by Jeff KirshenBusiness Use of the Home
Every year, more and more Canadians are opting to work from home. It saves the cost of renting/buying an additional space in an increasingly inaccessible property market, as well as travel costs. Technology has also made it possible to use a workspace at home on a regular basis with access to the same resources as would be provided in an exclusive office space.
The Canada Revenue Agency (CRA) enables Canadians who make business use of a work space in their homes to deduct expenses that flow from that use. However, the CRA often scrutinizes taxpayers for how they may draw the line between business and home expenses. It is important to understand the rules and conditions they set to avoid unnecessary audits and reassessments.
What is Required to Deduct Business Use of the Home Expenses
The CRA says that you can deduct expenses for the business use of a work space in the home, as long as you meet one of the following conditions:
- It is your principal place of business; or
- You use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your clients, customers or patients.
In essence, your home office must be your main office. It must be your home base. Individuals who, say, work from home for a couple days each week, but their work still centres around a workspace outside the home would not be eligible. This is an important distinction because individuals are increasingly working from home, but that does not mean that their home office would be their principal place of business.
Or, you use the space in your home exclusively to produce business income. This is very relevant when it comes to deducting expenses incurred for upkeep and maintaining the work space. For instance, one could not claim their kitchen as their home office, and deduct expenses for buying a new kitchen table they work on. It must be a space used exclusively for deriving business income.
How do I Deduct Home Office Expenses?
If you satisfy one of the conditions mentioned above, you can deduct part of your home costs such as heat, home insurance, and electricity. You can even deduct part of your property taxes, mortgage interest, and CCA. However, you can only deduct the work space’s proportion of the total expenses. This attracts much scrutiny by the CRA: what proportion of the home’s expenses are incurred due to the home office?
The CRA advises that if you use part of your home for both business and personal living, you should calculate how many hours a day you use the rooms for business, and then divide that amount by 24 hours, and then multiply that by your total home expenses.
The amount of expenses you deduct cannot be more than your net income from the business before you deduct these expenses. Basically, the CRA does not allow you to use expenses to increase a business loss.
If you are being audited for your home office, or you have questions about what expenses are eligible, give us a call today! We’re here to help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenWhat is a T2200 Declaration of Conditions of Employment Form?
A T2200 Declaration of Conditions of Employment is a form that allows certain employees to deduct specific expenses that are incurred for the purpose of earning employment income.
Generally, the Canada Revenue Agency (CRA) does not allow employees to claim deductions from their employment related expenses. Most employees cannot claim employment expenses, which means that taxpayers are unable to deduct expenses such as the cost of travel to and from work, or other the purchase of most tools and clothing. Although, there are a variety of employment arrangements that allow for employees to deduct employment costs.
What is a T2200 Declaration of Conditions of Employment Form?
However, in order to be able to claim employment expenses, a T2200 Declaration of Conditions of Employment must be completed by your employer. The purpose of this form is to certify an employee’s eligibility for deductions that can be claimed to reduce your overall income which would reduce the amount of taxes you are required to pay. This T2200 form allows you to deduct certain expenses (including any GST/HST) that you paid to earn employment income. However, this can only be done if your employment contract required you to pay the expenses and you did not receive an allowance for them, or the allowance received was included in your income. A T2200 form helps employees maximize their tax deductions for unreimbursed employment expenses.
What is on a T2200 Form?
The T2200 form details the employee’s day to day conditions of employment. These conditions help determine which deductions the employee may qualify for based on their type of employment. There are different deductions and eligibility requirements based on type of employment. For instance, the Income Tax Act makes a distinction between employees earning a commission and those earning a salary, and provides distinct rules for transportation employees, employees working in forestry operations, tradespeople, and artists.
If you have more than one employer, each employer must complete and sign separate forms for each year the employee intends to claim the deductions. An employer completing this form is required to complete the form truthfully and return it to the employee.
Do I need to keep the T2200 Form and Proof of my Expenses?
Though the CRA does not require the T2200 to be filed with the tax return, it is best practice for both the employee and employer to keep a copy in the event the CRA asks to see it. If you are audited, the CRA will require a copy to determine what expenses you are eligible to deduct, and which you are not.
It is important to remember that while a signed T2200 form enables an employee to claim employment related expenses, it does not guarantee that the expenses will be deducted. In order to maximize the chance of deductions, it is essential to keep detailed records of all expenses incurred. In a recent Tax Court of Canada decision, the Judge reaffirmed the notion that in a self-reporting tax system, “the burden of proof for deductions and claims rests with the taxpayer.” As such, it is imperative that a taxpayer keep detailed documentation in support of all claims being made.
If you are being audited by the Canada Revenue Agency for your T2200 form, or you have been audited and your expenses have been denied, call us today! We can help you get all of your employment expenses to which you are entitled!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenWho Can be Claimed as a Dependent?
Eligible dependents are normally your closest relatives. As much as we love to care for our loved ones, it can be expensive, so it’s nice to know that there are a number of credits and deductions that you can claim for your qualifying dependants in order to help you out.
When thinking of who qualifies as a dependant, people usually think of children, but other relatives can also qualify! In general, if a person lives with you and relies on you for either physical or financial support you may be able to claim them as a dependant for income tax purposes.
Who is an Eligible Dependent?
Whoever qualifies as a dependant will vary based on the credit or deduction that you wish to claim. Different people can qualify as dependants, and someone who qualifies as a dependant for one credit may not always qualify as a dependant for another credit, so you need to know the rules.
The most common types of dependants are:
- Children and grandchildren (either biological, adopted or stepchildren);
- Parents and grandparents;
- Brothers or sisters (including brothers-in-law and sisters-in-law); and
- Nieces, nephews, aunts or uncles.
How Does Claiming an Eligible Dependent Work?
If you claim a qualifying dependant on your tax return, you will have access to tax credits and deductions that can reduce what you owe to the Canada Revenue Agency. Different credits are based on different things, some are based on the age of the dependant or their relationship with you, while some are based on the dependant’s health or even income level. That is why it is important to know all the ways that you can claim a dependant, and to make sure that you are doing it correctly.
Eligible Dependent Credit
This credit is designed for single parents who are not claiming spousal/ common-law partner credits and are responsible for the financial care of a relative. Single or separated parents who are not supported by or living with the other parent of the child may also claim this credit. It is important to know the rules for when you can and when you cannot claim this credit.
To claim this credit, the dependant must live in your home and you must maintain this home yourself. For example, if you have a dependant but you live in a home maintained by your parents you cannot claim this credit. You also cannot claim this credit for someone who is merely visiting you. Only one person per household is permitted to take this credit, regardless of the number of dependants living in the house. If you and your partner share custody of the child, you must agree on who should take this credit. If you cannot agree, then neither of you are permitted to claim it.
Can Children Over 18 Still be Claimed as Eligible Dependents?
Despite the reality that many parents continue to financially support their children after they turn 18, you are generally are not allowed to claim them as a dependant. However, there are still some ways you may be able to claim your children on your taxes. The following are helpful rules to remember to save some money on your next return:
- If your child was 17 at some point during the tax year, they are considered dependants and can be claimed for the entire year;
- Mental or Physical Impairment – if your child is unwell and older than 18, you’ll require a letter from a doctor describing their condition before you will be permitted to claim them as a dependant;
- If you’re a single parent and claiming the amount for an eligible dependant, you need to deduct the income that your child earned from the amount that you are claiming;
- Although most post-secondary students are over 18 and therefore cannot be claimed as dependants, it is important to know that they can transfer up to $5000 in tuition and education credits to you if they do not use all of them on their own tax return; and
- If your child is over 18 but you continue to pay for their medical expenses you may be able to claim these depending on your child’s net income.
The Canada Caregiver Amount
The Canada Caregiver Amount helps people that care for family members who are elderly or are impaired. You may qualify for this credit if you support a relative who Is over the age of 18 and who at some point during the year in question was dependant on you due to a physical or mental impairment.
So if you have people in your life that rely on you for support, make sure that you know if they qualify as a dependant for your taxes. If you want help with that, contact our firm for a free consultation so that we can help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenWhat is a T2125 Statement of Business or Professional Activities?
A T2125 form is a schedule that goes along with a tax return, and it lists income, and expenses where taxpayers operate certain types of businesses. The Canada Revenue Agency (CRA) requires all resident taxpayers who generate business income or losses in a given calendar year to complete and submit a separate T2125 for each respective source of business income. The T2125 form is a filing requirement for many Canadians each year—whether they know it or not!
What is a T2125 Statement of Business or Professional Activities?
The T2125 form is a versatile reporting tool that allows taxpayers to disclose many facets of their enterprise to the CRA including, but not limited to their business income, their purported capital cost allowances, and elections with respect to losses and work in-progress.
Who Needs to File a T2125 Form?
Anyone who has business income of any kind is required to fill out a T2125. This includes sole proprietors, members of a partnership, and even unincorporated individuals who have non-registered business income.
Even someone who partakes in an adventure or concern in the nature of trade must complete a Form T2125. For example, if a taxpayer starts making jewellery and selling it casually, that taxpayer must file a T2125 to record and report the income earned from “business”, even though the “business” may be somewhat disorganized and an inconsistent source of income. As another example, if you are an artist such as a painter, the non-registered income should be recorded and filed on a Form T2125.
Taxpayers who did not earn any Canadian income as a part of their business income still have to record and report their foreign income on their Form T2125. This income may subsequently be eligible for foreign tax credits.
Even if you did not accept financial consideration in exchange for the goods or services that you rendered, the value of what you received in return for your goods or services must be recorded on the T2125.
What if I have Different Sources of Income?
For each source of business income earned in a given taxation year, the taxpayer must fill out a separate T2125 form. Even if you operate in the same field or have the same type of revenue, if there are different business entities earning the income, there must be a separate Form T2125 filled out for each.
Why does the CRA require a T2125 Form?
The CRA primarily references T2125s when assessing the aggregate value of business income earned by the taxpayer in a given taxation year and the available losses for carry-forward or carry-back. The CRA also uses these forms to discern the allowable capital cost deductions for capital outlays incurred to produce income for the taxpayer’s taxation year.
Many businesses incur expenses that do not fall under the “Current Expense” category, and consequently cannot be deducted from the income of the taxpayer. Capital cost deductions are not just for businesses, many taxpayers who generate income from other sources, such as rental properties, may also be eligible for capital cost deductions in a given year. These taxpayers would have to record this information on their Form T2125.
If have questions about the T2125 form, if the CRA doesn’t agree with your income / expenses, or if you are being audited for failing to complete the form, call us today, we can help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenAre Maternity Leave Payments Taxable?
Maternity and Parental benefits are a form of Employment Insurance (EI) which provide financial assistance to people who are away from work because they are pregnant, have recently given birth, or because they are caring for their newborn or newly adopted child.
Maternity benefits are only available to those who are away from work because they are pregnant or recently gave birth. Qualifying individuals can claim a maximum of 15 weeks of maternity benefits. The benefits can start up to eight weeks prior to due date and receivable up to 17 weeks after birth. The current benefit rate is 55% up to $562.00 per week or maximum yearly income of $53,100.00 as of January 2019. Therefore, an eligible taxpayer who receives an annual salary of $100,000.00 will receive the same maximum payment every two weeks of an eligible taxpayer who receives an annual salary of $65,000.00.
Parental benefits are available to people who are away from work because they are caring for a newborn or newly adopted child. The individual can receive up to 35 weeks of benefits. The person receiving maternity benefits may also be allowed parental benefits. For instance, if a mother has claimed the maximum 25 weeks of maternity benefits, she can also claim an additional 35 weeks for the care of her newborn.
EI benefits are taxable and these federal, provincial or territorial taxes are automatically deducted from your benefits. A T4E slip is issued to individuals who have received maternity or paternal befits during the past tax year, detailing benefits received, and taxes paid. The amounts of benefits paid on box 14 of the T4E slip can be declared on line 119 of your Income Tax and Benefit return. The amount of tax paid on benefits on box 22 can be added to line 437 of your tax return, in which the amount lowers your taxes due.
These employment benefits are available to taxpayers who have insurable employment. If the taxpayer is employed, the employer will deduct EI premiums from the taxpayer’s wages or salary. For self-employed taxpayers who qualify, EI registration is required to apply for these benefits. Furthermore residents of Quebec must apply to the Quebec Parental Insurance Plan (QPIP) in lieu of maternity and parental benefits available through Employment Insurance.
Applying for Maternal and Paternal Benefits
To maximize payments, eligible taxpayers can apply for maternal benefits either before birth or as soon as possible to the date of birth, since maternity benefits must end 17 weeks after the week of birth. Following this time, parental benefits may begin.
As of March 17, 2019, eligible taxpayers can receive extra weeks of parental benefits through the new Parental Sharing Benefit. Parents can split their leave for up to 40 weeks with neither parent taking more than 35 weeks or 69 weeks with neither parent taking more than 61 weeks, for the respective standard or extended options.
If you have questions or need help with any benefits, call us today!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenCanada Tax Return Deadlines for 2019
In Canada, personal tax returns for employees must be filed on or before April 30. Business tax returns must be filed on or before June 15 if a taxpayer, taxpayer’s spouse, or taxpayer’s common-law partner carries on a business. It is important to note that all personal tax and business tax balances owing from the previous tax year must be paid on or before April 30.
When a due date falls on a Saturday, Sunday, or public holiday recognized by the CRA, tax returns are filed on time if received or postmarked on the next business day. CRA-recognized statutory holidays are listed here.
Failing to tax file returns on time may result in delayed or stopped provincial/territorial and/or federal GST/HST credits, childcare benefit payments, old age security benefit payments, and/or late-filing penalties.
Estate Taxes and Deadline
If a taxpayer is the legal representative (the executor, administrator, or liquidator) of an estate for a taxpayer who died in the tax year in question, the taxpayer may have to file a tax return for the deceased for that tax year. If there are no documents assigning the taxpayer as the deceased’s legal representative, the taxpayer may request to be the representative by completing an Affidavit form for intestate situations. For more information, see T4011, Preparing Returns for Deceased Persons and Information Sheet RC4111, Canada Revenue Agency – What to Do Following a Death.
Tax Deadline – Where to get information?
Taxpayers may retrieve the guides, schedules, and forms required to file their tax returns here. Non-residents and deemed residents of Canada may retrieve the same here. This documentation is also available in formats accessible to those with visual impairments. For information about these formats and accessibility, see About multiple formats. Taxpayers may also complete an online order form to receive printed copies of the Income Tax Package and any other forms and publications. Taxpayers filing tax returns on paper should receive their Income Tax Packages in the mail. A limited quantity of Tax Packages will be available in both official languages at Canada Post, Service Canada, and most Caisse populaire Desjardins outlets starting in February. Immigrants, emigrants, and non-resident Canadians may consult Individuals – Leaving or entering Canada and non-residents for assistance in completing their tax returns.
Tax return preparation may require reference to still other guides, schedules, and forms. See Other guides, schedules and forms you may need to complete your income tax and benefit return for assistance.
Tax Return Deadline – Payments and Interest
Interest on balances owing for previous tax years compounds daily from the day following the April 30 deadline. Balances owing include those resulting from CRA reassessments. Amounts owing from previous years will continue to compound daily interest. Any payments towards balances owing will first apply to any amounts owing from previous years. Taxpayers are charged interest on any penalties assigned for late filing.
The rate of interest changes every three months. The late-filing penalty for 2018 is 5% of the balance owing plus 1% of the balance owing for each full month after which the balance remains unpaid. Interest may compound for a maximum of 12 months. Taxpayers charged a late-filing penalty for 2015, 2016, or 2017, may be liable to pay a late-filing penalty of 10% of any balance owing for 2018 plus 2% of this balance owing for each full month the tax return is late. Interest may compound for a maximum of 20 months.
The CRA retains legislative discretion to cancel or waive penalties or interest when taxpayers are unable to meet their tax obligations due to circumstances beyond their control. Taxpayers are only eligible for penalty or interest cancellation or waiver if they apply for taxpayer relief. The CRA considers applications only for tax years or fiscal periods ending in any of the 10 calendar years before the year in which the request is made. For example, a request made in 2019 must relate to a penalty for a tax year or fiscal period ending in 2009 or later.
If you have any questions about how to fill out Form RC4288, Request for Taxpayer Relief – Cancel or Waive Penalties or Interest, how to apply for taxpayer relief, or how to file your tax returns up to date, call us today! We can help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenWhat is a T1135 Tax Form: Foreign Income Verification
A T1135 Tax Form: Foreign Income Verification Statement reports all required foreign property owned by a Canadian resident taxpayer. If a taxpayer in Canada owns specified foreign property with a total cost of more than $100,000, they must fill out Form T1135, the Foreign Income Verification Statement in addition to their annual income tax return.
Presently, the T1135 Form has been redesigned to have the following two-tier information reporting structure for specific foreign property:
- Part A – Simplified Reporting method
- Part B – Detailed Reporting method
T1135: Do I Fill Out the Simplified or Detailed Reporting Method?
Taxpayers can fill out the Simplified Reporting method if they own specified foreign property which collectively costs $100,000, but less than $250,000 at any time of the year. Alternatively, if the foreign specified property is valued at more than $250,000, then the taxpayer must fill out the Detailed Reporting Method.
The distinguishing factor between the two forms is that the Simplified Reporting method allows the taxpayer to report the gross income from all specified foreign property they held during the year. For the Detailed Reporting Method, the taxpayer must provide the gross income from each type of foreign property. In other words, as the name says, the Detailed Reporting Method requires the taxpayer to give a more detailed response regarding the quantum and type of specified foreign property held. Categories in the Detailed Reporting method include:
- Funds held outside of Canada;
- Shares of non-resident corporations;
- Indebtedness owed by non-resident;
- Interests in non-resident trusts;
- Real property outside Canada;
- Other property outside Canada; and
- Property held in an account with a Canadian registered securities dealer or a Canadian trust company.
T1135: What is Specified Foreign Property?
When the term “foreign property” is used, rental property owned outside of Canada immediately comes to mind. However, the categories in the Foreign Reporting Method show that specified foreign property encapsulates a much broader term. For instance, a common mistake made by taxpayers is failing to realize that foreign stocks held in Canadian registered securities dealers must be reported. As such, if you invest in classic blue-chip stocks such as Apple, Disney, Microsoft or any other companies based in American stock exchanges, they must be reported (Over $100,000).
Regarding “specified foreign property” the term also includes but are not limited to the following:
- Foreign bank account balances;
- Shares of Canadian corporations on deposit with a foreign broker;
- Shares of foreign corporations;
- Foreign land and buildings;
- Interests in foreign mutual funds;
- Debts owed by non-residents and
- Interests or rights in specified foreign property.
T1135 Penalties
Failure to file T1135 forms can result in harsh penalties for the taxpayer. Specifically, taxpayers are charged a penalty of $25 per day for up to 100 days for failing to file the T1135 Form. The minimum penalty for failure to file is $100 and the maximum is capped at $2,500 per year. So if you have missed multiple years the penalty and interest amounts can be steep!
What if I have not Filed my T1135 Form?
Taxpayers who have not filed the T1135 form or otherwise have provided inadequate information can file a Voluntary Disclosure. The CRA encourages taxpayers who have provided incomplete information, omitted information, or who have not filled Form T1135 to come forward and correct their tax affairs through the program.
It is important to note that the period within which the CRA can reassess a taxpayer’s tax return is extended by three years if both of the following conditions have been satisfied:
- The taxpayer has failed to report income form a specified foreign property on their income tax return; and
- Form T1135 was not filed, was not filed on time, or was filed inaccurately.
Taxes involving foreign property always involve an added layer of complexity. If you have any questions about how to file a T1135 form or apply for a voluntary disclosure, call us today! We can help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenWhat is a T2202A Tuition and Enrolment Certificate?
A T2202A Tuition and Enrolment Certificate is a document that allows taxpayers to claim tax credits for amounts paid to certain schools, colleges, universities, etc.
During tax season, one of the most important inclusions for Canadian post-secondary students when filing their income tax returns is the T2202A. Issued by the post-secondary institution to the student, the T2202A provides the student and Canada Revenue Agency with a detailed snapshot of the student’s financial expenditure at the university for the taxation year in question and is pivotal in determining the student’s present and future access to tuition tax credits.
What Expenses are Covered by the T2202A?
A T2202A is a certificate issued to students of Canadian universities that provides the Canada Revenue Agency with salient information about the student’s post-secondary expenses. Among other things, the T2202A provides proof as to the enrolment of the student, the number of months spent at the post-secondary institution by the student, and the amount of eligible tuition money spent. The university also indicates whether the student was enrolled for full-time or part-time study. The T2202A may also include any charitable donations that the student contributed through the institution during the taxation year.
Who Gets a T2202A
T2202A forms are issued to all students who have expended in excess of $100 on post-secondary studies during a taxation year. Only amounts paid to institutions that are tax deductible will be listed on the T2202A. Fees such as health insurance, residence fees, meal plans, and books may not be eligible for the tuition credit and consequently, not listed by the post-secondary institution on the T2202A.
How does a Student File a T2202A?
The T2202A is used in conjunction with “Schedule 11” forms that indicate the maximum amounts of federal tuition, education and textbook amounts that can be transferred to a designated individual and that can be carried forward to a future year.
The T2202A is used in conjunction with the “Schedule (S11)” for students who lived outside the province of Quebec on December 31st of the taxation year to calculate the provincial or territorial amount that can be claimed and the maximum amount that can be transferred to a designated individual with respect to the personal education amounts incurred by the student during the taxation year.
Students living in Québec on December 31st receive “RL-8: Amount for post-secondary studies” slips that allow for the students to transfer tuition expenditures to their parents and also allow for the student to apply for the province of Québec’s tuition tax credit.
Is the T2202A Used to Transfer Tuition Credits?
Despite the fact that parents are eligible to have the tuition amounts apply as a tuition credit on their returns, the T2202A must be filed by the student. The student must complete and sign the transfer section of their T2202A certificate before giving it to their parent, grandparent or spouse. The recipient fills in the credit amount on line 324 their Schedule 1 in order to apply the credit to their income.
Tuition Tax Credits and T2202A
As of January 1st, 2017, Canadian students were no longer eligible for education and textbook tax credits, though still eligible for tuition tax credits. Any unused education and textbook tax credits incurred on or before December 31st, 2016 are still eligible for the education and textbook tax credit. For more detailed information on the new tuition tax credit deductions available to Canadian post-secondary students, click here.
If your tuition claims have been denied by the CRA, or you have questions about filing your taxes with these claims, call us today!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenWhat is a T5018 Used for?
A T5018 is a T-Slip that is provided to subcontractors in the construction industry detailing how much they have been paid. It is similar to a T4 Slip that reports the amount of employment income that a taxpayer has received.
Individuals, partnerships, trusts, and corporations who receive their primary source of business income from construction activities are required to report amounts paid or credited to subcontractors for construction services. These amounts are to be reported on a Contract Payment Information Return which consists of either a T5018 return, or a T4A-NR summary and slip depending on the residency of the sub-contractor.
If the sub-contractor is a resident of Canada, the taxpayer is required to complete and submit a T5018 return, consisting of a T5018 summary and slip. Payments over $500 for services must have a T5018 slip filed but if amounts are under $500, a T5018 slip is not required. Goods-only payments are not required to be reported. If the payments to the sub-contractor are for mixed goods and service payments, where the total annual service component is $500 or more, the amount paid is required to be reported under a T5018 slip and summary. To report amounts paid or credited to non-resident sub-contractors, taxpayers do not submit a T5018 return but submit a T4A-NR return instead. The requirement to report sub-contractor payments continues to apply to Canadian resident taxpayers who are paying for construction services performed outside of Canada.
A T5018 return assists the Canada Revenue Agency (CRA) in reconciling reported or non-reported income from the subcontractor, and identifying subcontractors who are required to register for and remit GST/HST. The requirement to report amounts paid through a T5018 return allows the CRA to reconcile cash and barter transactions for construction activities related to the erection, excavation, installation, alteration, modification, repair, improvement, demolition, destruction, dismantling, or removal of any part of a building, structure, surface or sub-surface construction.
A T5018 slip and summary may be provided to the sub-contractor by the contractor, and includes information on the reporting period, the name of the subcontractor, the subcontractor’s CRA business or social insurance number, the total paid to each subcontract and the subcontractor’s address. Payments for employee salaries are not reported on T5018 return, as these amounts were included on the T4 slip. However, if the employee also performs construction services as a subcontractor, these subcontracting amounts must be reported on a T5018 return.
T5018 – Business Income
Businesses in which more than 50% of its business income comes from construction activities, are required to report any payments made to subcontractors on a T5018 Statement of Contract Payments. These payments can be reported on a calendar-year or fiscal-year basis, due six months after the end of the reporting period. For business in which less than 50% of its business income comes from construction activities, reporting under the T5018 Statement of Contract Payments made to subcontractors in this case may not require reporting but may be voluntarily reported and accepted by the CRA.
T5018 – Contractors and Sub-Contractors
Each T5018 return must be completed and filed for each subcontractor. Contractors only report on those subcontractors they deal with directly. In the event of sub-trades, the subcontractor would be responsible for reporting amounts paid to the sub-trade, even if the contractor’s cheque is in the name of the sub-trade. In this event, the contractor would report the payment to the sub-trade to be included as payment to the subcontractor. Therefore, the contractor and sub-contractor report for the applicable amounts paid to the party with whom they hold their respective contracts.
T5018 – Possible Penalties
A failure to complete and file a T5018 return will result in penalties and interest depending on the quantity of slips outstanding or filed late and the number of days filed late. Interest on late filing penalties continue to accrue until payment is provided in full. The accuracy of reported information may be reviewed through the CRA’s usual course of audits. Tax evasion schemes involving the avoidance of tax through underground activities, face criminal prosecution, with finds of up to 200% of the tax evaded.
If you have not completed your T5018 slips, or if you have not reported all of the income you earned in any year, we can help! Call us today to learn more!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenWhat is Considered Passive Income in Canada
Passive income is income that is derived from the ownership of capital property or assets that generate income without excessive effort on the part of the stakeholder. Most of the time, passive income is considered taxable income in Canada. Sources of income where you actively have to work is considered “active business income”.
Passive Income Canada – Investments
One of the most common methods of earning passive income is through the ownership of financial investments. Low-risk investments like Guaranteed Investment Certificates (GICs) and personal savings accounts are typically low-yield sources of passive income where the owner earns small amounts of interest proportionate to the amount of money invested. Moderate-risk investments like dividends from shares of a corporation are also passive income. All passive income earned through investments that are part of a non-registered investment plan or portfolio are considered to be taxable income in Canada.
Registered plans like Tax-Free Savings Accounts (TFSAs) or Registered Retirement Savings Plans (RRSPs) may fully or temporarily shield investment earnings from inclusion in the income of the Canadian taxpayer. TFSAs allow investors to accrue tax-free earnings, so long as the taxpayer’s TFSA contribution limit is not exceeded. By contrast, RRSPs earn taxable passive income while allowing the taxpayer’s annual RRSP contributions to be fully deducted from the taxpayer’s taxable income for the tax year in which the contribution was made. The contributions and accumulated interest are then taxed at the marginal rate of the taxpayer upon their withdrawal.
Passive Income Canada – Rental Properties
Income earned through the leasing of a rental property is another prevalent method of generating passive income. While rental income is considered taxable income in Canada, passive income from a rental property allows taxpayers to deduct many expenses associated with the earning of the rental income. These deductions include most repairs, most energy costs (if the landlord is the payor), and even the interest portion of the taxpayer’s mortgage payment.
It is possible for rental income to be considered active business, but the vast majority of the time it is passive. Please give us a call if you would like to know more.
Passive Income Canada – Online
Online platforms have become an increasingly popular method of earning passive income in Canada. Earning money online can be done independently through one’s own website or through partnership with affiliates.
For example, a YouTube creator may generate passive income through the profit-sharing of the advertising revenue generated from the video. This is typically proportionate to the viewership garnered by the video. He or she may also generate income by establishing independent affiliation with other companies. If, for example, the YouTube creator is a product reviewer and hyperlinks products from their affiliates in the description boxes below their videos, any resulting sales from viewers who clicked the product hyperlinks result in royalties for the YouTube creator. A creator may still be earning significant amounts passive income from videos years after the initial release of their videos, as people continuing to view the videos and purchase the products will continue to generate income for the creator.
This is just one example of how web-based passive income can supplement taxpayer income or, in some cases, become the primary source of a taxpayer’s income.
Passive Income Canada – Corporations
It is likely that an income source’s characterization as either “active” or “passive” for income tax purposes is most important in the corporate context. Many corporations own shares in other corporations simply as a means to generate passive income. This presents issues for tax policymakers who want to incentivize economic growth through tax incentives for small businesses, but who are also concerned with issues of neutrality and fairness.
Canadian-Controlled Private Corporations (CCPCs), are able to access the Small Business Deduction on “active business income” (up to a maximum of $500,000 annually and pursuant to other eligibility criteria). However, the CRA does not allow CCPCs to apply the Small Business Deduction to reduce their income tax payable on income earned through investments, as investment income does not qualify as “active business income”. By not allowing passive investment income to be deducted under the Small Business Deduction, the Canadian government dissuades individuals who have controlling interests in corporations from transposing their personal investment portfolios from their personal asset pool into their corporation’s in order to garner the Small Business Deduction and pay less tax on their investment earnings.
With the exception of inter-corporate dividends, passive income earned by CCPCs (or any corporation in Canada) is ineligible for deductions and consequently fully taxable at the corporation’s combined provincial and federal tax rate. This is frequently higher than the marginal tax rate payable by the individual which reduces the desirability of incorporating one’s investment portfolio.
Now, CCPCs also have to be careful not to trigger potential consequences that may stem from the new rules regarding passive income and the small business deduction limit.
The difference between passive income, and active income can have a huge difference in the amount of taxes you end up paying. If you want to know how to turn your passive income into active income, call us today!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.