How Will The Changes To Income sprinkling Impact You

As soon as the government started talking about tax reforms for corporations who used income sprinkling as a tax saving strategy small business owners across Canada started to worry about the implications these impending changes would have on them.

Before we dive in and give you the full ins and outs of this tax law change, who it impacts, and what it means for small business owners we want to start by saying that majority of our small business clients will not be impacted by these changes. Those impacted the most are high-income earning professionals, such as Doctors and Lawyers, who have been income splitting with a spouse who is not actively working in their business.

What is income sprinkling?

Income sprinkling aka income splitting is a tax strategy commonly used by higher-income business owners or incorporated professionals to help them personally access more funds from their corporation without the high tax bill. To implement this strategy the corporation pays out company dividends to a lower earning family member of the business owner or incorporated professional, in most cases a spouse or child.  The family member receiving the funds is taxed at their tax rate, which is lower than the higher income earners tax rate.

 

The existing law

The original law around income sprinkling/splitting was the Tax on Split Income (TOSI) rule which applied the highest marginal tax rate to income that was split with a family member under the age of 18. Commonly known as the “Kiddie Tax” this law had not been extended to family members 18 or over.

The New Law

You can probably already see the writing on the wall and if you assumed the new law extends the principles of the “Kiddie Tax” to all family members 18 and over who receive dividend payments from the corporation without actually being an active member of the business, you would be correct.

Exclusions

It should be noted that there are some exceptions to the rule:

  • It doesn’t apply to salaries paid to family members.
  • If you are income splitting with your spouse and you are aged 65 years and over you are exempt.
  • If your family member works consistently in the business 20+ hours per week during its operations within the tax year or can show that they have consistently worked within the business over the past 5 years they will be exempt.
  • If you are 25 or over and you hold Excluded Shares in the corporation and the corporation is not a professional corporation or a business that provides services.

What it means for you

For a majority of small business owners, these changes don’t pose a significant impact. So long as your family member is actively working within the business and can provide documentation to prove that fact the high tax bracket won’t be applied.

For a lot of incorporated professionals that have been income splitting with a spouse who does not actively work in the business these changes will have a significant impact on their tax saving strategy.

Sole Proprietor: “Do I need to file my business and personal tax returns separately?”

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Running a small business is an eternal learning curve of aha moments. Whether you’re filing an income tax return as a startup or exploring entrepreneurship for down the road, here’s one of the most popular questions that come up every year come tax time.

“Do I need to file two tax returns?”

Every year, many new small business owners who are NOT incorporated ask whether they need to file two tax returns: personal and business.

Before we jump into the answer let’s look at what is classified as business income.

Canada Revenue Agency (CRA) classifies business income as money you earn from the following:

  • Profession
  • Trade
  • Manufacture or
  • The undertaking of any kind, an adventure or concern in the nature of trade, or any other activity you carry on for profit and there is evidence to support that intention.

(So essentially any money you make that doesn’t come with a T4 at the end of the year)

NOTE: This income may be earned from a business you operate yourself as a sole proprietorship (SP) or with someone else as a partnership.

CRA Tip: You have to report all amounts of income that are required for calculating income for tax purposes. If you do not report all your income, you may be subject to a penalty of 10% of the amount of income that you did not report.

I Definitely Have Business Income. Do I Need To File Two Tax Returns?

The short answer is – NO! You just need to file ONE return. But… and there is always a BUT…There is more to the process than a simple personal tax return.

Additional Step

As a sole proprietor (SP), you need to report your business income on your personal tax return (AKA T1 General) by completing and attaching a Form T2125: Statement of Business or Professional Activities (see below).

 

Other Fun Facts You Should Know

While you only need to file ONE tax return, there are some tax benefits to being self-employed that you don’t get as an employed individual:

  1. Deadline
    1. While the deadline for individuals filing their 2017 personal income tax return is April 30, 2018, SPs get until June 15, 2018 to file their taxes. That is, if you or your spouse or common-law partner carried on a business in 2017. However, if you owe tax money that is due on April 30, so it’s best to get in early.
  2. One extra form to complete
    1. All your business tax deductions are reported on Form T2125, Statement of Business or Professional Activities (pictured above).
  3. Business tax deductions
    1. Business expenses: Deduct only the business expenses from business income Eg. Meals, Travel, Equipment, Office Supplies relevant to your business.
    2. Home Office Tax Deductions: In order to deduct expenses, the workspace must either be:
      • the place where the individual principally (more than 50% of the time) performs administration or employment duties,or

      • used on a regular and continuous basis, for meeting customers or other persons in the ordinary course of performing the office or employment duties.

      • You can deduct expenses that are required to run your home office. Eg: Utilities and maintenance costs. If you rent your home, you can deduct a portion of your monthly rent. You can deduct the cost of office expenses (eg: Pencils, stationery, paper clips, stamps, etc). You have to claim the maintenance and repairs related to business use of work space in your home as business-use-of-home expenses. Learn more here.

    1. Private Health Services Plan Premiums: You can deduct the Private Health Services Plan (PHSP) Premiums you pay to insure yourself, your spouse and/or any dependents. Click here for more info.

Can Homeroom Just File For Me?

Of course, individual and business tax returns are our specialty.

Check out our Business Tax Checklist to see what we need to complete your return.

Contact us here if you have any questions or concerns.

Happy 2018 tax season!

Avoid CRA penalties

Income Tax Filing Vancouver

Unleash your inner beach diva mid tax season, and rejoice!

Whether you’re ripping the waves in Tofino, or lounging at home with a bird’s nest do, file you e-return whenever, wherever.

Our quick and easy electronic tax filing option is a great alternative for anyone who prefers hassle-free, no appointment necessary service.

April 30th filing deadline is approaching as quick as the Easter bunny. Save time and paper, and avoid CRA penalties.

And don’t let taxes stop you from quality time on the beach.

Fill out the form below, and request an e-return today!

If you know someone who needs help with their taxes, please forward this post to them. We always appreciate your referrals. 🙂

Request an e-return

 

Fix and flip: Three things you need to know about house-flipping in Vancouver

house flipping vancouver

I see a  beautiful, white 10-bedroom villa, with a long, spacious veranda that leads to a vineyard, overlooking a flowery hillside. The birds are playing in the field, chirping my favourite tune, with crops that are gently swaying in the warm summer breeze. Life is awesome. 

They say, “One person’s trash is another person’s treasure.”  When it comes to flipping houses, it comes down to this:

  1. Have a vision
  2. Be brave
  3. Sell for profit

What the flip?

It’s when you see that junky house or an apartment and envision something different in that space, be it new, shiny tile floors and a fresh coat of paint, or a complete and utter gutting of the space.

So you buy it, spice it up, and sell it for profit. Flipping easy, right?

Suddenly, that run-down house becomes a mansion and that dude refreshing himself with a cold beer in front of it turns into a swimming pool. At least in your imagination they do, for now…..

Here’s the bare bones of house/ apartment-flipping:

  1. Find cheap land/ apartment. Without a good deal, there will be no margin for profit once the renovations are complete and all the other fees are paid out.
  2. Don’t spend more than 40-50K. If you are flipping an apartment that is 500-800 square feet, you should not be spending more than 40-50K on the renovation before you sell or you won’t be able to sell it for a high enough price and you might lose money.
  3. Rent it, don’t sweat it. House-flipping is less popular in Vancouver than apartment-flipping. Developers and homeowners can usually make more money just buying and holding the land for 6-12 months or more while renting the house, and making a significant profit of the appreciation of the land.

Tip: Like anyone engaged in the intricate art of renoing, you will need a cool bookkeeper to manage your expenses, file your GST return and make sure your taxes are filed properly.

That’s where we come in.
We can definitely connect you with some kick-ass professionals in the industry, or just take on your books!
Happy house-flipping!

 

 

 

 

Avoid procrastination, after reading this

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Even The Number Cruncher, Allysia Lewis gets occasionally sidetracked by the internet……

Virtually everyone is prone to procrastination. A new Donald Trump meme can induce low-brow fun and hysteria even for the most focused cat person ….and put that important tax preparation on the back burner.

The Lady in Charge Teya was interviewed by the CBC about the topic of procrastination. This was fitting for two reasons:

A lot of people procrastinate about organizing their bookkeeping and taxes (even when the tax deadline April 30, 2016 is peeking like a creepy clown behind a wall). As a the owner of a bookkeeping company Teya’s job is to help business owners become more organized and meet their CRA submission deadlines.

As perpetual procasters, we have found that Teya has an impeccable ability to avoid distractions (such as social media) and get things done. (If we could nominate her for the “least likely to procrastinate” award, we would.)

You can get there, too–we all can! Stick to the following five tips to really increase your productivity.

1. Outsource

Starting a new business can be quite costly so it is common for business owners to take on the initial roll of “everything to everyone” in order to keep costs low.

Although this isn’t a bad way to start, as time goes on and the business grows this workload can begin to become unbearable. This is where the procrastination starts.

According to an article by Phyllis Lokki in the New York Times the larger your workload the more likely you are to become overwhelmed and start procrastinating.

This is why outsourcing certain tasks is really important. It allows you to reduce your workload, free up some of your time and focus on your strengths.

For example: Teya has outsourced writing this blog to me because she is so busy making sure your taxes are filed on time 🙂

2. Lists, lists, lists and more lists

Write everything down and prioritize your important tasks. It is easy to use small tasks as a method of procrastination because they give a false sense of productivity.

Think about the revenue each task will bring you and then prioritize accordingly.

For example: Vacuuming your bedroom floor, although necessary, will bring $0 to your business so it should be last of your list. Completing work for your client will bring in revenue so it should be a priority (you can then use this income to outsource your vacuuming)

3.Limit your social media usage

This is easier said than done, especially when social media is so prominent in most people lives.

Time your usage. Create a social media plan that allows you to fit your daily social media into 20 minutes per day and stick to it OR outsource your social media management to an employee or to a firm.

It is very easy to get caught in a social media vortex. All it takes is for you click on a one link and before you know it 2 hours have passed.

4. Make sure you take breaks

Breaks allow you to refresh your mind. There are several studies that reveal taking a break to eat your lunch or to go for a walk actually increases your productivity.

So stop eating at your desk and enjoy some fresh air.

5. Only check your emails twice a day

Emails are often a procrastinators drug of choice. Don’t get me wrong they are important. However,  it is easy to fall into the trap of checking them 300 times a day.

You need to limit the time you spend with your emails so that you can focus on other important tasks.

Most people are happy/ pleasantly surprised by a same day turnaround. So even if you only respond to emails once in the morning and once in the afternoon that is usually all you need to ensure positive feedback from your customers.

A great tip suggested by Timothy Ferriss author of The 4 Hour Work Week is to set up an email response that lets your clients know exactly when and on what day you check and respond to your emails so you can manage their expectations.