Saving tax dollars is an art. Filing taxes in time can save you from penalties. Making timely tax installments can also save you from penalties.
In Canada, personal tax return is due April 30 each year. Government of Canada will extend the date if April 30 falls on a weekend. For self employed individuals tax filing date is June 15 of each year. Married couples with one spouse self employed can also extend filing their taxes till June 15. However, if you owe taxes these must be paid before April 30.
Taxpayers who file their returns late end up paying interests and penalties. From the date your tax payment is late to the date it is paid, your are charged interest, compounded daily, at a rate set by the government.
Penalty for late filing is 5% of the amount you owe in taxes 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.
If you are running a profitable income you might come to a point where you have to make installment payments. Any time your taxes owing is more than $3,000 (greater than $1,800 in Quebec) you are automatically under the threshold of making interim payments for the following year. Government wants you to prepay your tax for the coming year. If you are an employee, your employer will withhold portion of your taxes and remit it to the government.
Installments due dates are March 15, June 15, September 15 and December 15 of the year. If you do not make your installments on time or you do not remit sufficient installments, CRA will assess you interest on the insufficient payments. Interest rate charged by the government is higher than the bank rate and it is not tax deductible.
Missing a tax installment payment means you are borrowing money at a very high interest rate. On the other hand prepaying your installments will not earn you any interest income.
If you hire employees in your business you must remit tax withholdings, CPP/QPP and Employment insurance premiums to government. If you do not make these payments in time you are subject to very heavy interest and penalties.
If you are late by three days or less in remitting your payment, a penalty 3% will apply. If you are late by four or five days, the penalty will be 5%. If you are late by six or seven days the penalty is 7%. If you are late by eight days the penalty will be 10%. If you fail to remit the employee deductions the penalty will be 10%. A 20% penalty will apply in case of gross negligence.
Usually your remittance due date for payroll remittance is the 15th of the month following the month your employees were paid.
As of January 1, 2008, if your average monthly withholdings were less than $3,000 for either the first or second preceding calendar year and you had a perfect compliance record for the preceding 12 months, then you would be eligible to remit on a quarterly basis. CRA considers employers to have a perfect compliance record when all deductions, withholdings and remittances of income tax, GST/HST, CPP contributions and EI premiums have been made on time T4 information returns and GST/HST returns are also filed on time. Quarterly remittance periods end on March 31, June 30, September 30 and December 31 and remittances are due by the 15th of the month following the end of the quarters.
All T4 slips, T4A slips and T4F slips must be filed before the last day of February for the previous calendar year. If you delay in preparing these forms, CRA will charge you a penalty of $25 per day for each failure to file the above information returns with a minimum penalty of $100 to a maximum penalty of $2,500.
Construction businesses hire many contractors during the year. Construction businesses have to report to CRA the payments they make to contractors. This reporting is for information purposes only. The contract payment reporting system is applicable to individuals, partnerships and corporations. This system is only focused on services and not goods that are sold.
The information return must include subcontractor’s name, address, identification number, GST number, CRA business number or social insurance number, the amount of contract payments and reporting period to which the return relates. This information return is filed on form 5018. If construction businesses do not submit the required information they can be assessed penalties.
If you use borrowed money for business reasons you are eligible to write off interest expenses. You can use your automobile and your house as a security for a loan. If you use this money for your business you will be able to deduct interest incurred.
If you use your life insurance as a security for a loan for business, you can deduct life insurance premiums. Lending institution must be a Canadian bank, trust company, credit union, insurance company or corporation whose principal business is lending money and interest on the loan must be normally deductible.
Health and dental premiums are deductible by self-employed and corporations.
You can only deduct health and dental premiums in your unincorporated business provided that you are actively involved in business and either the business is your primary source of income or your income from other sources does not exceed $10,000.
In order to deduct the health and dental premiums, you must also offer equivalent coverage to all your permanent full time employees.
You can only deduct up to $1,500 for each yourself and your spouse and $750 per child. You can only deduct premiums that are purchased from a third party normally in the business of selling insurance or health and dental plan is operated by a trustee that is in the business of operating such plans.
If you are deducting health and dental premiums in your business you will not be eligible to claim a medical expense tax credit for the payments.
Self employed individuals can deduct one-half of Canada Pension Plan or Quebec Pension Plan contributions paid for their own coverage. Corporations can deduct their portion of CPP and EI they pay for the employees.
You can deduct 50% of meals, beverages and entertainment expenses if incurred to earn business income. If meals, beverages or entertainment are available to all employees you are eligible to deduct all expenses in full. You can also deduct meal costs in full if these are built into a rail, airplane or bus ticket. If the ticket shows the cost of the meal separately, you can only deduct 50% of the cost.
If your business involves the ownership and renting of a club, camp, lodge, yacht, or golf course you are eligible to deduct expenses. If not, you cannot deduct any expenses. Even if you are taking a business client on a golf round and you discuss with business with him deductions are not allowed.
You can give two non-cash gifts and two non-cash awards to your employees in a year. Non-cash gifts have to be given on special occasions like Christmas, Hanukkah, birthdays or marriage etc. Total cost of the gifts cannot exceed $500 per year. Similarly, non-cash awards can be awarded in recognition of achievements such as meeting sales goals, meeting safety standards etc. Cost of awards given cannot exceed $500 per year. Employer can deduct these costs and benefits to employees are tax free.
If you take a course which is intended to maintain, update, or upgrade an existing skill that relates to your business, the costs associated with the course are fully deductible. If you take a course to learn new skill deductions are not allowed.
If you pay for an employee’s training you will be able to deduct the costs. These training costs would be non taxable to employee.
Advertising costs related to foreign publications and foreign media are not deductible. When you advertise to the Canadian public, you must use Canadian newspapers and Canadian media to be eligible to deduct advertising expenses.
Disclaimer:
This information is for educational purposes only. It does not constitute any legal advice or opinion. Please do not use any of its contents without seeking a professional advice.
References:
167 Tax Tips for Canadian Small Business by Stphen Thompson
Mansoor Suhail (Mani)
Accountant
BSBA – EA – ICIA – RA
Tax for Canada and U.S.A
Web: www.theaccountingandtax.com and www.taxservicesguru.com
Blog: http://taxservicesguru.blogspot.ca
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