What is an installment payment?
An installment payment is a partial income tax payment made through the year in order to reduce and make regular contributions to your income tax payable at year end. As far as the Quebec tax act, your installment payments must also cover your contributions to the Quebec pension plan, the Quebec health services fund, as well as the Medicare Insurance.
Reasons for …
The taxpayers who are making installments reduce their payable income tax at the production date of their tax returns.
The installments must be done per any individual whom income tax at source is not enough to cover the income tax payable at year end or for any individual who is not paying income tax at source.
You must make installments if you evaluate your income tax and other contributions for the current year or if you had to pay for one of the last two prior years an amount which exceed over 2 000$ to the government of Canada and/or an amount of 1 200$ to the government of Quebec.
For both tax departments you must make your installments on a quarterly basis on March the 15th, June the 15th, September the 15th, and December the 15th.
Corporations: you must make your installments on a monthly basis, on the last day of each month. The amount of the installment is calculated on your prio year income tax returns (T2 – Canada, CO-17 Quebec).
Working from home.
DÉFÉNITION DE REVENUS POUR LES AUTORITÉS FISCALES
C’est à l’article 3 de la loi de l’impôt sur le revenu du Canada que la notion de revenu est définie.
Pour les autorités fiscales votre revenu se compose de :
- Votre salaire (revenu d’emploi)
- Des jetons de présences que vous avez reçus si vous êtes sur un conseil d’administration (revenu de charge)
- Des vos revenus de votre entreprise
- Des vos dividendes, des intérêts sur vos placements (revenu de biens)
- Des vos revenus de location (propriété à revenu)
- De vos gains en capital imposables
- Vos dépenses admissibles relatives à un emploi, à votre entreprise, à la génération d’un revenu de location, de dividendes et d’intérêts
- Des pertes d’opération de votre entreprise
- De vos pertes de location
- De vos pertes en capital déductibles
L’article 9 de la loi fédérale quant à lui spécifie que le revenu d’une entreprise ou d’un bien est le bénéfice que vous en tirez pour une année d’imposition.
Pour le fisc :
Un emploi est un poste qu’occupe un particulier au service d’une autre personne.
Une entreprise est soit l’exercice d’une profession, d’un métier, d’un commerce, d’une industrie, ou d’une activité de quelque genre que ce soit comportant un risque ou une affaire à caractère commerciale.
Autrement dit : le contribuable a un revenu d’entreprise s’il lui incombe le risque de faire une perte ou un profit sur ses opérations.
Le gain en capital constitue un type de revenu à part et unique en son genre. Il est donc exclut du revenu d’entreprise et fait l’objet d’un traitement qui lui est propre.
Voici les critères retenus par les tribunaux et par les autorités fiscales au cours des ans afin de déterminer si vous avez réaliser un gain en capital ou un revenu d’entreprise :
1. la nature du bien
2. la période de détention
3. le nombre et la fréquence des transactions
4. l’attitude générale du contribuable à l’égard du bien
5. les circonstances entourant la disposition
6. l’intention lors de l’achat
7. l’intention secondaire
8. l’objet de la transaction en relation avec les activités habituelles du contribuable.
En espérant que ces quelques propos sur la notion du revenu fiscal vous a quelque peu éclairé je vous invite à me consulter au besoin.
(Réf. Loi de l’impôt sur le revenu du Canada, IT-459, Happy Valley Farm )
Food,beverages and entertainement expenses, convention expenses and advertising expenses.
FOOD, BEVERAGES AND ENTERTAINEMENT EXPENSES
In computing your business income, you are allowed to deduct a reasonable amount for your food, beverages and entertainment expenses attended in connection with a business or property taxable income.
These expenses are deemed to be 50% of the lesser actual amount paid or payable or the reasonable amount in the circumstances. The 50% limitation applies for all purposes. Unless that you are in business of providing the food, beverages or entertainment, for example, restaurants, hotels, and airlines.
The 50% limitation does not apply to the Christmas party or similar event to which all employees at a particular place of business have access.
The entertainment expenses are also subjected to the 50% limitation: tickets cost for a theatre, concert tickets, athletic event or other performance, admission to a fashion show, except, membership or dues in golf club and gym.
You also must keep registration of the names and business addresses of the clients or any other person who had been part of the meal and or entertainment.
(References: IT-518R, IT-148R3, TN12)
Quebec maximum eligible representation expenses
On top of the rule of the 50 %, Quebec tax department made a limit to eligible deductible representation expenses according to your sales. Here are the maximum amounts according to your sales:
|32 500 $ and less||2.00 %|
|Between 32 5000$ and 52 000 $||$650 .00|
|52 000 $ and more||1.25 %|
The maximum amount of 1.25 % does not apply to meals and drink expenses made under normal and usual business at 40 kilometers and more from your business place as soon as they are made for enterprise purposes.
Please take note that this 1.25 % rule also apply to the Quebec sales tax refunds on business expenses.
This 1.25 % rule does not apply to big business ( which are making 10 millions and more of sales) because they are already submit to more severe limitations.
A self-employed taxpayer who is carrying on a business or practicing a profession is allowed to deduct, in computing income for a taxation year from a business, expenses incurred in attending not more than two conventions a year provided that the conventions were
- a) held by a business or professional organization
b) attended in connection with the taxpayer’s business or professional practice
c) held at a location that may reasonably be regarded as consistent with the territory scope if the organization sponsoring the convention but attendance at the convention must be related to the business or professional practice on by the taxpayer
The meals at the convention must be reasonable portion of the fee as pertaining to these benefits. The amount of this portion of the fee must be specified and is deductible at the limitation of 50%. For each day of the vent which entitles the participant to such benefits, CCRA consider that 50$ is deemed to be paid or payable in respect of food, beverages and entertainment. This provision does not apply to incidental beverages and refreshments made available during the course of meeting or receptions, such as juice, coffee, doughnuts and muffins.
In general, the advertising expenses are totally deductible, except if it is made of pamphlets or any countable items which can be used in the future and it is part of an inventory. The golf tournament sponsors advertising expenses are generally deductible if you are able to prove that it will bring you any new clientele, else wise, these sponsors expenses will be accounted for advertising expenses.
This subject has been responsible for a lot of discussion and energy spending trough the last year. In fact, it became the in subject of business and finance magazine through 2003 fall. It really has been the leader of headlines.
In fact, it is Mister John singleton tax case and story. Partner in a law firm, Mr. Singleton used his equity to purchase a house. He refinanced his law firm equity with borrowed money the same day.
He guarantied the loan through a mortgage on his house. In 1988 and 1989, he deducted the interest on his tax return for those years.
The trial has been heard by the Supreme Court of Canada. The held has been delivered by the judges in September 2001. The trial decision was based under section 20(1)c) of the Income tax act. Section 20 (1)c) says that relevant interest to a business or property income is an eligible use to the taxpayer to deduct interest.
So, since more or less a year and a half, many strategies of cash damming got build up. To keep this technique in it simple way, it does consist in opening two banks accounts. The first one to make the deposit of your business income and pay your personal needs. The second will be used to pay your business operating expenses, account which your loan or credit line will be linked to.
Further more, the new interpretations bulletin It -533 of Canada Customs and Revenue Agency says that CCRA does accept the technique. So you will be entitled to deduct interest and use the cash damming technique in the future. Especially that some banks have started to make programs to do so.
But please, be fare to yourself do not play alone in the cash damming technique. Consult your account or tax advisor.
What does tax authorities know about you ?
… Here are the available tools and data bases available to Quebec tax department
Well known on the wealth key factors, the main tool of the tax department is the increase of your net working value and your declared income. Here are the steps followed by the tax auditor of Revenu Quebec.
The first step done by the tax department is the valuation of your wealth. For this particular purpose here are the data bases available to them. These data bases are split in two categories :
First, internal informations, what ever is available on your tax return :
Income “relevé” (T4, T5, …), bank statements from Canadian banks, investments statements, etc …
Second, external information :
Once a year Revenu Quebec make a request into its audit program to upload different data bases from other government departments. Revenu Quebec gets the following information:
Real estate :
City valuation roles
Cities construction permits
The Quebec registre foncier contains the list of all the properties and mortgages of the province. This registry is updated per each transaction signed at a notary office. The publication of these transactions is an obligation of Civil Code of Quebec.
Automobiles, skidoo, motocycles, boat, planes…
Société d’Assurances Automobiles du Québec files and registry
Federal registry on boat and airplane
Business (Corporations and Society)
Registraire des entreprises files on shareholders and board members.
The second step done by Revenu Quebec tax auditor consist on the validation of the following mathematical calculation :
In more specific terms:
And then, at the third step,
if this mathematical equation does not come in equilibrium, the auditor will mail a questionnaire named « financial situation statement and declaration ». this form is basically asking you to explain the difference between what came in and what came out of your pocket.
If ever you receive this letter, please consult an accountant or a tax lawyer.
Please do not ever try to tell me that this particular method is not legal.
Here are some judgments from tax court:
1) In default of having keeping proper accounting books, this method is accepted
2) In terms of tax right, the burden of the proof is on the taxpayer side.
That is means to say : you are guilty until you prove that you are not, in opposite of the criminal and civil rights in which the proof is the burden of the requesting party.
For the example: the proof that the government statistics does not apply to your way of consuming is
yours as well as the non taxable income.
3) This method is called the last request one.
Once again, if you ever receive this letter, before answering or opening your books to the tax department : consult an accountant .
With the tax season coming up, you better be safe than sorry : so before mailing your tax return do this little exercise with your accountant help and review.
Believe me, it is worth it ….
Home buyer’s plan (hbp).
This plan allows taxpayers to withdraw funds form their RRSPs, tax free, for the purchase of a principal residence without having to pay tax on the withdrawal if you or your spouse haven’t owned a home during once of the 5 calendar year beginning starting before the withdrawal date.
The buyer may withdraw up to 20 000$ from RRSP ( 40 000$ for a family, 20 000$ per spouse)
The withdrawal must be repaid in equal installments over a 5 year period beginning the 2nd calendar year after the withdrawal.
The property must be bought before October the 1st of October following the calendar year of the withdrawal.
Is it worth?
You have until February 28 of the following calendar year to contribute to your RRSP and get advantage of the HBP if you leave the funds for a minimum of 90 days in your RRSP.Then, here comes the tax refund benefit.
But even if you use your maximum eligible amount of RRSP to contribute enough to get the 20 000$ this current year, it might happen that you will not use the complete deduction against your current taxable revenue of the current year. The undeducted part is going to be applied on your taxable income of the following years.
Return on investment
Depending on the return on you RRSP investment and your available cash flow available for a down payment on your house property the answer might be yes, like it might be no.
Don’t forget that the interests or dividends in you RRSP plans are tax free until you make a withdrawal. When you make a comparison between the mortgage interest rate and your RRSP rate, you must make the calculation to make up your RRSP rate to a before tax rate.
The maximum contribution to your RRSP is made of:
18% of your earned income of the prior year up to a maximum of 22 000 $minus the pension plan adjustment (PA), which represents the contributions paid to the employer’s plan.
Your earned income is made of:
Income from employment, net business income, net rental income, disability pension income under CPP or QPP, taxable research grants (net of related expenses), royalties.
The RRSP limit is going to be increase up to 16 500$for 2005 and up to 18 000$ for 2006.
Is it worth?
RRSP plan is an immediate reduction of your taxable income. It might also make a change in you tax bracket level.
If you own a business with your spouse either personally or trough a corporation it is important to split the income between both of you in order to increase the eligible maximum amount to RRSP for the family tax reduction and increase your retirement income.
RRSP plan does report tax. Under normal circumstances your total revenue will be less at your retirement. So, from there we can presume that your RRSP withdrawal will be taxed at a lower rate then.
On the calendar year of your 69th birthday, you will have to convert your RRSP to a RRIF (Registered retirement Income Fund) and start to withdraw a minimum amount from your RRSP.
Interests and dividends in a RRSP plan are not taxable and compounded tax free, in the opposite of rental income or any other kind f income.
What are going to be your sources of income at your retirement?
Employer’s retirement plan
Capital coming from your business sale
(Capital exemption on qualified small business corporation shares)
At retirement date, what is going to be the fair market value of your business? Professionals be aware that your clientele bought you as an individual and might spread itself at the selling date. So what are you going to get out of your practice? Plan to retire gradually in order to transfer your clientele and get a decent value.
Is transferable in a lump sum tax-free into RRSP pr RPP to the extent of:
2 000$ for each year of employment with the employer for year ended from 1989 to 1995.
3 500$ for each year of employment with the employer for the year before 1989 that the employee was not a member of an RPP/DPSP, or employer’s contributions had not vested.
There is no credit for years of services after 1995.
The automobile expenses are deductibles for the business part only. These expenses are: operating cost (fuel, maintenance and repairs, plates, driver’s license, insurance, car wash), interest expense n car loan, leasing fees.
Each year the Department of Finance of Canada assign the ceiling capital cost of passenger vehicles, the limit of deductible leasing costs, the limit on tax-exempt allowances paid per employers. See the minister web site: www.fin.gc.ca/news00/0096e.html
The business part of your expenses calculation is based on your kilometers done for business purposes on the total kilometers done for the fiscal year. The minister for tax audit purposes requires a kilometers logbook
Your parking costs are not included in your operating costs. Your parking costs for business are totally deductible else wise the personal one are not deductible at all.
If you are a commission’s worker, and your employer pays you a reasonable allowance for your car expenses, you cannot claim your automobile costs or the over applied on you allowance.
Please again remind to keep all your bills and receipts.
Sales tax and my business.
Here are the answers to your questions concerning GST and QST.
Do you have to register?
If your annual gross income either sales of professional fess billed to your clients exceed 30 000$, you must subscribe to sales tax registration.
If not, you do have the choice. But if you do not register you will not be eligible to claim the tax paid on your purchases for your business.
Frequency of returns and payments to the Quebec tax department (it handles the administration of the GST and QST) is established according to your income:
If it is less than 500 000$, you have to file on a yearly income tax basis
If you generate sales in between 500 000$ and 6 000 000$, you must file quarterly
If you generate for over 6 000 000$ of sales or fees, you then have to file monthly.
Required in formations on your invoice to your customers or on your suppliers ones:
- Name of the company or trade name
• Invoice date
• Amount paid or payable (received or receivable)
• Identification of taxable items
• Tax accounts numbers for GST and QST
• Name of the client
• Description of the goods or services
• Terms of payments
Requirements of historical accounting books, sub ledgers and original documents
The books and the original documents are required for a period of six years or until a final and legal agreement in the case of lawsuit, or when the government send you an assessment notice which does not agree with your return, and which for a disagreement still on. Then, registry and books can be destroyed only under the approval on the tax departments.
Books and registry can be destroyed before ten years, only on the tax authorities permission.
Being in business …
Through a corporation or through an individual ownership.
Main of the clients who I met for the first time, or people who I met in my conferences do ask if they should operate under a corporation when they are planning to start a business.
Here are some keys on this famous question. There is not an only answer. A specific answer can only be given with considerations to your own business plan or situation.
Benefits of operating through a corporation
The main benefit is the limitation of the personal liability on the business debts up to your investment into the company. That is mean to say that in the case of a bankruptcy or on the protection of a official receiver, your will not have to pay personally the creditors of your business except if you personally warranted it per an other contract or engagement.
The corporation status is also giving your business a greater image, it is also giving prestige.
The trademark of your business is as well protected, except if the common trade name of your company is different of your corporation name. In general the corporation act will protect you from your partners in the descriptions of the different type of shares and in the number of issued shares which they will own. The shareholders agreement is also an important document to set up. It will describe all the tasks and responsibilities of yourself and your partners in terms of being a director of the board.
Tax benefits: the major one would be for sure the capital gain deduction on the qualified small business corporation shares.
Benefits of operating a business personally
The income tax statement of your business income will be filed under the schedule T2125 (Federal return) of your personal income tax return. The eligible expenses are more or less the same, except for the Research and development and the Quebec credit fro the e-commerce.
The legal and accounting fees are less expensive. You will no need any board meeting. The legal registry of the meeting discussions and decisions is not required.
Over and above, I would say that at the beginning of a business if you are a sole owner or shareholder and if you are not going to be liable to ordinary creditors, you can operate your business as a personal business. Banks will usually ask personal warranty on the credit line or loan at the beginning of a business. A personal warranty does apply in priority to your corporation protection of liability.
But do not forget to register the trade name of your business to the Registraire des entreprises du Quebec. In order to protect your business name, trademark and be in line with the act of the legal publicity of Quebec.
So, I figure if later on the growth of your business is worth a good fair market value, it will be time then to proceed to a transfer of the assets into a corporation.
One of the major factors to take in considerations would be the profit of your business. If you don’t need the total profit to make your personal living (essential goods and services, spare-time activities) and you are able to leave a part of the profits into the business it would be good to consider operating under a corporation act. It gives the possibility to reduce tax if the corporation is entitle to the small business deduction.
Other considerations might be interesting to look to. For further information, please do not hesitate to get in touch with me.
Are you or your employee a self worker?
A self-worker has the choice of the way to realize a contract and there is no link no subordination between him and the client. A self-worker is a physical person, an individual who is carrying on a business with or without an employee to achieve a profit.
Here are some of the criteria which are part of the questionnaire of Revenue Quebec (RR-65A) for the determination of your status to your employees’ status.
Are the services performed under the basis of a contract or agreement? Is there a written contract or agreement ? Does the worker have business cards?
ACTUAL SUBORDINATION OF THE WORKER
- 1. Does the worker file financial statements?
- Does the worker have a business telephone line?
- Has the worker obtained MRQ identification and file number and GST account number?
- Name of the person who determined the worker’s status
- Is the worker required to abide by regulations and in-house procedures, and to consult the instruction manual or the principal’s company?
- Name of the person who assign the work and describe how the work is distributed.
- Does the principal decide how the worker should carry out the work?
- Does the principal set standards and objectives to be met by the worker?
- Does the principal provide training for the worker?
- Does the principal develop tools for evaluating the work?
- Does the worker use a list of customers given by the principal in carrying out the work?
- Does the worker have a regular workload?
- Is the worker responsible for any of the expenses while performing his or her duties?
- Is the worker obliged to pay union dues?
- By what method is the worker remunerated?
- Is the worker paid to for working overtime?
- Is the worker entitled to fringe benefits?
- Does the worker pay employment insurance premiums?
OWNERSHIP OF EQUIPMENT, TOOLS OR MATERIALS
- Is the worker obliged to provided equipment, tools, or materials at this or her own expense?
- Is most of the worker’s income derived from work performed for the principal?
- Is the worker allowed to keep the list of customers when he leaves?
IMPORTANCE OF THE GOOD STATUS DETERMINATION
When an audit occurred, the Ministers evaluate the situations or the workers and may qualified them differently then the principal. In that matter, the principal has to pay the employers parts which should have been paid.