In August 2019, CRA released guidance on when an employee of a company, who is also a shareholder of the company, can deduct employment expenses on their personal income tax return.
But, before we get into those requirements, let's look at how this all started.
In about September 2017, CRA began asking employees of corporations, who were also major or sole shareholders of the corporations and who were claiming employment expenses, to support their claim for those employment expenses. They ended up reassessing those employees/shareholders on the basis that the expenses could not be a requirement of employment since the shareholder was not going to fire himself for refusing to incur those expenses.
In February 2018, after backlash from the public and the tax community and media interest, CRA backed down from the program and reversed any reassessments that had taken place. They also promised consultation with stakeholders in the tax professional community to provide clarification.
That clarification is as follows: if you are an employee and a shareholder, you must satisfy two key conditions before you can deduct employment expenses on your personal income tax return.
1. The expenses were incurred as part of your employment duties, and not as a shareholder.
If you are a shareholder, you must establish that the expenses were incurred in your capacity as an employee and not a shareholder. To do this, you must be able to establish that the expenses are comparable to expenses incurred by employees (who are not shareholders or related to a shareholder) with similar duties at your company, or at other businesses similar to your company in size, industry and services provided. You do not need to include this information on your tax return or the Form T2200 Declaration of Conditions of Employment, however, the CRA could ask you to provide this later.
2. You were required to pay for the expenses yourself as part of your employment duties.
Usually, a written contract of employment specifies the expenses a non-shareholder employee must pay. Sometimes there is no written contract or the requirement to incur expenses is not clearly identified in the contract, but there is an implied requirement for the employee to pay the expenses. For example, an employee can demonstrate an implied requirement by showing they face possible disciplinary action from their employer if they do not meet the requirement.
If you are a shareholder-employee however, an implied requirement may be more difficult to demonstrate, and a written contract may not be adequate to establish that you were required to pay for the expenses as part of your employment duties.
To satisfy this condition, you must therefore be able to establish that the expenses are comparable to expenses incurred by employees (who are not shareholders or related to a shareholder) with similar duties at your company, or at other businesses similar to your company in size, industry and services provided. This will support that you were required to pay the expenses to fulfill your obligations in your capacity as an employee.
You must satisfy both key conditions to deduct the expenses on your personal tax return. If both conditions are met, you may, as a shareholder, have the authority to certify Form T2200 Declaration of Conditions of Employment, for yourself or a related employee.
Tax planning between your corporation and shareholder(s) can be challenging and fraught with unforeseen consequences to both the corporation and the owner-managers. A CPA can help navigate ever changing tax legislation to ensure you stay compliant. Contact Ryan Rawluk, CPA, CGA or Eric Robert, CPA, CGA to get the proper advice.
The Disability Tax Credit (DTC) is an important tax credit that provides financial support for persons with disabilities or their supporting persons. Before anyone can claim the DTC, they must first apply for the DTC with Canada Revenue Agency to determine their eligibility. The application process can be long and complex.
A person may be eligible for the DTC if one of the following situations applies: be blind, be marketly restricted in speaking, hearing, walking, eliminating (bowel or bladder functions), feeding, dressing, or mental functions necessary for everyday life, or require life sustaining therapy.
If you think you, or someone you know, may be eligible for the DTC, you must first complete an application form. The form is called T2201 Disability Tax Credit Certificate. It is completed by the person with the disability or their legal representative and a medical practitioner. A medical practitioner can include a medical doctor, nurse practitioner, optometrist, audiologist, occupational therapist, physiotherapist, psychologist or a speech-language pathologist.
Once completed, the original form is submitted to Canada Revenue Agency where they will review the application and either approve or deny the application. CRA will mail a Notice of Determination informing you of their decision. CRA's service standard for this application process is eight weeks, however, it usually takes longer.
If the DTC application is approved, we request to have the tax returns amended for the applicable years to include the Disability Tax Credit. In Manitoba, the DTC credit is worth almost $2,000 in tax savings per year as well as opening up other tax advantages such as the ability to claim certain medical expenses and the ability to open a Registered Disability Savings Plan (RDSP).
If the DTC application is denied by CRA, they will explain why in the Notice of Determination. If you disagree with the decision, you have the option of discussing it with CRA, submitting additional information that may be relevant, requesting a review of the application or filing a formal objection. The formal objection has to be filed within 90 days.
Every year, we help our clients through this process. We charge $175 plus tax to discuss eligibility with our clients or their representatives, help with completing the form, reviewing the application and submitting to CRA, and amending the returns upon approval. This is a far better value for clients than those firms that work on contingency, which may cost up to $5,000 for the same work.
So, if you think that you or a family member, or someone you know, may qualify for the Disability Tax Credit, please discuss it with them or us or their accountant or tax preparer. It is a very important tax advantage.
My Account for Individuals is a secure portal that lets you view personal income tax
and benefit return information and manage your tax affairs online.
This is a great way to keep track of your important documents, stay organized and keep up to date with all your tax information.
My Account is:
Some of the many things you can track when you register are; your refund, view or change your return, check your benefit and credit payments, view your RRSP, set up direct deposit, receive e-mail and so much more.
You will need:
To register for My Account, select CRA register at the following link:
Step 1 – Provide Personal Information
Step 2 – CRA Security Code
After completion of step one, you will have access to limited information until you enter your CRA security code. You will receive your CRA security code in the mail within two weeks or less. After you enter your CRA security code, you will have access to the full suite of service in My Account.
Step 3 – Enter CRA Security Code
Last month, the Federal Court of Appeal heard an appeal from an Ontario lawyer who operated a private law practice on a part time basis in addition to her full time employment with the Government of Canada. This is a common situation in Canada and we often see people working full time that set up 'side businesses'. Sometimes the intent is to start a business, build it up, make big profits and retire. Other times the intent is to write off otherwise non-deductible or personal expenses to create a business loss which can be applied against their employment income creating a 'tax refund'. A cautionary tale follows.
Ms. Renaud began working for the Government of Canada in 2000 and moved to the Ottawa region at that time. Prior to 2000, she ran her own full time law practice in Repentigny, but reduced her hours after taking on the new position.
From the years 2001 to 2014, she claimed business losses every year, ranging from $1,956 in 2003 to $15,680 in 2012. In addition to the losses, her gross billings were quite low with her maximum gross income reported in a year was $3,850. In three of those years (2005, 2009, and 2010), she reported no gross income.
At issue were the years 2011, 2012, 2013, and 2014. In those years she reported gross income of $2,500, $850, $850, and $3,850 respectively. Her losses for those four years were $12,613, $15,680, $4,014, and $6,662 respectively.
Ms. Renaud made assertions that she spent on average about 5 to 10 hours working in her private practice per week. She did not take on more work than she had time available and made sure there were no conflicts with her full-time job.
Her practice was varied; she practices family, civil, administrative and criminal law. She does consultations, gives legal advice and participates in negotiations.
Some of her answers to questions were vague. When asked how many clients she had or how many cases she handled, her answers were not very specific.
Ms. Renaud testified that she does not work on a volunteer or pro bono basis. She does, however, adjust her rates based somewhat on a client's ability to pay. She also testified that she does not advertise as she receives enough clients from word of mouth.
The issue in this case was whether Ms. Renaud had a 'source of income'. CRA didn't challenge the legitimacy of her expenses but challenged whether or not she actually was operating a business. If they can prove she didn't have a business, they could deny her losses.
To determine whether she had a 'source of income', the court turns to the Supreme Court of Canada and the 2002 case Stewart v. Canada. In this case, the Supreme Court determined a two-step process for determining if a 'source of income' exists. The first step equates 'Source of income' with an activity undertaken 'in pursuit of profit', which is consistent with the traditional common law definition of 'business'.
After considering the facts of the case, the judge stated that the practice "is quite simply not undertaken in pursuit of profit." He came to this conclusion partly by looking at the hours worked by the appellant. She claimed to work an average of 5 to 10 hours per week. At 50 weeks per year, the judge concluded she worked at most 500 hours per year. In the four years at issue, she billed $2,500, $850, $850 and $3,850 respectively. This works out to $5 per hour in the first year, $1.70 per hour in the second and third, and $7.70 per hour in the fourth year for each hour worked. He stated "This is not at all like a law practice as normally understood, even in the wildest sense."
Further, the judge pointed out that Ms. Renaud made no mention of cases that could be highly profitable later on and no evidence was provided to show Ms. Renaud sought to change her billing practices or make changes to her client base to increase income.
So if you are in a similar position to Ms. Renaud where you are operating a small business with multiple years of losses and deducting those losses from other sources of income, you may want to consider whether you have a 'source of income' and are operating 'in pursuit of profit'. If not, you should be aware that CRA can simply wipe out your losses for tax years that are not statuted barred.
As of the passing of the Province of Manitoba budget 2018, Bill 34 now allows licensed chiropractors in Manitoba to incorporate their professional services and to benefit from the potential tax savings that comes with it. What does that mean for you, the professional Manitoba chiropractor?
To begin with, a professional corporation is one that provides professional services and is regulated by a governing professional body such as the Manitoba Chiropractors Association. Generally, only those professions that are governed by a legislative professional body or association and have been legislated by government will be allowed to incorporate.
There are many reasons why this is appealing to a professional’s practice but the ability to use tax deferrals on professional income is a reason for many to incorporate. Prior to 2018, all licensed chiropractors who chose to practice in Manitoba were required to recognize their professional income at higher tax rates. In Manitoba, these higher tax rates could be as much as 50.4% on net professional income over $205,800.
With incorporation, the possibility of deferring this tax until a later date is possible. Income recognized through a corporation, where taxable income is below $500,000, would benefit from a 10% (9% in 2019) tax rate in Manitoba, which is a 40.4% (41.4%) tax drop from the personal tax rates. Shareholders could then pay themselves from the corporation as either employees or shareholders through salary or dividends respectively. All other money that is left in the corporation could be held within the company and reinvested or paid out in the future when the shareholders are in a lower tax bracket.
If a corporation qualifies as a qualified small business, the future sale of shares of the corporation may be done on a tax-free basis. When planning on retiring, chiropractors can sell their shares to another party and use their capital gains exemption on the sale to recognize either no taxes on the sale or a drastically reduced amount.
As with most professional corporations, only a licensed member of the Manitoba Chiropractors Association will be able to hold voting shares and act as a director and president in a chiropractic corporation. Non-voting shares can be held by family members or a spouse. Careful consideration must be used when splitting income with family members in order to avoid any additional tax on that split income.
Incorporation also provides some Protection and liability limitation compared to a sole-proprietorship or partnership. The corporation would not protect you if you were sued for malpractice, your professional insurance would cover you in those cases. A corporation would offer some protection of your personal assets from third party creditors in case your corporation was unable to pay any outstanding debts.
Many chiropractors today have also been working for many years and have purchased many assets over their professional careers. Incorporation allows for a transfer of these assets to the corporation from an individual on a tax deferral basis, so chiropractors can continue using their current equipment and assets without having to pay tax on the transfer of these assets to your new corporation.
A transfer of equipment and other assets to a corporation also allows for a possible release of money built up in the assets. Depreciation is usually calculated at a rate deemed reasonable by CRA but unfortunately, this is not always the case. Equipment and assets can be transferred to the corporation at the fair market value of the item, which in turn allows for more money to be withdrawn from the corporation at a reduced rate of tax. If the fair market value is greater then the tax value, taxes may apply as well.
If you are a licensed Manitoba chiropractor and are interested in incorporation but have more questions or would like to discuss your options further, one of our staff would be happy to sit down with you to discuss this subject with you.
Before taking any steps, it is recommended to sit down with your accountant and lawyer before proceeding with incorporation as there can be a lot of difficult questions that can be helped by having a professional assist you in this process.
Please see the following link for the full Bill 34, which goes into further detail about incorporation and chiropractors of Manitoba.
Canadian's annual Tax Free Savings Account (TFSA) contribution limit will increase by $6,000 in 2019. The annual increase in contribution limit has been $5,500 each year since 2013 (except for 2015 when the limit was raised to $10,000 for the year) and, thanks to inflation, will be $6,000 per year for the next couple of years.
The cumulative limit for Canadians who were at least 18 years old in 2009 and who hold a valid social insurance number will be $63,500 in 2019.
Beginning on January 1st, 2019, Canadians will begin contributing more to the Canada Pension Plan (“CPP”). This change is referred to as the CPP Enhancement and is being introduced in two phases, over the next seven years. The purpose of the Enhancement is to increase pension benefits to recipients by approximately 50% over current benefit levels.
Since 2003, Canadians have contributed 4.95% (9.9% if self-employed) of their earnings (up to an annual maximum) to the Canada Pension Plan. Beginning January 1st, 2019, that rate will increase to 5.1% and will increase each year until January 1st, 2023 when Canadians will begin paying at a rate of 5.95% (11.9% for self-employed individuals), a 20% increase over 2018 contribution levels (excluding the increase in contribution limits).
For an employee earning $45,000 per year, the employee will pay CPP premiums of $2,116.50 for the year in 2019 whereas they would have paid $2,054.25 in 2018; an increase $62.25 per year. By 2023, the same employee on the same earnings would be paying $2,469.25 per year, or $415 more than they would have paid in 2018.
The same increase applies to businesses and organizations with employees. A business with 10 employees each earning $45,000 per year will pay an additional $622.50 in 2019 and an additional $4,150 per year by 2023 before any increases in pay. This would bring the total CPP costs to $24,692.50 for that business.
Phase 2 will begin in 2024 with the introduction of a higher annual limit for higher income earners. This higher limit will be set at 7% higher than the normal 2024 annual limit and 14% higher in 2025. Canadians and businesses will pay CPP at a rate of 4% (8% if self-employed) on this higher limit. The government projects this higher limit in 2025 will be $79,400 but that will change based on increases in the average wage in Canada between now and then.
To assess the full impact of the changes, we can look at an employee earning $79,400 under 2018 rules and under 2025 rules. The annual maximum earnings in 2025 is projected to be $69,700 and an employee would have otherwise paid $3,276.90 in CPP premiums under 2018 rates. Under the Enhanced CPP, the same employee would end up paying $4,326.90 for a total increase of $1,050 per year, a 32% increase.
1. A Professional Designation
Consider whether a professional designation, like a Chartered Professional Accountant, is important to you. CPAs are professionally regulated in each province and they help to protect the public through rigorous educational and certification programs. So, not only can you be assured that its members uphold the highest professional and ethical standards, but you have recourse if something goes wrong between you and your CPA. If a conflict or complaint arises between you and your non-designated accountant, you may find your alternatives are limited.
Always discuss fees with your accountant. Fees can vary widely from firm to firm and from accountant to accountant. Some accountants charge by the hour (ie. $150 to $400 per hour) and some charge by the job. Fees should be part of the initial discussion and, for new clients, accountants should be able to estimate the fees based on a review and discussion of prior year work. This discussion will help avoid surprises after the work is complete.
3. Level of Service
You will want to determine the level of service you need from your accountant and whether you can grow with your accountant. For example, as your business grows and gets more complex, can your accountant provide the increased level of service that your growing business needs. Many accountants do not provide audit services or review engagement services which you may find you need at some point.
You will want to find out how available your accountant will be. How quickly do they return phone calls or emails? Generally, within 24 hours is the norm, but two weeks is unacceptable. Also, do you get to speak to the accountant or is someone more junior returning your calls or emails.
5. Use of technology
Technology is changing each year and you will find that you want your accountant to match or exceed your level of technological savviness. If you're using a cloud based accounting software, you can often add your accountant and they can access your accounting records as you do. Not only does this matter from a practical viewpoint (does your accountant ask you to print out a general ledger from QuickBooks Online) but can your accountant offer you advice or training in better use of the software. Talk to your accountant about technology and you should also research them online. Do they have a website? Do they have a social media presence?
6. Risk tolerance
Just as people have different risk tolerances, so do accountants. If you're the type of person who likes to push the boundaries of tax law the opposite value in an accountant will not work long. In addition, an aggressive accountant with respect to tax compliance for a client who may have a low tolerance for risk may quickly find themselves in trouble with a tax agency. The accountant needs to be able to understand the clients' level of risk tolerance and advise appropriately.
7. Speak at your level
You will want to deal with an accountant that can speak to you at your level of financial expertise. You may be ok trusting your accountant to get your work done correctly, but the accountant should be willing to take time to explain or answer any questions you may have at a level that you will understand. After all, you are the one signing off on the work.
The average age of accountants in Manitoba is between 55 and 60 years old. While this experience can be a huge asset, you may find yourself going through the process of finding a new accountant again in a couple of years. You may want to find a trusted accountant that can guide you through to retirement. If your accountant is older and working on their own, what is their succession plan?
Consider the importance of location. You may only meet with your accountant once or twice per year. Do they have an office or are they meeting at a coffee shop? Is parking available? Would it be conveniently located to drop in on short notice?
10. Ask for Referrals
Finally, accountants get a big portion of their new clients from referrals. Happy clients are eager to share with friends and colleagues. Ask someone you know and respect who they use as their accountant, considering the points discussed above, and ask if they'd recommend them. Other people you can ask include your financial advisor, banker or lawyer.
On November 21, 2017, the Auditor General for Canada released its 2017 Fall Reports and one section of this report was particularly scathing about Canada Revenue Agency's Call Centres.
The Agency's call centres are in place to give individuals and businesses timely and accurate information about their taxes, credits and benefits. CRA currently operates nine call centres across Canada.
CRA publishes service standards each year and reports on its own results compared to these service standards. For example, when a caller calls the general enquiries 1-800 phone number and indicates they want to speak to an agent, CRA's goal is to have an agent answer the call within two minutes, 80% of the time. In fact, the Agency's own published results for the 2016-2017 fiscal year indicate this happened 81.2% of the time.
The Auditor General's findings were that if CRA could not handle the call volume, they would block calls. This means you would get a recorded message that instructed you to call back later and then ended the call. The Auditor General found that more than half of the calls to CRA call centres ended up being blocked.
The Auditor General also tested the Agency's accuracy as far as how it answered general tax related questions that people may have. The Auditor General found that almost 30% of the time, the Agency gave incorrect information.
For example, one of the questions asked was "When will the interest begin to be charged on my 2015 initial assessment?" The correct answer is May 2, 2016 but a CRA agent gave a different answer 84% of the time.
Obviously, Canadians expect and deserve better service than this. That's why at Rawluk & Robert Chartered Professional Accountants Inc, our clients rely on us to answer the phone promptly and to give them accurate and reliable information. This Auditor General report just reconfirms what our clients already knew.
Tax time is not too far away, and if you operate your own business as a sole proprietor you know that the time is now to start gathering your paperwork together. Sometime, though, it’s hard to know what is needed, so you toss it all into a shopping bag and drop it off to the accountant’s office. Personally, I like to dig to the bottom of the bag, sort it out and get to work on the data entry; however, this takes time to do and time costs you money. If you want to reduce the amount of time that we spend organizing your information, here are some simple tips to help:
A little organization on your part will only be to your benefit, but if you just can’t find the time to get it all together, don’t worry! I’ll just slip on my diving suit and swim right to the bottom and get started!
Your friendly bookkeeper.
On October 16, 2017, the federal government announced a reduction in the Small Business Corporate Income Tax Rate. The current rate is 10.5% after it had been previously reduced from 11% effective January 1, 2016.
The reduction will occur in two steps. The rate will be reduced to 10% on January 1, 2018 and further reduced to 9% on January 1, 2019.
The government also signaled that the non-eligible dividend tax rate will be increased on January 1, 2019 to compensate for the change in corporate tax rates.
As Manitoba's Small Business Corporate Income Tax Rate is already zero, Manitoba corporations will be subject to the above rates.