Blog

Preparing for CRA Auditors

I love telling success stories. This one is definitely an awesome success story of what we did for one client. They run a successful professional practice and grew by leaps and bounds in a very short amount of time. Over just 4 short years they grew from sole practitioner to 30 professionals working for this successful owner. Needless to say when you grow this fast you are bound to be catching the attention of the CRA and their computerized data filters.

The Beginning

The story goes like this, on a Monday the prospective client cold called us asking about accounting services. They received a very gentle and friendly letter from the CRA that they were going to harmlessly come to their place of business and perform a routine audit. “Not to worry” says the CRA but of course there is everything to worry about. By Wednesday we met with the owner and realized quickly why they were being audited. It was a payroll audit.

These are the issues we found just from a one hour complimentary discussion with them:

  • Their previous bookkeeper had not been paying attention to payroll remittance deadlines, they’re due on the 15th of each month
  • The T4’s were not filed, prepared, but apparently never filed.
  • The T4’s prepared were also incorrect.
  • They had no real payroll ledger to show what each employee made by pay period.
  • Employment benefits were also not being tracked

From our experience, if this client walked into the CRA audit with all of the above issues, they’re probably going to giving up a chunk of money at the end of the experience.

The Battle Plan

We sat down to work right away, in that same meeting we wasted no time, we came up with a list of things we needed from the client, we created an action plan of what needs to get done. The auditors were coming in 2 weeks. Oh no! Short timeline! Our primary objective was to make a payroll ledger, account for the benefits to each employee, and a set of real T4’s for the employees. In the meantime without a proper bookkeeper (she wasn’t fired, she disappeared) we were going to continue the function of payroll until the client found a suitable bookkeeper replacement.

Lots of emails, record dropoffs, and several meetings in between. We even coached the client for what to expect during the audit. The auditor in this case asked not to see us the accountants, but only to see the client, so we had to prepare the client. The end product at the end of 2 weeks was a thick paper package that will guide the CRA auditor to do their work as streamline as possible.

Don’t forget we were also running payroll for 30 staff we knew nothing about in the background while we produced this massive audit working paper package.

The Results

The CRA auditor showed up to the client’s home. They asked exactly the questions we thought they would, for which our client was already prepared in advance. They looked through our package for a couple of short minutes…

He called me from the client’s place of business…

“Wilson this is a really comprehensive package… it appears to be all I need, I don’t need to spend any more time here….”

He just got up and left after just an hour of simple questions and browsing through our package.

Three weeks later, no fines, no penalties, no extra taxes even, another success story for our client.

 

borrow from the company without really doing so

Today we just structured loan for the client in a way that worked out a lot better for them. The client is a successful family owned small business in Victoria. They wanted to buy an awesome beach vacation property and maybe one day retire there. What an awesome story. They had most of the value sitting inside their company, but as you may already know if you took that money out of the company it will become a taxable dividend or salary for the shareholder.

Getting a personal loan for a vacation property, combined with being a small business owner, is really difficult generally. Most business owners are perceived to be more risky than a salaried employee when it comes to obtaining a loan from the bank.

So you’ve been doing business as a corporation for years and years and the company looks great on your financial statements, but the bank is still going to look at you with an air of risk. Hey I get it, it’s not fair but that’s just what we’ve seen with the banks. What do you do?

After talking with the bankers, the investment advisers, and the owner, we found the perfect solution was that the bank issue the loan to the owner personally, but the collateral was the company’s excess assets. This may not necessarily work for you, I’d recommend you talk to your accountant about whether you could do this or not. In fact we only did this because of this client’s very very specific circumstances. In doing so we probably saved the client hundreds of thousands of dollars in taxes. Talk to your accountant, or talk to us, send us a message on the form.

 

is my accountant providing service?

This topic is something that comes up all the time when we receive a new client prospect. We always ask people why are they leaving their accountant? The answer is consistently that they’re not receiving a proper relationship from their accountant more or less. Accountants are not just the person who fills out the forms and files your taxes. A lack of accounting service could look like a number of ways:

a) No answer to emails or phone calls

b) When you visit for your sign off meeting you don’t talk about anything meaningful

c) Or you talk about your life or business changes and there’s no real advice provided in that context

d) You only see your accountant once a year at this “not so useful” sign off meeting.

Does this sound like the relationship you’re having with your accountant? That’s not unusual apparently, we hear about these stories all the time. I think anybody that has an accountant should always have a relationship of open communication with their accountant. What’s happening in your life? Are you planning a new business venture? More kids? Retirement? Getting married? No matter what phase of life you’re in, your tax and financial plan should be changing. These are the types of conversations we have all the time with our clients and giving active strategies to address each situation.

Communication is a two way street however, and if you’re not telling us about what’s happening in your life, we’re not going to know to ask the right questions. Next time you visit your accountant tell them a little more about yourself, and talk about your life or finances or whatever.

Are airmiles taxable?

Everybody likes to bank frequent flyer miles, or some sort of reward points program. If you’re a business owner you may find that your business expenses are also contributing to your accumulation of points.

Technically these points are taxable benefits if you are using your business expenses to earn miles. However, CRA will generally not tax an individual for these points related to business expenses if they are not convertible to cash or if it was not intentionally done as part of your compensation. If you’re using a company credit card then you may possibly have a situation where your points are taxable.

If you have a taxable situation then you should report the benefit on your T4 as a taxable benefit, which will trigger CPP and EI as well if this is for your employees. Not fun or easy to track and figure out. Give us a call or use the form on the right to talk about how to treat your airmiles properly.

Company Owned Vehicle?

I often get the question of whether a shareholder can use a vehicle owned by their company. The short answer is yes the company can own the vehicle but the long answer however, is that it’s not worth it for the shareholder.

Why not? If it is a passenger vehicle that you use more for personal than for work then a percentage of the value of the vehicle will be attributed back to the shareholder as a non-cash taxable income. There is often misconception that driving from home to work is considered part of work. Not only is going to work/home not considered using a company vehicle for work, but if you go to the same client over and over, that too is considered not for work.

There are ways to reduce the taxable benefit significantly. They are not easy to implement and are often done incorrectly by shareholders not given the proper advice. The best thing to do is to give me a call or use the form on the right to help you figure out the best scenario of a company vehicle for your unique circumstances.

Optimal tax free dividend

You probably know about the federal basic exemption amount of $11K that each individual may earn without paying income tax. Did you know that the exemption amount is magically higher when the income earned is a dividend from your company or your portfolio?

Assuming you earn no other source of income, if you are earning stock portfolio dividends then your tax free maximum is anywhere between $40,000 to $50,000 depending on which province you’re in. If you are paying yourself dividends from a small business corporation you own then that tax free maximum is anywhere between $20,000 to $32,000 also depending on the province and a number of other factors.

We calculate the optimal amount of dividends for our corporate clients and retirees all the time. There are many factors to take into account when calculating the best amount for you. It’s not something you should calculate on your own, give me a call or use the form on the right and let me work it out for you.

How to Keep the GST you Collect

Companies typically collect GST on their sales and then pay GST on their purchases. When you go to file your business’ GST return you will offset the amount of GST collected with the GST you’ve paid to determine the net amount of GST to pay to the CRA for the period. Sometimes it is possible to keep more than what you’ve paid on GST purchases.

Instead of the traditional GST calculation illustrated above you can apply to change the calculation using what is called the GST Quick Method. Under this method, in lieu of the credits on GST purchases the CRA will use a formula to allow you to keep 1.4% of the 5% you collected. If you’re in a service based business you may find that you don’t spend a lot on GST purchases and hence the 1.4% keeper is a better deal than the credits on GST purchases.

There’s a couple of other small nuances to this formula that sweeten the deal. You may also find it difficult to determine whether Quick Method is a better deal for you at all.  My recommendation is to give us a call or use the form on the right to help you determine what’s your best fit for GST and your business.

Tax Consequences of Divorced Couples

Divorce is a terrible situation to be in and often there is confusion on what to do with your taxes. You need to get a good accountant to get proper advice but here are some common areas to know about.

The biggest aspect is kids. If you have children together one of you will take custody. The parent who takes custody will take a lot of the tax credits by default. In particular:

1) Amount for eligible dependant (equivalent to spouse) – this credit allows you to claim your child who is under 18 in the same way you can claim a spouse who doesn’t work. Whoever has custody of the child gets this credit. If you share custody, and there are 2 children, then actually each parent may claim 1 child.

2) Amount for Children $2K – this one is claimed by the parent who claims the equivalent to spouse, they are tied together.

3) Children’s fitness and arts amounts – these are not tied to custody, it is generally tied to who ever pays for it (more on this later).

4) Childcare expenses – in a married couple the higher income spouse receives the expenses as a deduction. In a divorce situation it becomes more complicated. Usually it’s the parent who pays for the expenses, but I’ll have more on this topic later.

5) Medical expenses – again it’s usually the parent who paid for the expenses.

Now comes the complicated part, divorce is usually ugly and by default it is a breakdown of a relationship and will be complicated. With respect to ALL of the above tax credits, CRA has the right to revoke all of the above credits for BOTH parents if you cannot agree to who takes which credit. Yes, you may have paid for the Childcare expenses, but if the other parent doesn’t agree to allow you to take this credit, then neither of you will get it. Same with the eligible dependant, if you can’t agree to who claims which child, or worse you have 1 child and only 1 parent will claim this amount then CRA will revoke it for both parents. Very common scenario we see is both parents sit down once a year during tax time to talk about which credit they are each claiming and they agree to it via handshake.

Another big element of divorce is of course the divorce or separation agreement. Dictating what financial arrangements are to be commenced upon this marital breakdown. We don’t usually see the above tax credits discussed in the agreement, but maybe this is something you can talk to your lawyer about.

If in your agreement you are paying for spousal support, these payments can be deducted from the paying spouse’s income, and are also added to the receiving spouse’s income. Important note, if you have it in your agreement for child support payments, first of all these payments are not deductible

In our practice we often help individuals in this situation, we often recommend for us to talk to the ex-spouse to discuss which credits to share. We even perform a tax calculation of equalizing the tax credits between the 2 individuals. No matter what you do, I recommend you seek a professional accountant.