This blog will save small business owners thousands of dollars in accounting and legal fees.
I intend to answer all your questions about the process of starting a business, keeping the books, and filing taxes at the end of the year for a small business. And I plan on doing it without anyone’s eyes glossing over. I promise. I’ll also be talking about the latest personal tax credits and how to claim them.
If you have a business in another country, you will also find lots of useful information here. My Free Downloads of Excel spreadsheets for tracking Revenue and Expenses will work for any country. However, the focus is on Canadian start-ups and the Canadian tax system. My goal is to help people start their own small business by teaching them what they need to know to get started and keep track of their revenue and expenses in a manner acceptable to CRA (Canada Revenue Agency) without wasting money on accountants, lawyers, or expensive accounting software.
If you’re starting a business with a limited budget, this blog is for you!
“I have a trading account and my bank sent me a T5008 slip and a trading summary for the year. Do I have to enter both of these on my tax return or just one? If so, which one?”
Ack! Whatever you do, do not enter both! You’ll end up paying double the tax. Now that I have your attention…
So what is a T5008 slip anyway?
You mean besides a slip I absolutely hate? I know, hate is a strong word. I wish I had the vocabulary to come up with something stronger.
You see, the T5008 is not sent out by your broker or bank to “assist you in preparing your taxes,” despite what the letter says that accompanies the slip. The Canada Revenue Agency requires your broker to prepare and send these out to you whenever certain types of trades/transactions occur. And, of course, your broker must send a copy of the T5008 slip to the CRA. So, the T5008 slip is really just a sneaky way for the CRA to keep an eye on people selling stocks.
What information is on the T5008?
The selling price of the security is always on the slip. The CRA knows exactly how much you received in proceeds for dumping the latest dog. As for the cost of the security (or ACB, adjusted cost base in tax talk) sometimes it’s on the slip, sometimes it’s not. Occasionally it may even be accurate. Usually it’s not.
So…if the cost is not correct on the slip, how do I calculate my taxable gain on my tax return?
I know! Right?? This is further complicated by the fact that not all types of trades need to be recorded on T5008′s, so often they are not even an accurate portrayal of everything a taxpayer has sold in a given year. The taxpayer is required by law to calculate accurate ACB’s of any stocks bought and sold throughout the taxation year. Relying only on the flimsy T5008′s is a recipe for disaster.
So what do you use the T5008 for then?
I put my coffee cup on it. Works great. Then I use the trading summary to enter all my trades for the year on Schedule 3. Just remember to use a weighted average when calculating the ACB’s of any stocks sold in the year. I’ll talk more about that in another post since it deserves its own.
For now, just remember what to use the T5008 for.
My receipts fade and become unreadable after 6 months! Can I scan and keep electronic copies instead?
Yep! You can keep digital copies if you prefer. You just have to follow these rules (you knew there’d be rules, right?):
Check out Chapter 2: Keeping Electronic Records and specifically:
Requirements for an acceptable imaging program
You must keep the original version of records. You may, however, produce an electronic image of a paper document, which then can be accepted as the original record provided you follow certain procedures. Imaging and microfilm (including microfiche) reproductions of books of original entry and source documents have to be produced, controlled, and maintained according to the latest national standard of Canada. For more information, see Information Circular IC78-10R5, Books and Records Retention/Destruction, and GST/HST Memorandum 15.1, General Requirements for Books and Records. Also, refer to the Canadian General Standards Board (CGSB) publication, CAN/CGSB 72.11, Microfilm and Electronic Images as Documentary Evidence, and its latest amendment.
Businesses using commercial software for smaller scale electronic scanning of their paper records and supporting documents should ensure that their scanned records meet the rules and guidelines set out in the latest national standard of Canada.
You can destroy paper books of account and supporting documents if they have been imaged in accordance with the above CGSB publication. These images become the permanent records. If you have any doubt, obtain legal advice first.
If businesses cannot meet the Canadian General Standards, they must keep their original records.
The standards are available to view at selected libraries in Canada. The standards are also available for purchase from the CGSB:
Canadian General Standards Board
Gatineau QC K1A 1G6
Place du Portage
11 Laurier Street
Phase 3, 6B1
By Internet: e-Store
By telephone, fax, or email:
National Capital Region: 819-956-0425 Rest of Canada: 1-800-665-2472 Fax: 819-956-5740
This was a good question I got from someone recently that I thought others might find useful.
“I ran a small (teeny, tiny) gift basket business (from home). I’m reporting 2012 as my last year in business. What happens with the remaining inventory tax-wise? Any tax ramifications that I should know about?”
You can take care of this in the Cost of Goods sold section (on your T2125 form). Enter your opening inventory (Line 8300) but leave the closing inventory line blank (Line 8500) . That way you get the deduction for the entire amount of your remaining inventory, which is only fair because you had to pay for that inventory in the past.
Also, make sure you zero out any Capital Cost Allowance (CCA) items (computers, furniture, etc) by “disposing” of them for an amount equal to the “UCC at the end of the year”. This makes your “Undepreciated Capital Cost” zero. To do this, go to “Area D” in the capital cost section of the T2125. If you don’t do this and you carry forward your return into next year’s tax software, you may get a CCA deduction showing up on your return somewhere.
Oh, and be sure to check that box “yes” to the question: “Is this your last year of business?”.
Next year, when you do your tax return, just have a quick look to make sure nothing is coming through on Line 135-139 on your tax return. If there is something there, follow it back to the T2125 and zap it! Those old businesses sometimes have a way of hanging around and haunting their owners for years to come.
And the winner is … TurboTax! by Intuit.
Okay, let me get this out of the way up front. I don’t get anything for recommending TurboTax. Absolutely nothing–no affiliate pennies***, no karma points in Accountant heaven, no kickass adding machine for sending you all over to the Intuit website. (But if you’re listening, Intuit Man, you do owe me a favour.)
In fact I don’t even really like TurboTax as a tax software that much. But, they are consistent, relatively easy to use, and most importantly, since they are the big kid on the block, they will be around for years to come, unlike some start-ups. I’m looking at you TaxWiz – anybody remember those guys? They were around several years ago and were a few bucks cheaper than TurboTax (who was still going by the name of QuickTax back then, I believe). Anyway, once TaxWiz had acquired enough market share to make the Intuit mother ship angry, Intuit bought them out. Which, I imagine, was TaxWiz’s hope all along.
TurboTax has an online version and CD/Download version where you can store all your data on your own computer. Call me crazy, but I prefer the latter. Although, if you qualify to use one of their free online editions, you may want to check those out. It’s tough to beat free:
Free Online Edition (conditions apply)
Free Student Edition (conditions apply)
Intuit Turbotax Standard Tax Software Tax Year 2012 (I use this one)
So, which one should you use? Well, I use the Standard edition. I have to deal with a rental property, a few stock sales, and a couple of small (micro?) businesses.
What? You should be using the Home & Business edition!
If you just read the product descriptions, you would think so, wouldn’t you? But the truth is the Standard edition has all the tax forms necessary for rental properties, stock sales, and businesses included with it. Basically, the Premier and Home & Business editions have extra “interview questions” included with them. That is how they justify the higher prices. But if you prepare your return just using the tax forms themselves, you don’t need those interview questions. In fact, I find them quite annoying.
So, why not go really cheap and use the “Basic” edition?
Because the Basic edition does not allow you to carryover last year’s information into this year’s tax return. You would have to re-enter everything in again, including your address info and all your carry-forward amounts (RRSP carryforwards, capital losses, etc.). A real pain if you have a memory like me.
So there you have it. If I wrote ad copy for Intuit it would go something like this:
“TurboTax Standard Edition–for cheap people with bad memories.”
***Update: Okay, I cracked (or rather figured out how to do it) and signed up for an Amazon affiliate account. So if you do buy anything from Amazon from one of the links above I will get affiliate pennies! If you prefer to get the Download Edition you can get it directly from the Intuit website: Basic, Standard, Premier, Home & Business.
You know what that means to me? It means the Bank of Canada has its annual average exchange rate available for 2012….woo hoo!
And here they are (in case you care).
Why should I care?
Because they can save you time, and occasionally, money! When you have to report foreign income or expenses on your Canadian tax return, you have 2 options:
1. Report the actual CDN$ amount received/spent after conversion has taken place
2. Use the Bank of Canada’s average annual conversion rate to estimate the income or expense.
Let’s say Uncle Bob is hired in 2012 by an American hunter to hunt moose. They get nothing, because Uncle Bob doesn’t know what he is doing, but the hunter still gives Bob US$100 because of his bubbly personality. Ecstatic, Uncle Bob takes his US$100 bill to the nearest A&W and asks them to convert it before he buys lunch. Knowing this could mean the difference between a Mama Burger sale and a Grandpa Burger, and because they don’t want to irk such a good customer, they give Bob CDN$110. Nice.
So what does Bob report for income on his 2012 Canadian tax return?
If you say, “Nothin’, cuz it was cash,” I’m going to pretend I didn’t hear that. As I mentioned above, Bob has 2 options:
1. CDN$110 (the amount he actually received)
2. Using the link above I see that the Bank of Canada average annual exchange rate is 0.99958008. I MULTIPLY this by the amount of foreign currency Bob received:
0.99958008 X US$100 = CDN$99.96
When it comes to income on your tax return, small is good! So Uncle Bob would be better off with option 2.
CRA is perfectly willing to accept reasonable estimations when it comes to foreign currency, but try not to get too creative.
Do you work in the forestry industry? Did you buy a new chainsaw or trimmer? You can deduct the cost of these (and their operating expenses) on your tax return on Line 229. To do so, you must meet these requirements:
- You work in forestry operations.
- You use a power saw to earn your employment income.
- You had to pay for the power saw under your contract of employment and your employer will not be reimbursing you.
You should also get a T-2200 form signed by your employer. You do not have to file this with your return but you should keep one at home in case CRA decides to ask you for it.
I got a good questions from a server recently and thought I’d share the answer with everyone, since I’m sure there are lots of you out there wondering the same thing.
“Hi! Came across your site randomly and really appreciate what you do! I am a server and I’ve always wanted to know, but didn’t know how to find out about what servers can write off at the end of the year as expenses. I’ve heard that we can write off clothing, toiletries, haircuts, etc, whatever we spend on our appearance as it is part of the job.”
Well, I’m afraid I have a whole lot of bad news and only $160 worth of good.
Servers are in most cases employees, and employees are usually not allowed to write off any of these things. If they could write off things that “enhance their appearance” than any office worker could also argue that, because they have to wear suits to work, they should be allowed to write off the cost of their clothing. This is not the case. Employees are expected to pay their own costs for clothing and uniforms. In other words, looking good is not tax deductible.
To offset these types of costs, all employees are allowed to claim the “Canada Employment Amount“, which is a non-refundable tax credit. In 2011 this was 15% of $1,065 (which equals about $160 in your pocket). Strictly self-employed people cannot claim this amount.
Special exceptions for other types of employees:
If you are a commissioned salesperson, or your employer requires you to pay certain job-related expenses AND they have given you a form T-2200 specifying what these expenses are, you may be entitled to claim some deductions on your tax return under Form T777: Statement of Employment Expenses.
However, I can’t see this happening much with an employee who is a server. And did I say I only had $160 worth of good news? Sorry, I meant $159.75.
I had someone email me recently with a good question. Thought I’d share my answer.
“I am an interior designer and have my own business as a sole proprietor in BC. I am volunteering my time and some materials on a renovation project for a woman with disabilities. I am just wondering if there is any write off, and how to go about doing it?”
When you volunteer your time there is no write-off for that, because there is no actual “out-of-pocket expense”. What do I mean by “out-of-pocket expense”? I mean you didn’t actually pay out money for anything. If cash didn’t leave your hand (or bank account) there is no actual expense. When it comes to CRA’s view on allowable business expenses, your “time” is worthless.
However, the cost of any materials used, on the other hand, is eligible because they cost you money to purchase. They pass the “Out-of-Pocket Test.” (I don’t really know if there is any such test, but there should be!)
There are 2 possible ways to write off the materials. Basically, depending on how much they are worth. If it is a relatively small purchase (say anything under a couple hundred dollars), just put it under “Supplies Expense” on your T2125 and be done with it. If you have COGS (Cost of Goods Sold), and you make purchases over the year and are left with an ending inventory at the end of the year, you can lump it into your “Purchases” account if you like.
Did I say only 2 ways? Yeah, I always say that when I actually mean 3. Putting the cost of materials under “Advertising Expenses” is another option if that’s how you view the activity.
There’s a lot of leeway here. Just don’t try saying it took you 5 hours, and since your hourly rate is $1000, you’re going to write off $5000.
That kind of creative accounting could get you volunteering your time to make license plates.
Students, seniors, first-time filers, and people with a total family income under $20,000 can use UFile FREE!
FREE. Ahhh…that’s a beautiful word, isn’t it? If you fit into one of these groups of taxpayers go here and read more about how you can file your tax return online for free.
So, no excuses. Get those taxes over and done with. Get that refund. Build up your RRSP contribution room. Apply for those GST refunds. Register with Elections Canada. And if you think you have a balance due, get them done anyway! Think of how much you’ll save on interest and penalties!
Sorry, that’s the best pep-talk I can come up with for filing your taxes.
Did I mention it’s free?