T4 and T5 Slip Deadline is February 28

With the February 28 deadline approaching, there could be some worries about getting these slips prepared on time. Depending on the size of your company, you should allow at least a couple of hours to complete these slips, including the summaries that must be submitted to CRA. If you have more than 10 employees or slips to prepare, you should consider getting someone else, such as Makes Cents, to prepare these for you.

The Canada Revenue Agency does have an extensive information page for employers on how to fill out and file all of the T4 information. There is quite the extensive amount of information, including all of the normal information as well as exemptions, deferred income, amending, and information on penalties and more. Go to their site now for more reading on this.

The T5 slip, for those of you who are unfamiliar with it, is the slip that is used for investment information. Most people will see one of these if they have open (non-RSP) investments that make money in the year, whether it’s interest income, dividends, or capital gains. What a lot of people, including some small business owners, are unaware of is that when a corporation pays dividends to its shareholders, this slip must be filled out, and the corporation must also file a T5 summary to CRA.

There are options for business owners on how to pay themselves. The easiest, for most people, is to take a salary, which requires monthly submission of personal tax with-holdings  However, there is also the option of dividends. Dividends are paid out from the corporation’s retained earnings – the amount of money left after corporate taxes are paid. If you choose this option for paying shareholders, it is required that the T5 information slip and summary be done before the February 28 deadline of the year they are paid in (for 2012, this deadline is February 28, 2013). The CRA has a webpage with more information about this here. There you can read all about the T5 slip, deemed dividends, and more. If these things are confusing for you, then you will need help from a professional. And that’s where we come in!

 

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Penny Being Eliminated in Canada!

Yup, it’s official. Our penny is now becoming a part of history. As of February 4, 2013 there are no more pennies being made in Canada. This has happened with other coins in the past. Yes, we used to have half pennies. But no-one alive would have used them, as they haven’t been around since 1858.

So what does elimination of the penny mean to business today?

Firstly, it only affect CASH transactions!
Everything that is done through debit, credit, or cheque is still to include the cents.

With cash transactions, as long as there are pennies, then they can still be used.

But they will soon be out of circulation. And to there is rounding that has to be done on cash transactions. All rounding is to be done after adding on GST. Here’s a rounding table for some examples:

Example of rounding for cash transactions:

Total Bill of
Sale Amount
Including
Taxes, Fees, etc.
Rounding Cash
Payment
$1.01 or $1.02 Round down $1.00
$1.03 or $1.04 Round up $1.05
$1.06 or $1.07 Round down $1.05
$1.08 or $1.09 Round up $1.10

 

GST is not affected by the rounding of cash transactions. This means that the net amount that is changed by the rounding of cash transactions will only affect the net income of a business. In theory it should even out to zero.

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Personal Vehicle Expenses for Small Business

Many small business owners are the only person in their business, or there is only one or two others. There are some specific rules that should be followed in order to make your life easier when using a personal vehicle and tracking those vehicle expenses.

  1. Always keep a log of km driven.
    • This log needs to have the start and end km as per the vehicle odometer,
    • the date of the trip, and
    • the purpose of the trip. This means that if it was personal, just write “personal”. If it’s for business, write why (i.e. “Picking up office supplies at Staples”).
  2. If you’re a sole proprietor (or partnership), keep all of the receipts associated with your vehicle. This includes maintenance, fuel, supplies (washer fluid, etc.), insurance, etc.
  3. If you’re company is incorporated you don’t need the receipts, but it won’t hurt to keep them in a separate (personal) file.
  4. Whenever possible, double your trips. This means if you can run a personal errand (pick up milk at store, for example) at the same time that you are delivering a business package or meeting a client, then you can write the whole trip as a business trip. This is to your advantage!
  5. If you are registered for GST, don’t forget to separate out the GST from the base expenses and claim your GST input tax credits.

ProprietorshipID-10021166 (and partnerships) use a percentage of the vehicle expenses each year to figure out how much the business expenses are. This is why there must be a km log and all of the receipts have to be kept (and added up). It’s the only way to accurately know what is business and what is personal. And the CRA can ask for this log in any audit, including a GST audit.

A corporation can claim (for 2012) $0.53 for the first 5000 km used in each driver/vehicle (it has been interpreted that if one driver is using two personal vehicles, the total is for the driver – this is something to be careful of). After the first 5000 km, the rate drops to $0.47 per km. Also note that this amount includes GST! This means that you can claim ITC’s for the GST portion of these km. Remember that while an expense reduces your taxable income by your tax rate, an ITC credit reduces the GST payable dollar-for-dollar, so they are more advantageous in that sense.

If you note the rules on this, a business can have higher vehicle expenses on a per km basis than if the costs are split. Since only corporations can pay for a personal vehicle on a per km basis, this is one of the advantages of incorporating.

Please note that these rules are for personal vehicles used for business! If an incorporated company owns a vehicle, there are different rules.

Questions? Contact us!

Dividends or Salary, Which is Best for the Business Owner?

It’s a tough question that is often asked of small business owners, “Which is a better way to pay myself, a salary or dividends?” And it’s a valid question, since there are pluses and minuses to each of these. A dividend paid from the retained earning, which is the profits left in the company after all expenses and taxes are paid. For more on this, see the Wikipedia entry, which does a pretty good job of explaining them for the layperson. A salary is something that most people are familiar with and is considered an expense to a corporation. If you are a sole proprietor, then this whole question is irrelivent, since you are the company and any money made after expenses is taxed as if it were earned income. But which is better for the small corporate owner?

The dividend comes from money that is already taxed. For 2012, in Alberta, that means that there has already been a total of 14% taxes paid to the federal and provincial governments. Because of this the dividends are taxed at a lower rate than a salary would be. For example, if your only income was dividends and you earned $60,000, then you would have $5,034 in taxes payable. It seems paltry on $60,000. But remember that there has already been $9,767 in taxes paid to get that $60,000 – the corporation paid it. Therefore the actual earnings were $69,767 and the total taxes are going to be $14,801. Seems confusing? Well, this brings the marginal take rate up to about 21% when all is said and done. That’s pretty good! But that’s about what you’d pay on a salary, excluding EI and CPP.

The other option is paying yourself a salary. Most who ask this question (at least my clients) own more than 10% of the shares of the company, so they aren’t eligible for EI. However, everyone must pay CPP. The CPP rate is 4.95%, after the exemption of $3500 (earnings), and up to a maximum of $2,306.70 in CPP payments for each of the corporation and the employee. This is a total of $4,613.40. This does give you the advantage of now having contributed to CPP and can, therefore, collect (claim) it later in life. And earned income is also eligible for RRSP contributions, which can reduce taxes payable. (Amounts contributed to an RRSP are taken directly out of earned income and are not taxable until withdrawn from the RRSP.) What it really comes down to is what your goals are with your business.

There are other issues, such as how your balance sheet and income statement will then look to outsiders (say if you’re trying to get a business loan). And how you can control how much you take from the business, using these strategies for tax deferrals (which allows better cash flow in the current year so taht you can build your business), and more. Yes, it does start to sound complicated! Of course that’s why you should have an accountant to help with these decisions. It’s all part of financial planning, and your goals need to be expressed in order to know the best route for you.