Self-employed tax

Deductibility of business Expenses and

Generally any expenses incurred in order to generate business income can be deducted for tax purposes unless it is specifically prohibited in the income tax act. However there are some exceptions. For example major expenditures on and repair of property for the purpose of prolonging its useful life or increasing its value above its initial state are not deductible and should be added to the cost of the property in which case they will be deductible as CCA. In general, purchases whose useful life is over a year and cost more than $ 500 are considered assets and should be amortized according to their CCA class and rate.

 

So what happens if a business’ expenses exceed its revenues?

Business losses can be deducted against any other type of income and may be carried back 3 years or forward 10 years (if the loss was incurred after Dec 31, 2005). It is recommended that you use all of your non-refundable credits first before claiming your business losses in any given tax year. Also you can carry back only a portion of your current losses. By doing so you can carry back a business loss against multiple years of income that was taxed at a higher marginal rate since higher rates apply to higher incomes.

What You Need To Know About Vehicle Expenses

The CRA has stipulated numerous and convoluted regulations on vehicle expenses. Whether you’re an employer or an employee an in-depth understanding of vehicle expenses is crucial when filling out your tax returns.

In this article we try to simplify this by using a number of examples to better inform you when it’s a good idea to make the company car available to your employees and when it’s not.

If you’re an employee, you should know which vehicle expenses are deductible when you use your own personal vehicle to meet your employment obligations.

Taxable Benefits

An employee qualifies for a taxable benefit when the employer or someone related to the employer makes a company car available to them or someone related to them for personal use.

Note that the CRA considers the use of a company car to travel from home to work and vice versa as personal use and taxable benefits are treated as income.

There are two primary taxable benefits you need to be aware of;

  1. Standby Charge Benefit
  2. Operating Cost Benefit

Both these taxable benefits will have to be added to the employee’s income in order to determine the total amount of income that will be subject to source deductions.

Standby Charge Benefit

Simply put a standby charge is a recognition that the employer has made an automobile (primarily meant for business) available to the employee for personal use.

There are two special formulas that are used to determine how much standby charge benefit should be added to the employee’s income.

Only one of the formulas is used to determine the standby charge benefit.

To determine which formula to use, you have to consider two factors:

  • Is the car fully owned and paid for by the employer?
  • Is the car leased by the employer?

Calculating the Standby Charge Benefit When The Car Is Fully Paid For and Owned By The Employer

Here’s the formula:

2% x total cost of the car (including fees, HST/GST) x No. of months the automobile has been made available to the employee

Calculating the Standby Charge Benefit When The Car Is Leased By The Employer

Here’s the formula:

2/3 x monthly lease costs (excluding insurance) x No. of months the automobile has been made available to the employee by the employer

Getting confused?

Fine, let’s use some real numbers.

Jane owns ABC, a company that sells maple syrup. Jane has decided to make one of the company cars available to Peter to help ferry him between home and work throughout the year. There are two company cars that she could make available to him; a Nissan sedan ($34,000) which has been bought and fully paid for by the company or a Toyota sedan which has been leased to the company for $516 a month. Jane asks Peter to decide which of the two automobiles he prefers.

Standby Charge Benefit for the Nissan:

2% x 34,000 x 12 = $8,160

Standby Charge Benefit for the Toyota:

2/3 x 516 x 12 = $4,128

Assuming that Peter loves himself more than the Canadian Government, he’ll pick the Toyota since it has the lower standby charge benefit of the two. Remember that a standby charge will increase Peter’s total taxable income, so it’s prudent to keep it as low as possible.

Speaking of low as possible.

It’s also possible to reduce the standby charge even further.

Here’s how.

After 1 whole year of use the trip log shows that Peter has logged a total of 40,000km. 30,000km travelled was business related and the other 10,000km was for Peter’s personal use.

According to the CRA if:

  • More than 50% of the logged distance is business related or
  • Personal mileage does not exceed 20,004km or an average of 1,667km a month

These can be factored into the formula to reduce the standby charge even further. So in Peter’s case since he meets both requirements let’s go ahead and see how much standby charge benefit he’ll receive from Jane.

The formula changes a little bit:

2% x total vehicle cost x No. of months automobile has been made available x (total kms used for personal use/20,004)

So,

2% x 34,000 x 12 x 10,000/20,004 = 4,079 (for the Nissan Sedan)

Or

2/3 x 516 x 12 x 10,000/20,004 = 2,063 (for the Toyota Sedan)

You notice that this reduced standby charge is certainly less than what we had before.

Operating Cost Benefit

The operating cost benefit is the other taxable benefit you need to think about when considering personal vs business use of the vehicle.

The CRA considers all automobile associated expenses as operating expenses. We’ve listed some of them below:

  • Gasoline
  • Maintenance and Repairs
  • Tires
  • License and Insurance
  • Oil

Note that parking charges are not seen as operating costs.

Like with the standby charges, there are two ways to calculate operating costs:

Assuming that the automobile was used more than 50% of the kms logged for personal use, the formula to use is:

No. of km travelled x $0.27 per km (this rate is determined by CRA and changes every year)

The other formula is much simpler and is only used when 50% or more of the kms logged were for business purposes:

50% x Standby Charge Benefit = Operating Cost Benefit

Peter certainly qualifies for the second formula since he only logged 10,000km for personal use which is less than 50% of the total kms travelled (40,000km).

So Peter’s operating cost benefit will be 50% of his standby charge benefit of $2,063.

50% x $2,063 = $1,031.50

 

Remember the total taxable benefit is calculated like this:

Standby Charge Benefit + Operating Costs Benefit = Total Taxable Benefit

Therefore;

$2,063 + $1,031.50 = $3094.5 = Total Taxable Benefit

Deductible Vehicle Expenses

The example above does not address a situation where the employee owns a vehicle and uses it for business purposes.

So, if you’re using your own car to run business related errands do you qualify for deductible vehicle expenses?

Well, you do. But you’ll need to meet some contingencies first:

  • You had to work away from your employer’s business premises.
  • You met your own vehicle expenses and didn’t get reimbursed by the employer. You can read more about this here.
  • You have a copy of Declaration of Conditions of Employment.
  • You never received a non-taxable allowance for motor vehicles expenses.

Some of the deductible vehicle expenses include:

  • Insurance
  • Fuel
  • License and registration fees
  • Capital Cost Allowance (also known as depreciation)

Disclaimer

All information provided on this page is intended for general purposes and we will not be held liable for any loss that may arise from the use of the information thus provided. If you’d like we can schedule a free consultation with us here.

When is my Tax Return Due?

 

With the exception for self-employed individuals and their spouses, Personal income tax returns and the tax owing are normally due by April 30th.  Penalties and interest may be charged for late returns or late payments.

This year however, the due date is extended to Monday, May 1, 2017 because April 30, 2017 is a Sunday. Individual taxpayers can apply this rule to other CRA deadlines. According to the CRA information on Important Dates for Individuals “When a due date falls on a Saturday, a Sunday, or a public holiday, we consider your payment to be paid on time or your return to be filed on time, if we receive it or if it is postmarked on the next business day.”

It’s important to stress that this rule applies only to individual taxpayer and does not apply to the remittance of an deduction and amounts withheld (for example payroll taxes, CPP, EI or GST/HST remittances), or payable by a corporation.  The CRA deems these amounts to have been made on the date the CRA receives them. For more information see section 248(7) of the income tax act.

 

The Canada Revenue Agency (CRA) may allow a grace period for taxpayers who are experiencing delays in submitting their return online.  The amounts owed to the CRA are still due by the April 30th (or May 1st for this year) to avoid any penalties.

The deadline for Self-employed individuals is Thursday, June 15, 2017 to file their 2016 personal tax returns, but if the self-employed taxpayer owes an amount, the balance must still be paid by May 1st.

Remember the CRA applies a late-filing penalty and interest so even if you can’t afford to pay by the deadline, you can avoid late-filing penalties which may be as high as 34%. See my penalties article for more details.

CRA Penalties and interest

Let’s get the simple stuff out of the way first:

  • Your tax return is considered late if it is not received by the due date and a penalty applies
  • If you don’t owe or are owed a refund there is no penalty
  • Penalties are fixed and apply to returns that are late; interest is variable and depends on how long the owing amount was outstanding

Late-filing penalty

If a taxpayer owes tax for 2016 and does not file a return by May 1, 2017, the CRA will charge a late-filing penalty. The penalty is 5% of your 2016 balance owing, plus 1% of your balance owing for each full month your return is late, to a maximum of 12 months (i.e. as high as 13%)

 

If a taxpayer is charged a late-filing penalty on their return for 2013, 2014, or 2015 their late-filing penalty for 2016 may be 10% of their 2016 balance owing, plus 2% of their 2016 balance owing for each full month your return is late, to a maximum of 20 months (i.e. as high as 50%).

Conclusion:

  • Always try to file and pay by the deadline
  • Even if you can’t pay on the deadline, file your return by the deadline
  • If you can’t afford to pay the entire amount owing you or you representative call CRA’s debt management call centre at 1-888-863-8657 from 7 a.m. to 11 p.m., Eastern time.

 
CRA prescribed rates can be found here

Canadian Tax system

 

 

In Canada, most types of income (employment, commission, gratuities, business, capital gains, investments, etc.) are taxable and must be reported in the year in which they were earned. This includes worldwide income for individuals who are considered Canadian residents for tax purposes. Generally Canadian residents are those with substantial residential ties to Canada such as owning a home or having immediate family members in Canada. Canada employs a self-assessment tax system which means that it is the taxpayers’ responsibility to report their own income, claim their deductions and credits, and file their own tax returns based on the rules set out in the Income Tax Act.

Depending on their source of income, taxpayer may be entitled to some deductions. Business income earners, for example, can generally deduct all reasonable expenses they incur in order to generate income. All taxpayers, regardless of their income source, can deduct their eligible RRSP contributions in the year in which they were made. Tax payable is further reduced by a series of refundable and non-refundable tax credits. These credits include age, disability, charitable and political donations, universal child care, and public transit credits. The distinction between deductions and credits is that deductions reduce your taxable income while tax credits reduce your tax payable. This means the money a taxpayer saves by deducting a deductible expense depends on their marginal tax rate so if you are a higher earner with a 29% marginal tax rate, your deductions are also applied at the same rate. On the other hand, eligible taxpayers all receive the same amount by claiming their tax credits. For example every person who purchased public transit passes will receive a 15% credit regardless of their income and marginal tax rate. Therefore for taxpayers whose marginal tax rate is higher than the lowest tax bracket, deductions result in more tax savings than tax credits. The difference between refundable and non-refundable tax credits is that you can only reduce your taxable income to zero by applying a non-refundable tax credit. Any overages will not result in a refund. However you will receive a refund for your refundable tax credits once they have reduced your taxable income to zero. This is an important distinction for lower and middle income earners as most credits can be carried forward and should be applied only if the tax payer benefits from them in the current year. Otherwise they should be carried forward.
Some of the assistance programs provided by the government such as the Universal Child Care are also considered benefits and must be included in the recipient’s income. Others such as social assistance and Canada Child Tax Benefit are non-taxable, although social assistance is included in income but also receives a matching deduction.

Income tax returns must be filed no later than April 30 following each taxation year. In some circumstances such as when a taxpayer carries out a business, the deadline is extended to June 15 following each taxation year. A 5% penalty and a 1% monthly interest are charged by both the federal and provincial governments if the tax return is filed late. Penalties are increased for those who repeatedly miss the deadline. Those who expect a refund will not be charged interest or penalties.