quadrantadmin, Author at Quadrant

The tax man cometh for small businesses, too. How to be ready

Operating a business can be especially expensive, so don’t be afraid to use the legal deductions you have coming, but know what you can claim, keep records, know your deadlines and do it correctly. For instance, business expenses can offset tax liability, but this can also draw CRA’s attention to a small business. Any expenses incurred in the course of operating your business, whatever its size, can be used to offset tax liability and reduce what you’ll owe come tax time. Different kinds of expenses have different levels and rates of deduction, so check the tax code or consult a tax professional to be sure you’re taking advantage.

“Entrepreneurs will want to take advantage of any breaks and credits offered by the Canada Revenue Agency, but they also need to stay on the right side of the tax man.”

Five ways to prepare to sell your small business to reap the biggest reward

Even if your plans to sell you small business are several years away, you need to start planning now in order to get a great price when the time comes. Begin by documenting all business deals to show business connections. Also, ensure that any deals on paper are reviewed every year or so for accuracy. Risk in your businesses’ operations means a reduced price so it’s important to diversify and plan for long-term growth even if it means slightly reduced near term profits. Someone buying your business will perform due diligence, so make it easy for them to see the value in your business by cleaning up your accounting records and books. Family members may be great potential employees, but not hiring will make it easier to sell your business. Finally, a little goodwill at the end by offering to stay around and help during the transition will go a long way.

Key Takeaways:

Make sure to have things written out and organized, this includes current business deals and clients, and keeping your financial books in order.
Important to selling a business is minimizing the risk involved for the buyer by creating a stable, reliable business which insures that the buyer is confident of their purchase.
Family businesses are common, but having the business revolve around the family too much makes it difficult to transfer or sell the business to a new owner.

“A lower-profit, lower-risk business can be more valuable than a more profitable, all-eggs-in-one-basket shop. So, focus not just on maximizing profit, but also on managing risk.”

When is the best time to take your pension?

As we get closer to retirement, we often start to wonder when we should start to withdraw from sources of income like pensions. Depending on your situation and your other retirement savings, like RRSPs, when you start will be different from someone else. What you want to do with your pension money may also influence your decision. For instance, if you’re in good health and in a financially sound situation, then you can afford to wait longer and let the money grow. If you don’t think you’ll get the full benefit from it due to poor health, then considering a lump-sum cash payment may be the better decision. Or, if you want to use it to leave money to your children, then you’ll want to consider how you can do it to reduce your tax rate. Whatever you decide, keep in mind that there are ways to lessen your tax burden, so speaking to a professional first can help you with your estate planning.

“Once you begin taking your pension, in the majority of cases, you can’t stop the process — and that makes the timing crucial.”

It pays to know what you can claim in work-related tax deductions

As an employee, it can be quite difficult to take advantage of tax deductions. Regardless, you may still be entitled to make a claim. Here are just some of the deductions you should investigate. One area is your vehicle expenses provided you didn’t receive a reimbursement or a tax-free allowance, then you may be able to claim the work-related portion of your vehicle costs. Other areas to look are sales expenses if you’re a commissioned employee, the cost of supplies and tools, food and beverage costs, travel costs, home office space, legal fees, assistant’s salary and capital cost allowance on your vehicle. Whether you qualify will depend on certain conditions being met and may require additional documentation from your employer. It’s best to speak to a tax specialist if you’re unclear or need help with your special circumstances.

“If you happen to be an employee, you’re no doubt aware that tax deductions for employees are rare. Still, you may be entitled to claim a thing or two on your tax return this year.”

Snowbirds be warned: Spending too much time in the U.S. can trigger double tax

If you spend your winters in the United States, you might be subject to paying U.S. taxes to the IRS. The common belief that spending 182 days or less makes you safe is wrong. The reality is that the IRS applies the Substantial Presence Test, which looks at a three-year period. If you overstay, you can apply for an exemption provided you meet the “closer connection” to Canada criteria and file the correct forms with the IRS before the deadline. Either way, you’ll want to watch your days spent in the U.S., or you might get hit with a hefty fine.

Key Takeaways:

The Substantial Presence Test calculates the number of days over a three-year period that an individual spends in the U.S.
To claim the closer connection exemption for 2017, Canadians must file IRS Form 8840 provided no exceptions apply.
Planning to exit Canda for tax purposes should begin at least a year in advance to as it involves immigration, tax, estate, health care and other financial issues.

“It is important to understand the U.S. tax rules – and the actions snowbirds need to take to avoid being taxed south of the border.”

Personal Investor: 3 risk-free ways to boost your net worth

Many of us assume that investment goes hand in hand with risk; that you have to be willing to take on the possibility of losing it all for the chance of higher investment returns. However, for many people, there are other ways to make or keep more of their money without incurring risk. For instance, if you’re carrying debt, pay it off to avoid the interest charges. Create an investment strategy to avoid, reduce or delay taxes, which will allow you to achieve a higher after-tax return. And, look for low-fee investment opportunities as even a one percent annual saving will compound over time.

“Utilizing available tax tools including a registered retirement savings plan (RRSP) and tax-free savings account (TFSA) can divert much of your money from the Canada Revenue Agency back into your account, and that money can compound over time.”

Reality cheque: Will paper cheques soon be a thing of the past for small business?

The old ways of making payments is not just shrinking; they’re often vanishing entirely. Consider cheques, printed slips of paper your bank issues to you, tied to your account, and filled out by you to pay for a purchase or bill. Electronic means of payment, like Apple Pay, PayPal, and Interac, are taking over where once only a paper cheque was an accepted method of payment. Most of the changes have occurred at the consumer level. Increasingly, small businesses want more options when it comes to point-of-sale payment choices for customers, in addition to back-office payment options for suppliers and vendors. However, to make these options available, Canada needs to modernize its payment infrastructure, and to cover the cost of making these changes, banks may need to charge a fee for these services. Keeping these costs low is key to small businesses using them.

“Why cheques? For starters, accepting a cheque as payment can be less costly for a small business than accepting a credit card payment, which has merchant fees as high as three to four per cent of the transaction value.”

Personal Investor: Tax perks for home offices

You might call your home your workplace if you’re one of the nearly 3 million self-employed Canadians or those working for larger companies from home. Like any business-related expense, your home office will work in the same way on your annual tax returns with these expenses being deductible. Expenses that are exclusively used for business-purposes are fully deductible. Only a portion of shared expenses, like utilities, repairs and insurance, can be claimed.

Key Takeaways:

The portion you can claim on shared expenses is based on what portion of your home is used for your business in terms of its square feet relative to your home’s total square footage.
If self-employed, you can add mortgage interest and property taxes to your deductions, which employees cannot claim.
One note of caution: If you deduct expenses related to permanent changes, such as renovations or an addition, you could lose the principal residence status on your part of your home and lose a portion of your principal residence capital gains exemption.

“Many deductions are a portion of expenses homeowners typically incur anyway, but claiming the right portion is critical if you don’t want to run afoul of the Canada Revenue Agency.”

Nearly three million Canadians are self-employed. Others work for larger companies from home. In many cases, their homes are their workplaces.

This updated rule of retirement saving has you working longer, running out of money sooner

With the global economy having gone through tremendous upheaval in the past decade, some of the principles used to calculate what we need to save for retirement need to be adjusted to better account for today’s investment environment. A common rule was to assume $20 of savings would generate $1 of investment income in retirement. However, with today’s lower investment returns, the rule needs updating. Using this formula now requires that we start at 65, not 60, and savings are projected to last about 25 years assuming an inflation rate of 2.5 percent. You may also want to tweak it to $21 or $22 in savings, in order to be more conservative with your financial planning.

“The Rule of $20 was just updated, and it’s still a useful gauge of how much income you can generate from your retirement savings. But it’s a more demanding rule than it used to be, largely thanks to today’s thinner investment returns.”

Navigating taxes in the emerging sharing economy

Everything old is new again, eventually, so to the barter system, albeit with a new millennium twist. Today, there is what some experts dub the sharing economy, whereby a person profits by sharing an asset. This can consist of a room for the night, use of a car, etc. If this goes on as a way of exchanging a specific thing, or activity, for a separate thing, or activity, well and good. However, those that profit fiscally from such a platform have been, thus far, finding ways to snub the tax man – at least some of them. And the tax man is now figuring out how to not have that happen. Restructuring efforts are underway, around the globe. In one example, the Danish government made an agreement with Airbnb, so that rental revenue data would be appropriately relayed to the government. In Canada, businesses falling under the definition of a “taxi” service now include ride-sharing enterprises.