Are you at risk? The Canada Revenue Agency (CRA) continues to audit the following key areas, as these areas seem to be the ones of greatest error or non-compliance by small and medium sized businesses:
Denied expenses – CRA denies unsupported and non-deductible expenses. It is important to have proper and adequate documentation to support the expenditures.
Taxable benefits – CRA scrutinizes automobile benefits and other expenses such as travel expenses and phone and internet usage to ensure taxable benefits are attributed properly to employees.
Shareholder benefits – CRA continues to seek out personal expenses paid for and deducted by the business that should be denied or taxed to the shareholder. Taxpayers should carefully document the business purpose of all expenses and have practices in place to closely monitor shareholder accounts and credit cards to avoid these reassessments.
International compliance / cross-border transactions – Many business are unaware of the tax and reporting implications of conducting business outside of their country and engaging in certain financing transactions outside of Canada, including sales taxes, payroll and employee withholdings, and corporate tax reporting implications. For Canada and the US, there is information sharing and new processes at boarder security to more closely scrutinize cross-border business travel.
Sales & commodity taxes (or Indirect taxes) – There have been a lot of changes in the sales tax rules in Canada over the last few years, with significant changes affecting large businesses, cross-border transactions, pensions, and financial institutions. Many businesses are unaware of how these changes affect them. The CRA also continues to find and disallow ITC claims for expenditures with inadequate or improper documentation.
Non-arm’s length transactions – Whether domestic or international, if there is insufficient proof/documentation for the validity of the transaction between non-arm’s length parties (such as management or administration fees), the expense can be denied (but yet, the income still taxed in to the other party – resulting in double taxation).
Aggressive tax planning/schemes – Aggressive tax planning and abusive tax avoidance schemes are a global concern. The CRA has invested millions in its program to reduce aggressive tax planning or abusive tax avoidance schemes that contravene specific anti-avoidance provisions of the law. The CRA now has the tools to detect, correct and deter the non-compliance of taxpayers using aggressive tax plans, and there will likely be more audit activity in this area.
As part of this scrutiny, the CRA has recently sent notice that it will be increasing its audits of individuals who have claimed business or property losses. If you do receive an audit request letter or request for information, don’t sit on it or stick it in a drawer somewhere hoping it will go away or take care of itself (yes, people do this). Take the letter immediately to your accountant or tax advisor to assist you in dealing with it.
Not dealing with the CRA requests in timely manner can cost you hundreds or thousands or even more in additional taxes, interest and penalties, which can cripple a small business. But CRA auditors are people too – just doing their job, serving you, the taxpayer, as their client. You may have done everything correctly, or you may have made honest mistakes (CRA audits can be a great opportunity to learn and boost your tax management controls and practices). But be prepared. Talk to your accountant and ask them what your risks are and how you can reduce them.
[author] [author_image timthumb=’on’][/author_image] [author_info]Linda Spencer is a CPA, CA, Canadian Tax Specialist and Money, Marketing & Soul business coach. Her mission is to eliminate stress and anxiety around money and taxes, by empowering heart-centered small business owners with the tools, knowledge, strategies and mindsets to put them in the driver seat of their financial success and wellness.[/author_info] [/author]
It’s that time of year again – Tax Season, and while some people are eager to get their taxes done early, many stress and wait until the last minute (or later) to get their tax return filed. So, how can you better prepare yourself for this coming tax season?
- Be aware of the changes in tax law that may affect you. In Canada, the changes that were made in the last year relating to the 2016 personal tax year include:
- Children’s arts credit – The maximum eligible fees per child (excluding the supplement for children with disabilities) has been reduced to $250 for 2016. This credit will be eliminated for 2017 and later years.
- Children’s fitness tax credit – The maximum eligible fees per child (excluding the supplement for children with disabilities) has been reduced to $500 for 2016. This credit will be eliminated for 2017 and later tax years.
- Home accessibility expenses – You can claim a maximum of $10,000 for eligible expenses you incurred for work done or goods acquired for an eligible dwelling.
- Family tax cut – The family tax cut (allowing income split allocation of up to $50,000 for families with children) has been eliminated for 2016 and later years.
- Eligible educator school supply tax credit – If you were an eligible educator, you can now claim up to $1,000 for eligible teaching supplies expenses.
- Canada Child Benefits (CCB) – 2015 was the last year of the Universal Child Care Benefit (UCCB). As of July 2016, the non-taxable CCB has replaced the Canada child tax benefit (CCTB), the national child benefit supplement (NCBS), and the universal child care benefit (UCCB). You may have received taxable UCCB payments up to June 2016 that you would have to include in your 2016 income tax return.
- Sale of principal residence – Starting in 2016, the sale of a principal residence must now be reported on your tax return in the year of sale, along with any principal residence designation. Under proposed changes, the CRA will be able to accept a late designation in certain circumstances, but a penalty may apply.
- Reassessment period – Under proposed legislation, for tax years that end after October 2, 2016, the CRA may at any time reassess your income tax return if you fail to report a sale or other disposition of real estate. So make sure you report those real estate sales, including the sale of your own house.
- Open your mail as it comes in and keep separate file folders if you have a lot of different types of slips. Every year I get clients who bring in their tax slips in unopened envelopes. First, I wonder why they wouldn’t open their mail (What if the information on the slip is incorrect, or if it’s the wrong slip altogether? Or what if it’s a request that needs a response by a certain date?) Keep like slips together. I recommend keeping separate file folders for different types of slips/receipts (such as charitable donation receipts, T4 slips, T3 slips, T5 slips, RRSP slips, medical receipts). Please note that most slips will have been sent out to you by February 28th, but some (like T3 slips for mutual fund and trust investments) are not due until the end of March. You can always log in to your online account with CRA to check for missing T-slips.
- Have all your tax documents and support in order. If you are self-employed (i.e., you run your business as a sole proprietor), or have interest in a partnership or rental property, gather, organize and summarize all your transactions into categories and put them in a spreadsheet (or on a piece of paper, or in a bookkeeping program such as QuickBooks or Freshbooks). Accountants and tax preparers really do not enjoy getting a shoe box or grocery bag full of disorganized slips…and it can add a significant amount to your accounting bill since it does take time to go through them and verify with you the business purpose and category of expenditure they relate to. The same goes for your revenue invoices and receipts. The more you can organize and summarize yourself, the more efficient (and less costly) the process of getting your tax return completed and filed.
- Keep your business transactions and documentations separate from your personal documents. Always keep a separate business bank account, and if you make business purchases by credit card, I recommend keeping a separate card just for business purchases and don’t use it for personal items. It’s easy to get things mixed up, but the mistake of claiming personal expenses as business expenses can be a costly one when faced with a tax adjustment or audit.
- If you use your vehicle for business or work, keep a log of your business and total km’s travelled. If you don’t already keep a log, you’ll need some way of documenting and supporting your business usage claimed in your tax return.
- 6. Get your taxes done early. The deadline to file and pay your Canadian personal tax return is April 30th, without incurring penalties and interest on any amounts due. If you are self-employed, June 15th is the filing deadline (but the tax payment due date remains April 30th).
The information reported in your tax return is ultimately your responsibility, not your accountant’s. Therefore you should at least be aware of the rules that apply to you, so that you are comfortable signing off on your return before it’s filed.
Here are some helpful links to find further information:
For individuals – http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/menu-eng.html
For small business owners and self-employed individuals – http://www.cra-arc.gc.ca/tx/bsnss/sm/menu-eng.html
I also love taxtips.ca for their tools and calculators.
If you have a specific tax or business question you want answered, or would like assistance with your income tax return, feel free to send me a direct email at Linda@visionspire.ca.
You may also want to attend my upcoming workshop in Georgetown, ON on March 22, 2017 – Tax Essentials for Small Business, where I will be showing you essential tips and best practices regarding income tax and GST/HST compliance for small business in Canada.
[author] [author_image timthumb=’on’]ca/wp-content/uploads/2017/03/Visionspire-Linda-Spencer-Ontario-quote.jpg[/author_image] [author_info]Linda Spencer is a CPA, CA, Canadian Tax Specialist and Money, Marketing & Soul business coach. Her mission is to eliminate stress and anxiety around money and taxes, by empowering heart-centered small business owners with the tools, knowledge, strategies and mindsets to put them in the driver seat of their financial success and wellness.[/author_info] [/author]