Hey, thanks everyone for joining me for today’s session on how to save taxes. It’s sort of a year-end tax update. So understanding the tax system and the rules that are available to you. This is one thing that I’ve commonly find that our customers have trouble with is really understanding the tax system and it’s our jobs as tax professionals to help you through this. But there’s some basics here that we’re going to cover today to give you a basic understanding as well as tell you about some opportunities that you have both before the end of the year and some stuff that’s coming up after year end here that we need to deal with. So of course, a little disclaimer, everybody’s situation is different. This is not tax advice. This is simply just some stuff that we’re running through. So if you have questions and if you want to chat about your specifics, then give us a call or call your accountant.

(01:29)
And of course we would love to be your accountant so you can give us a call. And then there’s the stuff that I have to put at the end because the lawyers require us to, here’s what we’re going to be covering today. We’re going to talk about what’s new. We’re going to talk about how to know your way around the CRA. We’ll cover installments, tax deadlines, penalties and interest, what’s deductible, some record keeping. There’s a really interesting discussion coming on salaries and dividends that I can’t wait to have with you. There’s shareholder loans that I want to talk about, employees versus contractor, and then we’ll cap it off with an ask me anything and I see that people are joining, so they must have gotten the new link. Thank you so much and so sorry about that headache. So what’s new? Well, we’re going to go through a few things here.

(02:14)
These are the things that we’re going to go through. The main one or one of the big ones that I want to talk to you about is a lot of people are going green and they want to trade in their truck or whatever, their car for an electric vehicle. The incentive for zero-emissions vehicle is still ongoing. The deadline for this was supposed to end in 2022 or whenever the funds are depleted. So it seems like the funds have not been depleted, which seems to be the case with our federal government. The funds never seem to be depleted and so on and on the effort goes. So what is this? Well, you can get, if you go and buy an electric vehicle, and most car manufacturers have a big list, and in fact the list of eligible vehicles is linked in here, but you can google eligible canada.ca and it’ll bring up a list.

(03:01)
You’re going to get 5,000 for full electric or 2,500 for plugin hybrids, and there’s certain capacities in the batteries that have to be met and there’s certain MSRP. So you can’t go out and buy the most expensive Tesla and get this. It’s really for sort of base model. It’s not meant, I think the idea is there. They’re not trying to target the wealthy, but I think in order to get into a reasonable Tesla, you maybe need to be wealthy. But anyways, that’s a different topic. So the incentive for zero-emissions vehicles, this is another big one for the end of the year. A lot of people didn’t know about this, but you have the ability to expense a thing. So if you’re going to go buy a car or some computers and you would normally have to write those off over a few years, or maybe you have a brewery and you want a new set of tanks or you’ve got a construction company or a earth moving company and you want to go buy some equipment, you’re allowed to expense in full in year one.

(03:59)
Anything that’s available for use. Here’s the catch. It expires December 31 of this year. It’s actually been on for a couple of years, but a lot of people haven’t realized it. And so you can go and spend the money before December 31st, something that would normally be written off over a few years, you’re going to get the full write-off this year. There’s a 1.5 million limit in the associated group. So yeah, so you want to check that one out. The next one that we’re going to talk about is the underused housing tax. I mean, I don’t want to spend a whole bunch of time on this. I think people are generally very annoyed by it, but the deadline just keeps getting kicked down the road. As you can see on my slide here, the idea with the underused housing tax was supposed to be to target foreign buyers coming in and buying up property and sitting on it.

(04:46)
And so maybe that was happening in Vancouver and a few other places in Canada. But what the actual legislation started to cover was scenarios where if you were in a partnership, for example, with your spouse like most of us are, and a partnership is a legal concept where you’re in business with another individual or multiple parties with the IDA profit. Now you are a member of a partnership that owns a property and maybe you have to report an underused housing tax form for that property and it’s by person on title by property. So if my spouse and I are on joint title for a rental property that we own, and we are in fact in business to earn profit on that rental, so for example, in an Airbnb, short-term rentals are almost certainly caught by this long-term. Rentals are a bit more of a question mark, then I have to file this form and what happens if I don’t?

(05:43)
Well, it’s a $5,000 penalty per individual that’s on title. So that’s 5,000 for me, 5,000 with my spouse. Well, what if we have five rentals? Well, now that’s a $50,000 penalty for not sending in these UHT returns. It stirred up a lot of controversy. They were originally due to be filed April 30th, 2023, but they had an administrative policy that granted relief until October 31st, 2023. And then a pile of people paid us a pile of money to establish whether or not they had to file these things, and then we helped them file them. And then on 4:00 PM on October 31st, the government extended it again until April 30th, I think because they realized what a nightmare this legislation is. This is a giant information gathering exercise and I’m not even sure that the government’s smart enough to know what they’re going to do with all this information. But off we go in line with our information gathering exercise.

(06:30)
We’ve got the new trust reporting rules, which is effective for trusts ending this year, so on or after December 31st, which is effectively all in trusts and some testamentary trusts that with a year-end on December 31st, the new reporting requirements are to complete a form that says who the settler was, who the trustees are, who the individual’s beneficiaries are, well, who all the beneficiaries are. And on that form we have to put in your social insurance number and your address. There’s a lot of intrusive information that may be very hard to get for trustees. And then the tax community was up in arms going, well, what about bear trusts? Bear Trust is a trust that exists in name only. The beneficiary has control of the assets still, and I’ve got a whole podcast and blog about what a trust is and how these rules apply. Go check it out.

(07:23)
But the CRA just recently announced that they’re going to relieve penalties for bear trusts that don’t file this one on time. I think because they realized that things like co-signing on a mortgage for your child could trip your filing obligation to file a T3, which could be very problematic. And so it’s an ongoing debate on due dates. Last year these things were due and they extended the deadline sort of halfway into us preparing these things last year. And so I don’t think the can will get kicked again, but the CRA just last week or a couple of weeks ago announced additional relief for this because frankly, the rules are a bit insane in terms of how much paperwork has to go in and how much people are going to have to pay us to deal with these things. Even for unsuspecting taxpayers who don’t even know they have a trust, which is a lot of scenarios.

(08:08)
So go check out that blog. SEBA changes anybody who took out an emergency business account loan during COVID, the deadline was extended to December 31st of this year, and hey, it’s been extended again by two and a half weeks. I’m not sure if that’s to facilitate a banker’s holiday, but we’ve got till January 18th, 2024. But then they’ve also said if you initiate a refinancing with the institution that you originally got the siba loan from, as in you’re going to take out a $30,000 loan from this institution to go and repay your SIBA loan and access the $10,000 loan forgiveness or 20,000 depending on how much siba you took. If that financing agreement is or if that financing negotiation is happening and initiated by January 18th, as long that refinancing is in place by March 28th, you’ll still get the $10,000 or $20,000 forgiveness. Okay, so that’s the new rules with CEBA.

(09:03)
CPP and EI are going nuts. CPP is through the roof. We are now up to in 2024, we’re going to be nearly $8,000 when you combine the company and employee portion. So for example, I pay myself a salary out of my professional corporation. When I started doing this, back when I started to be employed, it used to cost me under $5,000 a year or close to $5,000 a year for the CPP. When you combine my portion and my company’s portion, now it’s up to eight and it’s still going up for another couple of years. And there’s also an enhanced CPP that kicked in for higher income earners. And so this really throws a wrench in whether or not we’re going to pay ourselves dividends or salaries. I’ve been a huge advocate for paying salaries for a lot of years. Our biggest performing piece of content that I’ve ever put out on the web was a salaries versus dividend article, and I have to revisit that.

(09:58)
I’ve got plans to retype that here in the next couple of weeks for 2023 realities, which is I really need to revisit whether or not I’m going to pay out a dividend or a salary because I have to pay so much into CPP and my confidence for me personally, my confidence that I’m going to get a good amount of value out of that compared to simply investing my $8,000, it’s diminishing. And so I think a lot of Canadians are, and so keep an eye out for that blog. There’s a lot of stuff around housing and the housing crisis. So I just wanted to run through a few things to do with housing. You can open a first time home savings account starting on April 1st. You must be at least 18 and no older than 72. You got to be a resident in Canada. There’s maximum contributions annually, just like or you can transfer over from your RRSP.

(10:43)
It is tax deductible just like in our RSP and there’s a lifetime limit of $40,000 and provided that you’re using it for a good purpose, it saves you a bunch of tax in the long run. So check out the HFHSA vehicle, which is intended to supplement your first time home buyers withdrawal from your RRSP in terms of getting into a new house to combat the housing crisis, the qualifying withdrawal if you’ve used it to put a down payment on a house again. So you’ve gotten a deduction on the front end when you put it in and if it’s a qualified purpose that you take it out for, you’re not going to be taxed on that withdrawal. So it’s a big win. And then if you take it out for another purpose other than one of the qualifying purposes which are listed there, then you’ll be taxed on.

(11:33)
Okay, so then there’s the first time home buyer’s tax credits. This increased to $10,000. It was less than that before. So when you go out and buy your first time, first home, you’re going to get a big credit. And by the way, if you’ve separated from your spouse and you haven’t lived, if you haven’t purchased a new home or lived in a primary principal residence for the preceding four years, you’ll be eligible for this credit as well. There’s a multi-generational home renovation tax credit. So if you’re thinking about moving grandma in or mom in, you can spend up to 50 grand and the government will give you a credit back of 15% on that. Yeah, 7,500 bucks is kind of no hell in terms of building a granny suite, but it’s something, right? But you can also do maintenance appliances, home entertainment, those are excluded.

(12:18)
So if you’re just coming in and repainting your granny suite, no go. If you’re buying new appliances, no go. But if you’re building out a suite, for example, putting an addition on the garage or whatever, those would qualify. Okay. Home buyer’s plan, you can withdraw up to 35,000 bucks from your RSP to buy a home. So you combine that with the other one that we were talking about, that’s 75 grand that you can pull out to put as a down payment. Unlike that though, the home buyer’s plan needs to be repaid over 15 years, and if you don’t make a contribution to your RP repay it, it’s just automatically calculated as an income inclusion on your tax return. So I want to shift gears a little bit. I’m going to go up and look for questions. Give me a second here. I don’t see any new questions. Thank you for attending.

(13:07)
Perfect. Okay, sounds good. So I’d love to do by a show of hands, but this platform doesn’t really allow it. Where is everybody registered for? CRA’s, my business account for their business and CRA’s my account for their personal. I feel like this is getting to be an old question, but it still surprises me the number of new clients that we pick up who haven’t done this, and this is a real priority for us. There’s a lot of good stuff in here and it’s getting better. So you really should get on the CRA’s portals. You can move payments between accountants, between accounts. So for example, if you’ve overpaid your GST account and you want to flip that over to your payroll account, you can do that automatically without having to make a phone call. Now you can pick up your mail, you can see your notices of assessment, all your tax balances are there, et cetera.

(13:55)
So really good to be in CRA my business account. The other new features, which I don’t like this one as much, but it is a new feature, is you can authorize an accounting firm or authorize an accounting firm in the CONFIRMER representative section online. In fact, you have to do this now in order to get us on your account. So not only, you may be new to this, but we can’t just sign a form anymore and get authorized on your business account. It’s more onerous on you and it involves you more, which is what I don’t like about it. We like to take the pain and friction out wherever we can. They’re going to be going digital by default, expected in May 2025… as in they’re not going to be mailing anything out anymore. So that’s coming. So you’ll have to be registered. They’ve got a progress tracker.

(14:39)
So if we send an election or a complaint or a notice of objection or some amended stuff, there’s a progress tracker that tells you where the CRA is at on those things. We can submit special returns and elections. This is all new stuff, and they’re going to want a hundred dollars penalty for payments over 10,000. You can’t write a check for those things anymore. So digital payments are on the way similar for the personal accounts. You can look up your historic tax returns notice assessment. You can see your account balances and transactions, all your slips, your carry forward amounts, et cetera. There’s a lot better communication now in that portal with the CRA. So when you have to get on, I don’t know if anybody’s tried to phone the CRA, but it’s brutal trying to get through to somebody at CRA one and then getting a correct answer out of them.

(15:28)
Statistically speaking, according to a number of auditor’s, general reports that have come out, when people go to the C RCRA for tax advice, there’s a very, very good chance that you’re going to get the wrong answer from the CRA agent. And guess who’s responsible for that? Not the CRA agent. It’s you. It falls on you. And so be careful when you’re getting your advice from the CRA, but the communications are online here and we can get ahold of them now and at least maybe you can record the conversations a little better than a phone call to have some kind of a fallout when they give you fallback, when they give you bad information, which happens statistically a couple years ago, it was like half the time they gave you wrong answers. So very important to have a competent tax accountant. Here’s how your CRA account numbers work.

(16:14)
For anybody who’s not familiar with this, you have your nine digit CRA number in your company followed by rc, which is corporate account RTS, GST, payroll. There’s NR for non-residents, et cetera. So the other thing that I wanted to highlight here is the CRA. A lot of people think that the CRA writes the laws and they don’t. Our parliament writes the laws. The CCRA is just the police. They’re just the enforcer of the tax laws. And just like the police, if you got a speeding ticket in a situation where you think you shouldn’t have gotten a speeding ticket, you can go to court or you can argue with them because what you thought your interpretation of the rules is different than the police’s interpretation of the rules and you can have an argument about it. And that’s where a nice tax accountant comes in because the CRA make mistakes all the time.

(17:03)
And so having a good tax accountant on your side is going to help you because there may be certain facts or scenarios where the CRA aren’t seeing the whole picture or you’ve got a hasty auditor, which is happening quite a lot lately where they’re just making a decision and processing a processing an adjustment, which is really unfortunate. If for anybody who’s interested, go hit up my blog and we did a podcast with Audit Shield a couple of weeks ago talking about how arbitrary the CRA’s actions are. Audit Shield’s a great product that we offer to offer a fee waiver service for any questions that come up from the CRA for our customers. And Audit Shield tracks the CRA’s activities in real time because they get all the request letters and a ton of stuff that comes through from the CRA frankly is completely arbitrary and most claims that are made at Audit Shield, there’s no adjustments at the end of it.

(17:54)
It’s just the CRA asking questions. Well, the problem for you as our client is that costs you money and time. And so it’s kind of interesting to see audit shield, it’s a fixed fee and then we can have some breathing room and budget. We are insured to go to town with the CRA request without having to bill you for it. It’s kind of a nice product. So a lot of people don’t understand installments, so I thought I’d run through that. So we get into trouble when we’re new to business because you don’t have to make installments in your first year of business. Installments are calculated based on your last two years of tax history. And so if last year you owed more than $3,000 in corporate tax, you’re going to have to pay installments next year, and it’s generally calculated as a quarter of whatever you owed in a previous period.

(18:38)
But you get exempt and then Alberta has its own requirements as well, but you’re exempt from Alberta installments. If you’re a Canadian controlled private company, you claimed a small business limit in the previous year and your taxable income was under 500 K. So most people, statistically most small businesses are exempt from paying Alberta installments, but they still have to pay federal installments. The due dates for these are if you have a perfect compliance history, you can go on quarterly and you pay at the end of the month following the quarter, and if you don’t interest starts accruing. And by the way, you have an option with installments to pay less than the stated amount. If you think you’re going to make less money and you’re not going to owe that much tax, you can short your installments. But the trouble is, if you get to the assessment date to calculate the amount of tax that you actually owe and you under installed, but you should have installed more and you owe tax and the amount that you installed was below sort of the required amount, they’re going to charge you interest on that.

(19:35)
And when interest gets sufficiently high, there’s also penalties. And so there’s the three methods for calculating installments. You can have a look at that. This is a lot more important now for interest. Interest and penalties are two different things. Interest is when you don’t pay a balance. A penalty is when you don’t file a thing. But with installments, if you’ve got sufficient amount of interest, then penalties apply as well. And so a penalty is a one shot deal at a fixed percentage, and interest is an accruing compounded daily thing for almost my entire career in tax. The interest rate at CRA was 5%. So people go, oh 5% not bad. I can use, use the C RCRA as my bank and not pay my tax obligations and I can get that loan for 5%. That’s very flawed thinking for a number of reasons, not the least of which that the CRA is a brutal creditor and they can seize your accounts and assets and all of that.

(20:35)
But the climate’s changed here. We’re at 9% right now for interest on overdue debts, and we’re going to 10 in the new year, which is a super high interest rate. And when you go, okay, well once I hit a thousand dollars in interest on my overdue installments, I start paying penalties. Well, it’s a lot easier to hit a thousand dollars of interest at 10% interest than it is at 5% interest. So a lot of people are going to get stung with penalty interest because they go, you know what? 5% I’m not going to make installments this year. I’m going to keep my cash, I’ll give it to CRA at the end of next year and we’ll pay the 5% financing charge. The dynamic has shifted. We’re going to 10% here in the new year, so be careful on that one. Alright, so tax deadlines on payroll.

(21:21)
Generally your payroll is your source deductions that are withheld from your employees and your paycheck. So CPP, EI withholding tax owners don’t pay EI because they’re not eligible to claim it for the most part. There’s a few exceptions. Those are due by the 15th of the month following the payment. And if you miss it, there’s an instant 10% penalty charged if you’re late. So it’s one of the most severe penalties in our tax system that is applied all the time. Why is it applied all the time? Well, it’s applied all the time. Oops, let’s go back here. Okay, I see if I can figure out how to go back. It’s applied all the time because I run into an astonishing amount of business owners that are still manually calculating their withholding tax payments based on the online CRA calculator. They’re using QuickBooks to do their calculation and then they write a check and it didn’t get to the CRA on time or whatever.

(22:19)
Here’s the little tip for you that’s instant and easy. Get on a payroll processor, get on wagepoint or Payment Evolution. It’s fairly simple. You link your bank account up, they take money from your corporate account, they drop it in your employee’s bank accounts, they send the remittances to CRA and they don’t miss a beat. We like Wagepoint and Payment Evolution. They integrate with your accounting software and at the end of the year they’ll issue T4s. Now, if you’re a guru client and we help you with your payroll, we’re going to reconcile all the T4s at the end of the year to make sure that they make sense. We’ll ask questions about are there any taxable benefits that didn’t get run through wage point? Is there anything that we’re missing that needs to be included here that may have been missed just on the baseline automatic payroll processor?

(23:00)
And you go, man, software costs money. I don’t like to spend money. Your time to process payroll on your own 100% of the time is worth more than the small payment that you’re going to get. Wage point and payment evolution, their fees are not expensive. How they make money is they arbitrage you. So they’re going to take money out of your corporate account and sit on it for four or five days before they disperse it to the employees and the CRA. And by doing so, they’ve made interest on a massive pot of money and that’s how they make a good amount of their money so they can keep their fees low. If you’re manually doing payroll on your own, stop it, get a payroll processor.

(23:38)
Alright, so tax deadlines, let’s go through these. So, your corporate and provincial taxes are due two months after year-end.

(23:46)
Unless you’re like most people on the call and you’re a Canadian controlled private company, then you’re three months after year-end. But all major large corporations or any holding companies that just hold investments there two months. What a lot of people don’t realize is your tax payment isn’t, sorry, that’s the payment deadline. Two and three months. That’s when we have to make the tax payment. The tax return doesn’t actually need to be filed until six months after year-end. We almost always aim for the three month window with our clients because why? I mean if you’ve already gone through the trouble of calculating the tax, chances are your tax return substantially complete. The six month deadline is for larger companies. January 15th is for December bonuses. So if you pay out December pay and December bonuses, remittances are due January 15th, January 31st, we’re going to have quarterly GST that needs to be paid and filed.

(24:34)
December GST needs to be paid and filed. Alright, so let’s see here. February 29th, your T4 and T5 slips are due. Your federal and provincial payments are due for investment companies. Your RRSP contribution deadline this year is February 29th. Yes, we are a leap year. March 30th is the T3 trust returns and slips are due to be filed, including those new trust reporting rules. If you’re on my mailing list and you haven’t read the blog about the neuter trust reporting rules and you go, I don’t need to do that, I don’t have a trust, think again, this is going to catch a lot of people who think they don’t have trust. So go read that. And the reason I say it’s March 30th and not 31st is because these are due 90 days after your end, which is March 30th. April 1st is the corporate and federal tax payment deadline for CCPCs.

(25:22)
Your annual GST filing and payments are due, Q1 federal corporate tax installments are due, as well. Which is super interesting. A lot of people will not have their year ends completed by April 1st, and yet their following years corporate installment is due. April 30th is the personal tax deadline. If you have a proprietorship, your tax payment is still due, but you have until June 17th to file your personal tax return if you have business income. And then July 1st is when federal corporate taxes need to be paid or filed

(25:59)
Best practices. So if you want to be on top of this stuff, the best practice that we can recommend, number one, is to make sure that your year-end books are closed, reviewed, and delivered to your accountant within 30 days of year-end. I realize that’s a tall order for a lot of small business owners because they’re just struggling to get AR in the door and complete work and bill.

This is why you need a good accountant. If you want to be on top of your stuff, you should have your urine closed within 30 days.

(26:25)
Number two, your books are closed and reviewed on a monthly basis within 15 days a month end. If you can’t make 15, go for 20.

(26:35)
Best practice Number three, you should be reviewing your books and records. Go through your sales account and make sure all those sales look right. Go through your accounts receivable and make sure that your receivables line up with what people owe you. Go through your payables and make sure that you actually owe money to those people. This is all reports that you can generate right out of your bookkeeping account. Go through shareholder loan. I know that when people don’t answer questions for us about what an amount that left their account might be in their company, we book it to shareholder loan.

(27:01)
We assume it’s a personal withdrawal. If people don’t answer our questions, that’s where we have to assume it is. It’s a personal draw that’s going to be taxed. So you want to look through expenses and make sure that TELUS isn’t in meals and entertainment and whatnot too. I’ve actually got a great blog on bookkeeping best practices that you can check out. So go have a look at that and best practice number four, this is one that I do, is you set up calendar. So when you get your installments from us in your year end letter, we say, here’s the dates that you need to make these installments by go and put those into your calendar. Set ’em up as calendar reminders right away. And if you want to take it one step further, which I do, I log into my online tax payment portal with my bank and I pre-program the installments in to happen at fixed days and then I don’t think about it again for the rest of the year besides making sure that there’s enough cash in the account to satisfy the installment requirements. I don’t think about it again for the rest of the year.

(27:55)
Alright, so I’ve got a great article here. It’s called Salaries versus DividendsSalaries vs. Dividends. So when you pay dividends, it’s easy. You just take money out of the account. Your accountant usually books it as a shareholder loan and at the end of the year we’ll put it through dividends and we’ll issue a T5 and that goes on your personal tax return and you pay tax on it in or around April 30th. The trouble with that is you need to have saved the tax. So if you took out a hundred thousand dollars from your business, that’s a hundred thousand dollars dividend, you’re going to owe tax on that of who knows?

(28:45)
Call it 20 – 25’000. You better have saved that money on your personal account or else you’re going to have a real surprise when April 30th comes along. This is what I call the dividend trap. A lot of people fall into this where they have no cash, the tax bill comes due and they have to pull more cash out of their company in order to pay the tax from last year. And thus, you’re in the dividend trap and you’re in this perpetual cycle of always taking out new dividends to satisfy last year’s tax bill. Not to mention that you also have an installment requirement for the following year, and so that’s even more dividends that you have to take out to satisfy last year’s tax bill. And you haven’t even paid for personal living yet. Dividends attract slightly higher tax than salaries do slightly higher it, it’s small, but with salaries you have to pay into CPP.

(29:35)
And as what we just learned from a few slides ago is for 2024, that’s going to top out at like eight grand between the employer and employee portion. So if you take the same amount of money out of your company via salaries or dividends, yes, dividends will attract slightly higher tax, but you’ll be in a way worse cash position by doing salaries because you’ve contributed to the CPP. Now, a lot of people will go, you know what? I want to contribute to the CPP when I retire. I want that steady income coming in from the government. Fair enough if that’s part of your investment strategy, no problem.

(30:12)
Now I have to really rethink this because CPP is going through the roof and it’s really interesting to see the CPP going through the roof at the same time as this argument about an Alberta pension plan is taking place. I mean, it’s just worth the conversation. I’m not saying I advocate one way or the other, I’m not sure I understand enough. But if you look at what’s happening to the CPP rates, I mean it is astronomical the growth over the last few years, and so it’s really worth a conversation.

(30:41)
The other thing about salaries is it’s earned income. So COVID benefits that applied right out of the gate when we hit COVID required on you to have T4 income, not dividend income. They changed their mind a little bit into it, but originally if you wanted any of those COVID benefits, you had to have salaries. And so that’s a thing. Salaries also build our RSP room. So if that’s part of your investment strategy, you can’t build that room with dividends. Okay, and then from a legal perspective, if a company has paid out a dividend and it has other tax liabilities such as corporate tax, the CRA has the legislative ability to go after the directors of the company who have paid out dividends instead of paying off the corporate tax liabilities that doesn’t exist with salaries.

(31:26)
So there’s a few differences. Go through and read my blog and then if you’d like to have a conversation about salaries versus dividends, we can definitely do that.

(31:36)
So what is deductible in your company? This is a good one. The answer is nothing. The first section in the Income Tax Act that talks about what’s deductible is an exclusion. It’s an exclusion, and it says nothing is deductible from income tax unless it falls under one of these exceptions. And one of the main ones is unless it was incurred for the purpose of earning income, so except to the extent that the taxpayer incurred it for the purpose of gaining or producing income from business or property. So then you go in and go, so people often ask me, Hey, can I deduct this? And my answer is, if you incurred the expense in order to earn income, and you can directly link those two, sure, why not? Go for it.

(32:20)
There are specific exclusions in the income tax act, for example, they specifically zero out golf dues. You can’t expense golf. I’m assuming that is related to some abuses that were happening on the golf course. I think it’s a shame a lot of business is done on the golf course, but guess at some point some minister decided that having the taxpayer fund business golf trips was not a good idea. The other one that everybody knows about is 50% of meals in entertainment is not deductible. I assume that that had to do with them just getting tired of auditing $5 Starbucks receipts, and they just went, you know what? Around half of this is denied anyway, so let’s just make a legislative rule that says half of meals and entertainment are not deductible. There’s always a personal component there.

(33:08)
Okay, record keeping. What do you got to keep? So you need sales receipts, sales registers, receipts, deposit slips, fee statements, contracts, data, purchase for expenses, name and address of the supplier, full description of the goods. This is interesting. I have the full description of the goods bolded. Why is that? Well, when you go to a restaurant and you keep the little visa slip off the visa machine and you don’t take the itemized receipt, that technically isn’t good enough. Audit support for the CRA, the visa slip or the MasterCard slip, you have to have the itemized description of what you purchased plus the vendor’s GST number. If they’re registered, it has to have the date of the transaction and the amount of the transaction. You need to keep banking credit card statements. You need to keep all major agreements. Okay, so that’s your record keeping for motor vehicles.

(34:03)
People go, do I really have to keep a log? And the answer is, well, if the CRA comes and looks at you, then yeah, they’re going to deny. I’ve seen them deny everything. They’ve gone, well, you know what? I don’t think that that vehicle had any business purpose when obviously it did, but they just deny it and they go, Hey, prove me wrong. And it’s on you to have that support to prove them wrong. This is not a guilty until this is a guilty until proven innocent type deal. So your log book has to have the date of the trip, the destination, the purpose, the number of kilometers driven. The neat thing is, is there’s an administrative policy that says after a whole year of good record keeping, if you have the same sort of activity all of the time, you can keep a three month, so a one quarter sample log book, and then they’ll just accept that and then you can extrapolate it over the year.

(34:54)
Okay? There’s a lot of technology that makes this really, really easy. QBO, MileIQ, jobber, mile bug, etc.

(35:05)
Dividends also only also eliminates accessing health spending accounts. So if you’ve got a health spending account, yeah, you’re going to need salaries for that.

(35:13)
Okay. Can we keep electronic records?

(35:17)
Absolutely, you can. It needs to be legible though. So you’re like blurred out shaky bar receipt from when you had six beers at the pub and it’s dark. That doesn’t cut it. You need to be able to read the whole receipt. Okay, accessible and readable in electronic format. Tools like DEXT and Hubdoc are really great for snapping pictures and keeping everything in a searchable library database. Really, really simple and you need to be able to make an accurate reproduction. If you can’t, then it’s not going to work.

(35:48)
Okay. What are shareholder loans? A shareholder loan for bookkeeping purposes is generally any money that you as a shareholder contribute to the company. And that is a payable, that is, the company owes you money, you’ve put money into the company, and so on your bookkeeping, that’s when the balance goes into a credit balance or it shows up as a negative. It’s on the right side of the ledger or a negative. That is where the company owes you money. So what can go into these things? Well, maybe you put a hundred grand into the company. Maybe you’re paying for company expenses on your personal credit card. So you went out and had a lunch and you put that on your credit card. Or maybe you use your home office for business and you want to write off a portion of the expenses that you’ve paid personally, that would be a credit to your shareholder loan.

(36:35)
Personal assets such as cell phones, vehicles, home office, etc. So that sits in the credit side. Well, what sits in the debit side? That’s a receivable. Well, that’s when you draw money out of the company. And if it’s not via salary, typically the normal bookkeeping practice is not to book that straight dividends. It’s to book it to shareholder loans. So it nets out against your contributions to the company. And at the end of the year, the net net amount is your dividends. Okay? So if you go and take $10’000 out of the company, that’s going to go as a debit to your shareholder loan. And when you owe the company money as in it’s on the left side of the ledger, or it’s a positive number, that means that the company has a receivable from you. And in order to clear that receivable, generally as accountants, we declare a dividend at year-end or a bonus at year- end.

(37:21)
Okay? Now, a lot of people go, well, you know what? I’ll pay it back after year-end. And you go, well, no, that’s not good enough. We have a rule in our tax law that says a shareholder cannot borrow money from their company the moment that they take money from the company. It’s deemed to be income, unless it’s repaid within one year-end after when the money was borrowed, then it can be zeroed out. But the trouble is, is people go, okay, well I’ll just borrow during the year, repay it on Jan one and start borrowing again. That doesn’t fly either. There’s a concept of series of transactions that the CRA looks at as well. So that doesn’t fly either. So we usually call it a dividend at the end of the year.

(38:04)
Okay, are you an employee or a subcontractor? So this is a really interesting topic, and then I think we’ll see what else we got, but I may move on and just open it up to and ask me anything. A lot of people will get a job as a contractor at a company, and the company will say, you know what? You need to go and incorporate your, you need to go and incorporate, I want to hire a corporation, not you individually. Why is that? Well, because in terms of employee versus contractor, from the CRA’s perspective, if it looks like a duck and quacks like a duck, then it’s a duck or an employee. So even if you say, I am a subcontractor, but all of the indicators sort of say that, that’s an employee. For example, company cell phone, they’ve got some business cards, they have a company email, they’ve got a desk that they can go to work at regularly.

(38:49)
They’ve got fixed hours that they don’t get to dictate their own schedule. The CRA can easily say that that is an employee. Well, what happens? Well, now the company is on the hook for all of the CPP, all of the ei, the withholding tax are still the employee’s responsibility, but it puts the company in a bit of a bind, not to mention all the labour regulations and laws that you’re subject to. And so the company will say, go and incorporate a company and I’ll hire you as a contractor through there. Well, what happens now is a company, a corporation cannot legally be an employee. So the company’s absolved of all those responsibilities, but then that incorporated employee runs the risk of being a personal services business, which is I would be an employee, but for this corporation, in that case, that corporation’s expenses are denied.

(39:35)
So the employee that’s incorporated wants to write off a whole bunch of things. While those expenses are denied, the small business deduction is denied, and all the income that’s earned in the PSB is topped at taxed at the top marginal tax rate. So it’s an ugly thing to be in. There’s a difference between an employee and a subcontractor for later.

So, that is my presentation to give you a little bit of an understanding on the tax system and to fill you in on some new issues that are happening for most small business owners. At this point, I would love to open it up to an ask me anything. So just punch your questions into the Q and A, and I’ll give it a minute here. Of course, if anybody wants to get ahold of me directly and ask me questions or have a chat about their business, you can get me at Clayton@achenhenderson.ca.

(40:17)
The phone number’s on the screen there. Here we go. We’ve got a question. Home office business space. What is the max that can be used? This is an interesting topic. So first of all, what you can claim depends on what your business activity is. For example, if you’ve got a rental property and it’s going on your personal tax return, there’s certain things like mortgage interest that you can’t claim certain depreciations that’ll be limited so that you can’t depreciate into a loss, et cetera. So there’s certain, you have to look at what the income type is. Now, if we’re talking about you own a business and you want to claim some home office, you go, okay, do you have an office already? So for example, I’m sitting in my office here, sorry, lemme just put me up on the screen. I’m sitting in my office here.

(41:04)
Well, I’ve got a place to come and work. So it stands that I can’t also write off a home office. Now I write off my home internet because I certainly need that so that I can work as much as I work and I write off my cell phone. But in terms of home office, you need to look at how many offices do you need? And if you’ve got multiple offices, usually you take the one where more than often than not, you use it to meet clients, and that’s in person, web doesn’t count, or you use it to function operationally, and that’s the one you can write off. Now, how much can you claim the office space has to be in a home office, has to be a dedicated space. And so at work or at home, I’ve got, if I was claiming it, I’ve got a 11 x 12 foot room, it’s bedroom in my house that is dedicated for work, and that’s it.

(41:49)
So that’s the first thing. It gets really tricky when you start working in your living room and the CRA can have a heyday with that. The way it’s worded is it has to be a dedicated space. So kitchen tables presumably are out. Now you go, well, that dedicated space is 120 square feet. The total square feet of my house is 2,800 square feet. So now I get to take whatever percentage that is of my property, tax, mortgage interest, insurance, utilities, repairs and maintenance, et cetera. And it turns into a very small number really, really quickly. So I’ve seen a lot of people agonize over home office expense. I’ve only ever seen one scenario in my entire career where the number actually mattered by the time you prorate. So you take the total expenses, prorate it down to the portion of your office, and so you go, maybe I spent $10,000 on home and 10% of that is my home office.

(42:41)
Maybe in my case, it’s less than that, it’s like 5%. So now we’re down to a $500 deduction and my tax rate’s 11%. So I’ve just saved $55 in tax to agonize over my home office expense. It’s a complete waste of time most of the time. I dunno if that answers your question, Jessica.

(42:57)
We’ll end it here. If anybody has any more questions, please feel free to reach out to me directly. And thank you so much for attending.