167 Tax Tips for Canadian Small Business

Beat the Taxman to Keep More Money in Your Business

Stephen Thompson

• Publisher: Wiley
• Year: 2010
• ISBN:
  9780470678343
• Edition: 2
• Topic: Personal Development
• Subtopic: Personal Finance

"...a book for every Canadian in a small or home-based business who is struggling with complex tax rules and regulations."
—Dale Ennis, Canadian MoneySaver

"...easy-going style and avoidance of the more mind-numbing details make for a solid primer on the perks and pitfalls of self-employment. The...one-sentence tips in the appendix are probably worth the price of admission alone."
—Gordon Powers, The Globe and Mail

"...one of the better books I've seen on the market for small-business owners and better yet, it's all Canadian content."
—Linda A. Fox, The Toronto Sun

As a small-business owner or a home-based entrepreneur, you have lots of questions about taxes, but very few answers. Fortunately for you, 167 Tax Tips for Canadian Small Business contains a wealth of tax planning advice and strategies to help you save on your business tax bill. So whether you want to do it yourself or reduce what you pay your accountant - not to mention the government - this is how you'll keep more money in your pocket, where it belongs.

• Packed with tax tips that will save you hundreds, or even thousands, of dollars year-round.
• Written in a question-and-answer format that's easy to understand, practical, and easy to apply.
• Features 167 "Tax Beaters" - quick-reference tips that highlight key points - plus three bonus tips to help you save even more!
• Explains how to save taxes in every aspect and at every stage of your business.
• Features a Year-Round Tax-Planning Calendar.
• Coverage includes: business start-up, corporate tax planning, GST/HST, deductibility of home and automobile expenses, what to do if you are audited by the Canada Revenue Agency, CPP and QPP deductions for self-employed entrepreneurs, and much more.

The ultimate "tax coach" for every Canadian in a small or home-based business, this book will help you to beat the taxman at his own game!

ROUND SEVEN

365 Days to Save

Many times a client will come into my office to discuss how to save taxes. The client will want to talk about complex corporate reorganizations or fancy uses of trusts. Once I sit down with them and discuss what’s involved and the costs of these plans, they often lose interest.

Then I ask if they paid their taxes on time last year, as I advised. I ask how they purchased that new car. And the answers I get make me shake my head. Many people are looking for the knockout punch, that one great plan that will shelter all their money from tax. Yet they forget that saving tax dollars occurs throughout the year by doing a lot of little things correctly, little things like filing their tax returns on time or making tax instalments.

When Is My Tax Return Due?

This should be one of the simplest questions going. Everyone knows that your tax return is due April 30 each year, unless the government gives us an extension due to April 30 falling on a weekend. How-ever, for self-employed individuals and their spouses, the tax return filing date became somewhat more complicated in 1995.

Starting in 1995, if you reported self-employment income on your tax return, you, and in most cases your spouse, could delay filing your tax returns until June 15. However, if any income taxes are owing on these returns, these taxes are due on April 30.

TAX BEATER

File your tax return and pay any balance owing by April 30 to avoid being charged interest.

What this means is, unless you are really confident that you don’t have a tax liability, you will have to complete your tax return by April 30 in order to calculate how much you owe to the government. And if you’re going to complete your tax return to estimate your tax liability and pay your taxes by April 30, you might just as well file your return by April 30, too.

So it is not much of a filing extension. Since interest will be charged on any insufficient payment, as a general rule, I do not recommend making use of the filing deadline extension and instead recommend that you keep filing your tax return by April 30.

Why Should I File My Tax Return on Time?

So few people realize that performing simple things like filing their tax returns when due can, over time, significantly increase a person’s wealth. Consider two individuals, who both, every year, have to pay $6,000 when they file their tax returns in April. Taxpayer A files her tax return on time. Taxpayer B always procrastinates and doesn’t get around to filing his tax return until September each year, after a nice relaxing summer. Say this goes on for 15 years, and over that 15-year period the average return on invested income is 8%. Taxpayer A will find herself in a much better position, in fact having as much as $38,000 more wealth, just by doing such a simple thing as filing her tax return on time. Why? Let me explain.

The government tries to discourage taxpayers from filing their tax returns late by charging interest and penalties. From the date your tax payment is late to the date it is paid, you are charged interest, compounded daily, at a rate set by the government. This interest rate is known as the prescribed interest rate. The rate is set quarterly and is based on the 90-day T-bill rate. For the calculation of the interest charged on late tax payments, the government adds an additional 4% to the base prescribed rate. For our example, we’ll assume that the average interest rate to be charged over the 15 years will be 10%.

Since Taxpayer B doesn’t file his tax return until September, he will be charged a penalty for late filing of 5% on the balance owing on the tax return, plus 1% for every complete month that the tax return is late, to a maximum of 17%. For repeat offenders, the penalty is double, 10% plus 2% for each complete month to a maximum of 20 months. The repeat offender penalty only kicks in if the taxpayer has been notified in writing to file a tax return.

In our example, this will mean that Taxpayer B will incur a penalty in the first year of 10% of the taxes outstanding, plus interest. In the second and subsequent years, the penalty will be 20%. Over the course of 15 years, Taxpayer B will pay approximately $21,500 in penalties and interest. If this money had been invested, instead of being paid to the government, it could have accumulated to $38,000 before taxes. This example has been exaggerated to prove a point. Remember, you can “Beat the Taxman” in many ways, but often the most effective ways are the easiest.

TAX BEATER

Reduce the money you pay the government by paying and filing your tax return on time.

What Are Tax Instalments?

As a self-employed entrepreneur, you may be required to make income tax instalment payments. As your business becomes profitable, you will owe more tax. The government doesn’t want to wait until the end of the year for you to pay that tax. So instead, they request that you make instalments periodically throughout the year. Essentially, they are asking you to prepay your tax for the current year.

This is not uncommon. Employees do the same thing, only it is less painful. Their employer withholds a portion of their pay and remits it on their behalf to the government. The employee is effectively making tax instalments every time he or she gets paid. But they don’t see the money, and since they don’t have it to spend, making the instalment is not as difficult. They may not like it, but it is not as painful.

As a self-employed entrepreneur, making this tax instalment can be annoying. However, as you will see, the alternative is worse.

Do I Have to Make a Tax Instalment?

Whether or not you have to make tax instalments for the upcoming taxation year depends on your tax liability that you are anticipating for the upcoming year and what has happened over the previous two years. If your net tax owing, not including instalments, for the upcoming year and either of the previous two years is greater than $3,000 (greater than $1,800 in Quebec), then you will be required to make instalments in the next year.

For example, if in 2008 your net tax owing was say $4,000 and you anticipate that in 2009 your net tax owing will be greater than $3,000, then you will be required to make instalments for 2009.

If you are a resident of Quebec, your net tax owing is defined as your federal tax payable minus your federal tax deducted at source, your refundable Quebec abatement and your refundable credits.

If you are a resident anywhere else in Canada, your net tax owing is defined as your federal and provincial taxes payable minus your tax deducted at source and your refundable tax credits.

The net tax owing also includes any liability for the Canada Pension Plan (except Quebec residents).

When Are the Tax Instalments Due?

Tax instalments are due every March 15, June 15, September 15, and December 15 of the year. Farmers and fishermen have until December 31 to make their instalment.

If you are required to make instalments, Canada Revenue Agency will mail you a reminder around February and August of each year.

Why Should I Make Tax Instalments?

Tax instalments appear to be a considerable hassle. So why should you make the instalments? Well, consider this. If you do not make your instalments on time or you do not remit sufficient instalments, Canada Revenue Agency will assess you interest on the insufficient payment. This means that you will be borrowing from the government. And their interest rate is normally higher than what the bank would charge.

Not only is the interest rate charged by the government higher than the bank rate, it is also not tax deductible. Had you borrowed from the bank to finance your business operations and thereby paid your tax instalments on time, you would have been eligible to deduct the interest expense and you would have saved tax dollars. However, interest paid to the government is not tax deductible. Using the government as a “bank” results in a significantly higher cost of borrowing!

AN EXAMPLE OF THE HIGH COST OF BORROWING FROM THE GOVERNMENT

Assumptions:

• Tax Liability of $15,000 outstanding for one year

• Average interest rate charged by the government, say 7%

• Average interest rate charged by the bank, say 4%

• For the purposes of this example, interest is calculated on a simple interest basis

Alternative 1—Borrow from Government	$
Taxes outstanding for one year	15,000
Interest rate charged	7%
Interest paid and cost to the business	1,050
Alternative 2—Borrow from Bank
Bank loan outstanding for one year	15,000
Interest rate charged	4%
Interest paid	600
Tax deduction at 46% rate	(276)
Cost to the business	324
Savings from Borrowing from the Bank	726

TAX BEATER

Pay your tax instalments as required to reduce your overall costs and increase profits.

And if this wasn’t bad enough, Canada Revenue Agency will assess a penalty if the instalment interest charges exceed $1,000 in a year. And of course, this penalty is not tax deductible either. When these interest charges and penalties are added together, not making instalments can be a very costly way to finance your business.

AN EXAMPLE OF HOW THE INSTALMENT PENALTY WORKS

Assumptions:
	•	Instalment interest charged $3,000
	•	No instalments paid during the year
	Penalty equals 50% of			$
		a)	Instalment interest charged Minus the greater of:	3,000
		b)	$1,000 and	(1,000)
		c)	25% of the instalment interest you would have paid if you had made no instalments during the year (25% of $3,000 or $750)
				2,000
				50%
			Instalment Penalty	1,000

What Are My Instalment Options?

You have three options to choose from in any one year to calculate the amount of your instalments. In some years, this can be very important in minimizing the amount of money you pay to the government and maximizing your cash flow. Remember, effective tax planning includes deferring as long as possible the money you pay to the government. Making proper use of your instalment options is key to effective tax planning.

No-Calculation Option

Your first option, which is also the option that is automatically used by the government, is the “Second Preceding Year Option” or as Canada Revenue Agency calls it, the “No-Calculation Option.” If you are required to make tax instalments, Canada Revenue Agency will notify you with reminder notices in February and August of each year. These reminder notices will indicate the amount of the tax instalment that you need to make to avoid any instalment interest charge. Canada Revenue Agency uses the no-calculation option to calculate the instalments required on these reminder notices. This method of calculating the instalments is as follows:

• The March 15 and June 15 instalment is based on your second preceding taxation year. For example, your March 15 and June 15, 2010, tax instalments will be based on one-quarter of your net tax owing and any Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) for the second preceding tax year, or in this case 2008.

• The September 15 and December 15 instalment is meant to be a catch-up payment. The idea is that by December 15 you will have paid to the government in instalments the amount of your net tax liability of the previous year. With that in mind, the government calculates your remaining two instalments by first de...

Table of contents

• Title Page
• Copyright Page
• Year-Round Tax-Planning Calendar
• Preface
• Acknowledgements
• ROUND ONE - Get Off to a Good Start
• ROUND TWO - Keep accurate Records—and Save!
• ROUND THREE - Start with the End in Mind
• ROUND FOUR - The Tax Rate Stairway: Easy Steps to Saving Money
• ROUND FIVE - To Incorporate or Not? A Taxing Question
• ROUND SIX - GST: Friend or Foe?
• ROUND SEVEN - 365 Days to Save
• ROUND EIGHT - Home Sweet Home
• ROUND NINE - Capital vs. Expense: A Wealth of Distinction
• ROUND TEN - AUTO-matic Savings
• ROUND ELEVEN - Saving by Spending
• ROUND TWELVE - Surviving a Visit from the Taxman
• ROUND THIRTEEN - And the Winner Is...
• Quick Reference to Tax Beaters
• Appendix
• Index