Tax Season 2019: What to know this year

Tax season - Calgary, Alberta

As the holidays are over and winter sets in we all know in the back of our minds that tax season is approaching.

The deadline for filing T4 and T5 slips is February 28. The deadline for filing T3 slips is March 31. If you are a corporate client, we will mail you your T4 and T5 slips in February with instructions for completing personal taxes.

The deadline for filing your personal tax returns is April 30 for most individuals. If you earn self-employed income that deadline is pushed out to June 15. If you are not sure if you qualify for the extension, it’s best get in contact with us. We will start the process of completing personal taxes in late March.

There are a few key changes with this tax season to be aware of:

  • There have been changes to the tax on split income and passive income rule changes for corporate clients. You can see our article posts on these topics titled “Income Sprinkling Rule Changes” and “Budget 2018: Passive Investments and More.” Please inquire with us on how these changes impact distributions from your corporation.
  • The Public Transit credit is no longer applicable for personal tax returns.
  • New in the prior year but an important reminder are the changes to the Canada caregiver tax credits for infirm dependents. Reach out to us for more information if you have infirm dependents you support.
  • If you sold a principle residence, even though the gain is tax free (subject to certain conditions) you still have to report it on your tax return. Please keep these details on hand so they can be properly reported. With that said, the penalty for unreported dispositions is quite high so it is important this is not missed.

Please contact us for a copy of our personal tax checklist for this season. Also, feel free to reach out if you have any questions or concerns.

GST: Tips, Traps, and Other Considerations

Wondering if you need a GST number, who should register for one or if you need a business number to get a GST number?

This article will provide an overview of GST/HST, a consideration for most businesses operating in Canada. Note that provincial sales tax (PST/QST) will not be discussed. If you are operating outside of Alberta, PST/QST may also be a consideration for your business.

Who Needs a GST/HST Number?

If you sell goods or provide services in Canada, you are required to collect sales tax from your customers. This applies whether you are a corporation, sole-proprietorship, or partnership. There are some common exceptions (including exempt or zero-rated supplies) where charging sales tax, and therefore opening a GST/HST number, is not required. Major exceptions include:

-Small suppliers (earning less than $30,000 in four consecutive quarters or a single quarter)

-Residential real properties (note that this is a complex area and often requires professional guidance)

-Health care (medical practitioners and medical devices)

-Education services

-Child and personal care

-Legal aid

-Financial services

-Exports out of Canada

-Basic groceries

The rules around the exceptions can be complex and we recommend talking to us to ensure we look at all the considerations that apply to your business.

Registration

If you start a business, whether it is a corporation, sole-proprietorship, or partnership, you would register for a GST/HST account with CRA. Registration can be done over the phone or online with CRA. As part of the business start-up process this may or may not have been done for you by your lawyer or accountant.  You are then provided with a GST/HST number effective as of a certain date that you registered. Backdating is typically only allowed up to one month.

This GST/HST number is usually the same as your business number, except with RT 0001 at the end. As a corporation, you would typically register for your GST/HST number at the same time as your business number.

It is recommended that if a business anticipates having to charge sales tax in the future, a GST/HST number is registered, and sales tax is charged as early as possible to avoid forgetting to register later and facing penalties as a result. If you register, you must charge sales tax, even if you continue to meet the small supplier threshold indicated above.

How to Charge Sales Tax

When invoicing customers or clients, your GST/HST number, name of the customer/client, date of the transaction, amount and sales tax charged, and description of the services provided are all required on the document.

A rate of 5% should be used in Alberta, and in provinces with HST, the rate that is applicable in that province should be charged on the subtotal. If you are providing services or selling goods in another province with HST, that applicable rate must be charged, even if you are incorporated in Alberta.

Claiming Input Tax Credits

As a business that charges sales tax, you also have the ability to claim back the GST/HST you paid to your suppliers as input tax credits. This offsets the sales tax you have to remit to the government. If you are using a bookkeeping software it will often have a function to track sales tax on both the income earned and the expenses incurred to run your business. You will have to set up the GST/HST rate, and choose to apply GST/HST to those transactions where GST/HST has been collected and those where GST/HST has been paid. Note that forgotten input tax credits can always be claimed in future filing periods.

How to File

The accountant will typically file the GST/HST return when the year end compilation and tax returns are completed. This is often preferred and usually the most cost effective because of other adjustments the accountant prepares during the year end process.

Most businesses should be set up for annual filing (due three months after year end) unless they earn over $1,500,000 in annual sales. In this case the filing is required to be quarterly, or in the case of being over $6,000,000 in annual sales, monthly, both of which have filing due dates one month after the period end.

GST/HST Quick Method

The GST/HST Quick Method is an election for businesses with less than $400,000 in sales in a year. It is made with CRA and allows the actual GST/HST filing to be based on a calculation which excludes having to track and claim the input tax credits. In many cases for consultants, technical, and project professionals this election will save time and real tax dollars at the end of the day. Whether this is desirable for your business depends on specific circumstances and we recommend you talk to us for more details.

Conclusion

This is just a basic overview of GST/HST, and there are numerous complexities that can arise, particularly on real estate and certain exempt service transactions. We recommend discussing your business situation and needs with us to ensure you are compliant with GST/HST requirements.

Should You Incorporate Your Business?

Wondering if you should incorporate your business

When starting a new business you can structure it in three legal forms: a sole proprietorship, a corporation, or a partnership. There are numerous differences to consider when determining which legal structure is optimal for your situation. The various pros and cons will be covered in this article.

Legal Structures:

Incorporation:

One question you may have when first starting out is if you should incorporate your business. A corporation is a separate legal entity owed by the shareholders of the corporation. It pays its own taxes at corporate tax rates, and any distribution out of the corporation to shareholders results in personal tax, which in turn becomes two levels of taxation.

Corporations also allow for limited liability to the shareholders. This means that an incorporated shareholder is not personally accountable if the corporation is found liable for damages in a lawsuit. Tax debts, and in some cases gross negligence, can still expose the shareholder(s) or director(s) of the corporation to liability.

Sole Proprietorship:

A sole proprietorship operates a business without any separate legal entity, so the business owner has personal liability for any actions of the business. Insurance can be used to mitigate this risk. A sole-proprietor also would declare income/losses on his or her personal tax return, so there is only one level of taxation.

Partnership:

A partnership is when two or more individuals come together to conduct business in the pursuit of profit. The income/losses of the business are distributed to the partners based on the partnership agreement in place, and included in the partners’ tax returns. Therefore, there is one level of taxation as the partnership is not considered a taxable entity. In certain cases, the partners may have limited liability like in a corporation, but generally partners are liable for the actions of the partnership.

Reasons to Incorporate your business

When you incorporate your business, you pay tax at the small business corporate tax rate at 12% in Alberta. This is assuming you earn less than $500,000 a year in net income. You only pay additional personal tax on funds distributed to shareholders, which means you can leave the profits in your business to re-invest, and only pay the corporate tax rate. Personal tax rates range between 25% to 48% in Alberta, which means you will pay less tax if you do not need to distribute all the net income generated in the business.

In certain cases, where other family members help out in the business, income splitting can also be taken advantage of. This means that a portion of the earnings can be distributed to other family members to utilize lower personal tax brackets. See our previous article on “Income Sprinkling Rule Changes” for additional details.

When you incorporate your business,  you can choose to pay dividends to shareholders rather than salary, which allows you to opt-out of contributing to the Canada Pension Plan (“CPP”). Incorporated individuals must pay the employer and employee portion of CPP, which is 9.9%, up to a maximum, every year. Therefore, many of our clients choose to pay dividends and not pay into the CPP pool. See our article on “Shareholder Compensation” for additional details.

An incorporated individual has access to the “lifetime capital gains exemption.” Generally, if they sell the shares of their business after two or more years of operations, and it meets certain criteria, they have up to $848,252 (as of today) in capital gains that would be tax free to the shareholder(s). There are various tax planning opportunities that can be put in place to ensure tax exposure on a sale of a business is mitigated.

Reasons Not to Incorporate Your business

One reason is, there is an administrative cost to incorporating. It’s a one time incorporation fee, as well as annual corporate tax filings and accounting requirements. These costs exceed the sole-proprietor filing requirements. This administrative cost should be weighed against the tax and legal benefits for each individual before deciding if incorporation is right for you.

In cases where all the income of the corporation is being distributed to the shareholders, and no amounts are retained in the corporation, there is no tax advantage to incorporating since the two levels of tax when incorporated should be very similar to the personal tax you would pay anyway. The tax system is designed with this in mind. If this is the case, the other benefits listed may still apply though.

In cases where large losses accrue in the early stages of a business, it may be difficult to use those losses to decrease tax in a corporation as they become “trapped” until income is generated to offset the loss. For sole-proprietors and partnerships, losses can be taken against other forms of income on the personal tax return in the year the loss was incurred.

At Kapasi, we make sure to understand all the details of your work and financial situation before advising on the best approach. Feel free to reach out to us to walk through your situation and provide our advice.

Shareholder Compensation

Meeting of shareholders

As an owner-manager of a corporation, there are two methods of shareholder compensation:

  1. Salary – an employment compensation that is paid from net income.
  2. Dividends – an investment compensation that is paid from retained earnings in a company.

Salary is deducted when arriving at taxable income in the company and is subject to personal tax based on the bracket you fall into. Dividends, on the other hand, are not deducted in arriving at taxable income in the company meaning you would pay corporate and personal tax on the dividends. Because of this, dividends are eligible for a dividend tax credit so that, at the end of the day, the total income tax you are paying in either scenario ends up to be nearly the same. The Canadian tax system was designed with this goal, and is known as tax integration.

That said, there are some key considerations that do differentiate the options. Salary is subject to CPP (Canada Pension Plan), while dividends are not. Because an owner-manager is paying both the employer and employee portion, this could mean up to a 9.9% payment into CPP. You are generally eligible to receive CPP payments after the age of 65 years, with an option to receive payments earlier or later. Based on the historic rate of return in which the government pays for CPP, many owner-managers would rather save the 9.9% and invest it within their company.

Salary also creates room for RRSP contribution, beneficial in the sense that an  owner-manager can then invest in their RRSP plan and claim a deduction on their own personal tax return. RRSP plans grow tax free, but the funds are fully taxed on your personal return when withdrawn. In comparison, to save for retirement, those who take dividends often elect to save and invest their money in a corporate investment account by retaining a portion of their earnings in the corporation. There is often an investment advantage by doing this because the funds will only be subject to the investment income corporate tax rates rather than the personal tax rate, which typically are lower.  Amounts invested in a corporation have the strong advantage of being eligible for favourable corporate tax rates and deferral advantages on any investment earnings. Therefore, a strong argument can be made for electing to invest in a corporation.

When investing in a corporation, it is often desirable to pay out dividends and claim back “refundable tax”. This is a tax on the investment income earned in a corporation which is refunded on the payment of dividends out of that corporation. This is another reason dividends may be preferred.

Dividends also present the option of sprinkling income to other shareholders who are family members, which could result in significant tax savings. See our December 14, 2017 article on the income sprinkling rule changes for more information on eligibility. Salaries paid to family members must be reasonable for the work performed, equivalent to what a third party would be paid.

A final consideration is the administration associated with paying a salary. Salary payments require tax withholdings and remittances made to the CRA (payroll taxes). This requires some up-front planning and organization to ensure that you do not miss payments, which would result in penalties down the line. Dividends do not have withholding tax requirements when paid to owner-managers in Canada, which often can result in less administrative burden.

At Kapasi, we often employ a combination of salary and dividends, depending on both the corporate tax picture and the personal tax picture of the owner-manager and his or her family. Feel free to reach out to us to learn more about how this applies to your tax situation.