once you owe $3,000 or more in a tax year you are required to pay instalments during the following year. The same is true for annual HST filers. HST instalments are one quarter of the amount for the prior year’s total. These rules are in place to ensure that the taxpayer does not have too much to pay at the end of the year and therefore has a chance to pay the balance due (after instalments) on time.  The requirement to pay instalments is enforceable. If they are not made, interest is exigible on the amount of the instalment for the period of time not made.Using tax preparersTax preparers rely on the taxpayer to present neat and accurate records. Loose papers and bags of receipts are not appreciated by tax preparers during April. There is insufficient time to sort and add these. The taxpayer remains 100% responsible for the accuracy and completeness of their returns. The accuracy of any numbers and totals provided to the tax preparer are the responsibility of the client alone. If you are audited, it is not worth trying to blame the tax preparer. Some taxpayers are chronic last minute actors; Christmas shopping, RRSPs, taxes. If you leave your taxes for the last 2 weeks it is highly likely that the tax preparer will not be able to do them by April 30. If you wish to use a tax preparer to do your taxes (always a good idea) you need to get them in as early as possible. It is just a fact of life that you must wait for T3 slips. Although these should be in your hands by March 31, some trusts/investment firms are late – issuing these slips in the first 2 weeks of April. Dealing with these returns late in April is why we have limited time for those who could have brought their self-employment numbers in in January.You can follow and like us on Facebook as Mount Albert Tax Company or Holland Landing Tax Company, and you can connect with us on LinkedIn.    Until next time,    Ian

Automobile Expenses for 2016 Tax Returns

automobile expenses 2016 tax returns
The CRA is looking at automobile expenses more closely than ever. Before assessment they are asking to see proof by way of receipts. The first check to determine if claims get allowed is the LOG BOOK. No log book no expenses. The purpose of a log book is to record all kilometres travelled and to mark which are business and which are personal.   Auto expenses can be claimed by the self employed through a schedule to T2125 or by those who have a T2200 from an employer for use of a personal vehicle to earn employment income or commission. The sticking point is always the ratio of the kilometres driven for business vs. the distance travelled for personal use. It has always been the law that that travel between home and the employee’s place of work is personal use.  A person travelling from home directly to clients all day incurs no personal use.   Self employed (assume HST registered)   Capital Cost of Vehicle The capital cost of a passenger vehicle (includes pick-up trucks) is limited to $30,000. The declining balance is “depreciated” by capital cost allowance (CCA) each year at the rate of 30%. The amount of CCA included as a deduction in form T2125 is determined by the ratio of business vs. personal use.   HST Input Tax Credit (ITC) The amount of ITC that can be claimed for the purchase of passenger vehicles  depends on: cost of the item, andtype of business entity, andpercentage of use in commercial activities  The maximum capital cost on which an ITC may be claimed for a passenger vehicle is $30,000 (excluding HST) which is the same as limit for CCA.  This limit applies to all types of business entities.    a. Corporations (Vehicle Owned by Corporation)   If the passenger vehicle is acquired for use primarily (more than 50%) in the commercial activities of the registrant, the ITC is 100% of the HST paid, subject to the above capital cost limitation.  Otherwise, no ITC may be claimed.  The ITC is claimed in the GST/HST return for the period in which the acquisition occurred.   b. Partnerships and Individuals   If the passenger vehicle is acquired to be used all or substantially all (90% or more) in the commercial activities of the registrant, the ITC is 100% of the GST/HST paid, subject to the above capital cost limitation.  This ITC would be claimed in the GST/HST return for the period in which the acquisition occurred. For amounts above 10% and below 90% the amount of ITC is calculated based on CCA for the year. See your tax advisor.   Employees   Use of a personal vehicle by employees for business purposes is a common event – particularly by commissioned salespersons. Auto expenses are detailed on form T777 provided the employer has completed and signed form T2200 and states that use of a personal vehicle is required. This form also details any reimbursement of auto expenses provided to the employee and depending on amount and how the payment was calculated can affect the claim for expenses.   a. Flat Monthly  Payment (Included in T4)   An automobile allowance paid as a fixed monthly amount is taxed with regular pay and does not affect a claim for expenses on a tax return.   b.  Per Kilometre Reimbursement (a “Reasonable” Amount)   The CRA announces each year what the guidelines are for the maximum amount of “non-taxable” reimbursement of automobile expense claims based on distance. These rates (i.e. 54 cents per kilometre) are determined by the CRA to be enough to adequately cover an employee for gas, maintenance, insurance and depreciation. They suit CRA purposes as the employer is left to be the arbiter of business use on the assumption that an employer (driven by prudent business practices) will not wish to overpay an employee any more than the actual kilometres travelled.    The amount is referred to as a “reasonable” rate and means that any reimbursement at a rate above the annual rate is taxable but any rate chosen by the employer below the CRA rate is not necessarily “unreasonable”. Where a distance-based reimbursement is used, CRA generally disallows all vehicle expenses UNLESS you can prove that the rate of reimbursement is NOT reasonable (i.e. 10 cents per kilometre). In these cases, the expenses are included but are reduced by the total amount of reimbursement received for the year and the resulting amount is included based on the ratio.   c.  No Reimbursement   There are no reimbursements of expenses in some employment contracts. This is sometimes seen where commission arrangements cover the vehicle use. In these cases, the employee can claim all expenses and the amount included is determined solely by the ratio personal/business.   Do you have any questions about automobile expenses and the CRA?   You can follow and like us on Facebook as Mount Albert Tax Company or Holland Landing Tax Company, and you can connect with us on LinkedIn.    Until next time,   Ian

Capital Gains Taxes: Sold Your House in 2016?

capital gains tax ontario
Capital Gains (an overview)The whole topic of capital gains is complex and much misunderstood. Seek professional help. For the purposes of this article we need to keep it simple – which is not easy. From CRA’s perspective generally, when you dispose of a property and end up with a gain or a loss, it may be treated in one of two ways:as a capital gain or loss (capital transaction); oras an income gain or loss (income transaction).When do you have a capital gain or loss?Usually, you have a capital gain or loss when you sell or are considered to have sold capital property. The following are examples of cases where you are considered to have sold capital property:You exchange one property for anotherYou give property (other than cash) as a giftShares or other securities in your name are convertedYou settle or cancel a debt owed to youYou transfer certain property to a trustYour property is expropriatedYour property is stolenYour property is destroyedAn option that you hold to buy or sell property expiresA corporation redeems or cancels shares or other securities that you hold (you will usually be considered to have received a dividend, the amount of which will be shown on a T5 slip)You change all or part of the property's useYou leave CanadaThe owner diesCalculating your capital gain or lossTo calculate any capital gain or loss, you need to know the following three amounts:the proceeds of disposition;the adjusted cost base (ACB); andthe outlays and expenses incurred to sell your property.To calculate your capital gain or loss, subtract the total of your property's ACB, and any outlays and expenses incurred to sell your property, from the proceeds of disposition.What happens if you have a capital loss?If you have a capital loss in 2016, you can use it to reduce any capital gains you had in the year, to a balance of zero. If your capital losses are more than your capital gains, you may have a net capital loss for the year. Generally, you can apply your net capital losses to taxable capital gains of the three preceding years and to taxable capital gains of any future years.ExemptionsThe principal residenceFamily farmFamily fishing propertySale of qualifying Small Business Corporation sharesThe scope of this article allows only to relate one of these examples:The Principal ResidenceA property qualifies as your principal residence for any year if it meets all of the following four conditions:It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation.You own the property alone or jointly with another person.You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year.You designate the property as your principal residence.The land on which your home is located can be part of your principal residence. Usually, the amount of land that you can consider as part of your principal residence is limited to 1/2 hectare (5,000 square meters), which converts to about 1.24 acres (54,000 square feet).However, if you can show that you need more land to use and enjoy your home, you can consider more than this amount as part of your principal residence. For example, this may happen if the minimum lot size imposed by a municipality at the time you bought the property is larger than 1/2 hectare. As noted, from 2016 you must report the sale of your principal residence on Schedule 3 (Capital Gains) and subject to its meeting the test above it will remain non-taxable (for now!). If you continue to report the purchase and sale of “principal residences” during any one year, CRA may well conclude that you are “in the business of” buying and selling houses and thus, gains from this business will be taxable as income. Please let us know if you have any questions. You can follow and like us on Facebook as Mount Albert Tax Company or Holland Landing Tax Company, and you can connect with us on LinkedIn. Until next time,  Ian