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. 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.
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.
Business use of a personal vehicle
The cost of business related travel is a deductible expense. These costs include fuel, gas, maintenance, insurance, repairs, and any other operating expenses. Generally you would divide the business related kilometers driven by the total number of kilometers and multiply this number by the total operating costs of your vehicle. Note that traveling from your home to work is not considered business travel.
Capital Cost Allowance (CCA)
Businesses amortize the cost of their capital property used to generate income based on a predetermined method depending on the nature and the use of the property (straight-line, declining-balance, etc.). For tax purposes a business must add back the amortization costs and can elect to deduct Capital Cost Allowance (CCA) based on CRA’s prescribed rates depending on the type and prescribed class of property. For example software and small tools fall under class 12 with a prescribed rate of 100% and therefore are fully deductible; however the half-year rule applies in the first year any capital property is purchased and therefore only 50% is deductible in the year in which the software was purchased. It is therefore beneficial to acquire capital property at the end of the fiscal year since you are able to deduct CCA even if it is at half of the prescribed rate and can claim the full prescribed rate in the subsequent years.
In any given tax year you may claim the full, a portion, or none of CCA available; the unused portion can be carried forward to future years. The CCA rules are complex. Disposing capital property can result in a terminal loss or a recapture and you should consult a tax expert before making significant acquisitions or disposals of capital property.
This account designed for private companies is mainly made up of the non-taxable portion of net capital gains, any capital dividends received from another company, and the net proceeds of a life insurance policy received on passing of a key employee. The sums in this account can be distributed to shareholders tax-free.
Capital Gains and Capital Gains exemption
Generally your business is a considered a Canadian Controlled Private Corporation (CCPC) if it is a private corporation which is controlled by Canadian residents. If this is case, the capital gain realized upon disposition (sale) of your qualified small business shares, is entitled to a deduction up to $ 800,000. This is a lifetime deduction which means that in a taxpayer’s lifetime, they may realize up to $ 800,000 of capital gains tax-free upon the sale of qualified small business shares.
Shares are considered Qualified small business corporation shares if the corporationuses all or substantially all of the fair market value of its assets principally in an active business carried on in Canada. The criteria are complex and even if your business is not incorporated or your shares don’t currently qualify, there are methods through which qualification can be achieved. Consult your tax adviser prior to the sale of your shares.
If upon selling a capital property, the seller accepts debt instead of cash proceeds, the seller may claim a Capital Gains Reserve for the amount taken as debt. However the seller must include at least 20% of the taxable portion of capital gains every year for up to 5 years following the year in which the sale was made. If you sell shares of a small business corporation to your children or grandchildren and take back debt, the inclusion percentage and period are extended to 10% and 10 years. Some forms of debt such as on-demand promissory notes are not eligible for such arrangements.
All employers and employees must make Employment Insurance contributions. The employer’s portion is 2.632% of each employee’s earnings to a maximum contribution of $ 1,279.15 per employee in 2014. The employee’s portion is 1.88% of their earnings to a maximum contribution of $ 913.68. Based on these rates the maximum pensionable earnings for both employees and employers is $ 48,600. Once earnings exceed this amount, employers and employees are exempt from making further contributions.
Self-employed workers may register and make EI contributions at the employee rates above in order to be eligible for maternity, adoption, parental, compensation and other benefits of EI; however they must be registered for at least 12 month before applying for any of the EI benefits.
All firms with annual sales of $ 30,000 or more must register for GST/HST with the Canada Revenue Agency. You can elect to register as an annual, quarterly, or monthly filer; however firms with annual sales in excess of $ 1,000,000must register as monthly filers, those with annual sales over $ 250,000 as quarterly filers, and those with monthly sales over $ 6,000 as monthly filers.
Zero rated firms such as farmers, fishermen, dentists, and doctors are not required to charge GST/HST; however they can claim the Input Tax Credit on GST/HST paid on purchases.
Input Tax Credit
If your business is registered for GST or HST, you may apply for Input Tax Credit and Input Tax Reductions for the taxes you paid on purchases during the course of commercial operations. If you receive a credit for having purchased a capital property, you may reduce the cost of the property by the amount of credit received.
Issuing and filing T4s (Statement of Remuneration Paid)
Employers must prepare and file employee T4s by February 28th of every year. Late file penalties apply for T4 receive after the deadline. Note that all T4 must have the employees Social Insurance Number and failure to do so will result in additional penalties.
If an individual has an office in his or her home and uses the office solely to generate business income, they can deduct certain expenses provided the proportion of these costs in relation to the total costs is calculated on a reasonable basis (for example square footage of the office divided by the square footage of the home). Such costs include mortgage interest (but not principal), electricity, heating, maintenance, property taxes, home insurance, and other utilities. If deducting these costs result in a business loss, the excess can be carried forward to future years. You can also deduct CCA on your home as a business cost; however it is not recommended as it may cause tax consequences when you sell your home and claim your home as principal-resident (generally any capital gains resulted from the sale of your principal resident is tax-free)
If the loan was obtained to earn income it is a deductible expense. If the loan was received in order to purchase capital property, the interest may be capitalized and added to the cost of the property on which CCA can be deducted.
Interest on investment loans
The interest on borrowed money used to earn investment income is tax deductible. This is the case even if no income is earned from the investment so long as there is a reasonable expectation that the investment will earn income in the future.
The easiest and most efficient way to split income with your spouse or family members is by paying them a salary for the service they provide to your business. Consult a tax adviser before proceeding with such decisions. Employers and employees must contribute to Employment Insurance; however in certain circumstances (for example if the employee owns more than 40% of the company’s voting shares), your employment is exempt from paying EI contributions.
Although there are special rules to deter individuals from transferring property to family members to avoid paying tax, there are some legitimate ways in which you can reduce your household’s tax bill. Generally if you transfer capital property to your family members, you are deemed to have disposed of the property at its fair market value regardless of the amount of money exchanged. If an income producing capital property is transferred to an under-18 family member (child, grandchild, niece, or nephew), the income is attributed back to you until they turn 18; however any capital gains that results from the sale of such property will be taxed on the minors hand. Therefore it is beneficial to transfer capital property with high capital gains potential to your minor children. Although you will have to report the income generated from such property will be taxed on your hand, the capital gains will be taxed on your children’s hands who are in a lower tax bracket.
Meals and Entertainment
50% of meals and entertainment costs are deductible if they were incurred to acquire new clients or retain existing ones. Transportation costs to such events are fully deductible.
Payroll deductions must be remitted to the CRA on a monthly basis on the 15th of every month for employers whose payroll deductions do not exceed $ 15,000 per month. Employers with $ 15,000 or more in monthly payroll deduction must remit the deduction on a biweekly basis. A late filing penalty of 10% applies the amounts not paid by the deadline. Note that the 15th day of the month is the day by which the government must be in receipt of your payroll deduction payments in order to avoid penalties.
Payroll deduction rates
The rates applied to payroll deductions are changed at the beginning of the year and the end of June. Using a frequently updated software package ensures that you are complying with the rate changes and avoid penalties.
Professional Dues, legal, and accounting costs
Professional Dues, legal, and accounting costs are generally deductible if they were incurred to carry on a business. Legal and accounting costs incurred to acquire a property, for example, are not deductible.
Private health insurance
Private health insurance premiums are deductible expenses if the business is a sole proprietor or a partnership, the taxpayer’s employees are entitled to the same or better coverage, and the business income makes up more than 50% of the taxpayers income or other sources of income do not exceed $10,000 annually.
Depending on the date you have chosen as your year-end, you may be able to declare a bonus prior to your year end and receive a deduction but defer reporting it on your personal tax return until the following year. In order to take advantage of such arrangements, the corporation must declare the bonus before its year-end but pay it after Dec 31; however it must be paid within 179 days of the declaration date.