Scott Taylor likes to tell a story about how you can pay a buck for a ballpoint pen and actually have it cost you more than a dollar and a half. “All you have to do is chuck the receipt when you buy that Bic,” says the affable Taylor, vice-president of operations at Transport Financial Services, an accounting and business services firm that caters to owner-operators and small fleets. “Simple as that, you’re throwing away hard-earned money.”
Taylor goes on to explain how a person earning between $30,000 and $60,000 a year will pay approximately 41% to 44% income tax on every dollar earned between those amounts. That’s the marginal tax rate-the percentage of income tax paid on every dollar earned in a specific tax bracket.
Now, let’s get back to that pen. Keep the receipt? Why bother.
Well, without the receipt you won’t be entitled to a refund on the GST you paid. Plus, without a receipt you can’t claim the pen as an expense item against your gross income, and therefore will have to pay income tax on that dollar-41 to 44 cents.
“So now that cheap pen actually cost you $1.48: the seven-cent GST refund, the 41 cents in income tax, plus the actual cost of the item,” Taylor says. “Add Provicial Sales Tax-which you can claim on the pen-and the price goes up a few pennies more. That receipt is a valuable little ticket. Taxes are too high in this country to be paying more than you have to, especially when you’re an owner-operator with one eye on the highway and the other on your fuel bill.”
Indeed, for owner-operators, tax planning is a tough haul. Most file as sole proprietors, a category of entrepreneur who reports business income along with personal income together, on one tax return. There used to be significant tax benefits to being a sole proprietor, namely the ability to define your own business year. But as of tax year 1995, proprietorships report taxable earnings on a calendar basis, wiping out any tax deferral benefit.
Some owner-operators opt to incorporate, trading a more complex filing process for tax advantages over their proprietorship kin.
Regardless of how you file, there’s always room to fine tune your tax strategy, and there’s no better time than before the year’s end. We asked Taylor to compile ideas to help you take to your own accountant as you tailor your tax plan.
Aside from the peace of mind that comes with having a handle on money matters, all businesses are required by law to keep a proper set of books and records that can support all claims made on tax returns and other government documents.
But is it a chore, especially when you’re managing your business from your truck. Slips of paper add to the clutter, and it’s often easier to stuff them away in the first convenient cubby hole than to file them properly.
Here’s the key: look for ways to organize your receipts and paperwork that you can use inside your cab. Buy an expandable file from a business supply store-one that looks like an accordion. Ask your accountant to help you develop categories that make the most sense-one place for meal receipts, for example, another for fuel. As you collect your receipts, simply put them into the appropriate slots. (We give something similar to each of our clients and have them put the whole works into a big envelope and mail it to us every three months. We pay the postage.)
While it’s important that you save receipts for every business expense, it’s also critical to ensure that they are valid receipts-ones that CCRA (Revenue Canada) would accept in the event of an audit.
If you claim an expense on your personal income tax return which an auditor disallows due to an insufficient receipt, you’ll have to pay income tax on the disallowance amount plus any interest penalties.
If you want to claim expenses from a U.S. dollar exchange transaction, for example, a hand-written cash slip from a border truck stop may not do.
CCRA will look for a computer-generated receipt from a bank, trust company or credit union (a credit card or ATM cash card statement would also do the trick). Be just as dilligent about revenue statements.
Track down T-slips from every source of revenue, including T-4’s and T-4A’s for wages and/or other remuneration, T-4RRSP’s for RRSP withdrawals, and T-5’s and T-3’s for investments. Don’t forget other sources of revenue that may not supply a T-slip-a private mortgage or loan, for example.
Organizing your receipts and statements is the first step toward really managing your business. Your accountant can help by providing financial statements each quarter, giving you a three-month snapshot of your finances. Quarterly accounting allows for quarterly GST/HST reporting-especially beneficial if you’re always in a refund position. Finally, don’t forget that quarterly statements help when you need to present up-to-date financial records-in order to obtain the best financing for new equipment, for example.
As you move toward quarterly financial reviews, consider paying your income tax in quarterly installments. If you want a good reason, we’ll give you two:
1) If you elect to skip the installment option and instead send your taxes in at the end of the year in one payment, Revenue Canada will assess an interest penalty calculated against what they say you should have paid. The interest charge on the outstanding amount is compounded daily. Furthermore, the interest assessed by Revenue Canada is not an allowable expense. You can’t deduct it as you would interest on a business loan.
2) Wait until year’s end to pony up your tax liability and you may not be able to afford to pay it. If that’s the case, Revenue Canada’s will put you onto a payment plan over the next seven months or so. Trouble is, it’s hard to set aside money to pay this year’s taxes when you’re paying off what you owe for last year.
Paying your tax expense (and your income taxes are an expense) in four smaller amounts throughout the year. In Some of our clients use their GST/HST refund to pay their installments.
Revenue Canada has a formula to help you determine whether you should be sending installments, and if so, how much to send and when. If you’re operating a proprietorship, installments are made quarterly on March 15, June 15, Sept. 15, and Dec. 15. If your total taxes payable are greater than $2000 this year and were greater than $2000 in either one of the two preceding tax years, then installments are required. Corporations must make monthly installments based on the previous year’s tax bill.
PUT THE FAMILY TO WORK
There are plenty of personal reasons why hiring your kids or your spouse is a minefield, but there’s at least one potential benefit. It’s called income-splitting: you distribute business profits among family members who helped generate the returns.
There are three ways to pay a family member a share of net revenues:
Percentage of profit. If you’re self-employed (not incorporated), you can split the profit (or the bottom line of your profit and loss statement). Use the income statement normally used to prepare your personal income tax return for both you and your partner (for example, your spouse). Include a copy of the statement with both of your T-1s ; the percentage split should show the portion to be included on each of your personal income tax returns.
Dividends. If you’re incorporated-your company operates as a separate legal entity-consider offering dividends. A Canadian, filing single, without other income or deductions, may earn up to about $25,000 in dividends without paying any personal income tax.
Wage or salary. You’re putting your kid or spouse on the payroll. As such, there are tax and legal obligations. Be careful how you calculate employment deductions: the family member in question may not be eligible for EI and/or CPP. You don’t have to follow your usual pay cycles (weekly, biweekly, etc.); a lump sum salary paid at the end of the year is an option.
As for how much income to split, Revenue Canada says your decision must be based on each individual’s performance within the company, your logic must be solid and documented and carry over from year to year, and what they are paid must be reasonable for the work performed. If you think the amount you’ve chosen to split with a family member seems unreasonable, it probably is. A seven-year-old son who earns $35 an hour “detailing” the truck is going to raise some eyebrows.
Don’t underestimate, either. That mileage log from the company service vehicle is one way to back up your claim for your spouse’s hours spent providing administrative services to the company.
To survive an audit from Revenue Canada, you must hold strong convictions about the value and worth of your family members’ participation to the business. Be prepared to back your convictions with documentation. Put some thought into the income splitting between family members at the beginning of a reporting period; don’t try to arrange a haphazard formula after your year-end. Put an agreement in place at the beginning of your fiscal reporting period outlining your decisions behind income splitting.
Here’s the general rule of thumb: if the expense was incurred for business purposes or in the course of producing business income, then it is tax deductible. Here are five things not to overlook:
1) Meals and travel expenses. Look beyond the basic TL2 meal calculation. If you kept your receipts, consider that they, along with the U.S. exchange, may amount to a greater sum than provided by the meal allowance. Remember, though, in both cases you’re allowed to claim only 50%.
2) Home office. If you have an area in your home where you routinely tackle and store paperwork, and the space is used as a bona fide office, then factor in a reasonable allowance for utilities, mortgage interest, taxes, and insurance.
3) Service vehicle. Often the family vehicle is used for business errands. Keep a diary in the vehicle so you can easily record the mileage and purpose of these trips. Again, an allowance should be introduced to enable an expense claim for leasing costs, or capital cost allowance and interest, as well as for insurance, fuel, maintenance, and vehicle licence.
4) Premiums paid to private health insurance plans. If you’re self-employed, insurance premiums paid are expensed under the business. The actual paid medical expenses are claimed on your personal income tax return.
5) Vacation expenses. I’m not talking about a trip with the kids to Disneyland. But if you visited a truck show along the way, for example, you can prorate a portion of your family’s trip to account for the business component of attending an industry convention.
Above all, discuss the importance of tax planning with your family. Make it part of an ongoing education about how the family business operates. Even your seven-year-old son can understand the value of collecting a little slip of paper when he knows it would otherwise mean shelling out more than a buck and a half for a one-dollar ballpoint pen.
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