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What class does CRA want software and computers entered into?

How do I enter software and computers on my tax return in Canada?

Computers bought in February 2011 or later belong in Class 50. This class allows a 55% deduction each year. Operating software (such as Windows, etc.) is also included in this class. So if you buy a computer and pay extra for an operating system, just lump them together and put them in Class 50 together.

Software (that is not an operating system) belongs to Class 12, which is a 100% write-off. But not exactly. It is subject to the “half-year” rule which means you only get to write off half in the year that the asset is purchased. Just put it in Class 12 in TurboTax and let the software figure it out for you.

Speaking of TurboTax, does that go in Class 12?

Not in my little piece of the universe. It is only worth about $40 so don’t bother capitalizing it. Put it in Office Expenses and put it out of its misery. Doing so gives you a 100% deduction right now with none of that half-year stuff to worry about. See my post on Expenses vs. Capital Assets for more.

April 5, 2012 Posted by | Home office expenses, Running Your Business, tax | , , , , , , , , | 7 Comments

Can I deduct meals I buy for my employees?

Can I write off meals I buy for my employees?

To answer this question I’m going to send you over to THE TAX DETECTIVE blog to a post by Eileen Reppenhagen.

The general jist is you can deduct up to 6 sessions of meals/entertainment per year as long as all your employees are included.

But, as always, there are exceptions and different tax treatments depending on the situation. So read Eileen’s excellent post on the topic here before you start planning any parties.

March 26, 2012 Posted by | Running Your Business | , , | Leave a comment

What year should I carry my current year capital loss back to?

(Before or after reading this post you may want to refresh your memory with: What do I do with a capital loss?)

 

Here is a great question that I thought I’d pull out of the comments and make into a post. I’m sure many of you out there will find it useful:

My specific question is not how to facilitate the carryback loss (T1A), but rather which year going back is optimal to get the largest return?

Year -3 net income 50,000
Year -2 net income 80,000
Year -1 net income 100,000
This year (10,000) loss

Will I get more of a return for my loss if I apply it to Last year (Year-1) since it was my highest earning year?

At first glance it would seem to make sense to carry back his loss to the year that has the highest income (in this case Year 1: $100,000), but let’s look a little deeper to make sure. I’m going to walk you through my thought process here, which is usually a pretty murky bog, but I’ll try my best.

“Net Capital Losses” and “Capital Losses” are different animals.

1. What kind of loss are we dealing with?

“This year (10,000) loss”.

Is this a “capital loss” or a “net capital loss”? For a detailed description of how to calculate capital gains and losses go here. But generally, this should clear things up:

capital gain OR capital loss = proceeds – cost – other outlays

taxable capital gain OR net capital loss = (proceeds – cost – other outlays) x 50%

That 50% is the “capital gains inclusion rate” for the year in which the transaction took place. In other words, you only get taxed on 50% of capital gains, as opposed to 100% on employment income or interest income.

For this example, I’m going to assume that the above “$10,000 loss” is actually only a capital loss. So that would give us a net capital loss of $10,000 x 50% = $5,000 .

2. Did he have any “taxable capital gains” in the previous 3 years that he can write off this year’s “net capital loss” against?

Year – 3 net income 50,000
Year – 2 net income 80,000
Year – 1 net income 100,000

Unfortunately, the above only tells me what the person’s net income for the year was. What I really need to know is what were the person’s taxable capital gains (Line 127 on the tax return) for each of those years. Why? Because capital losses can only be applied against capital gains. This means you cannot decrease any other type of income (such as employment income) with a capital loss.

So, for the purposes of this example, let’s assume the following:

Year – 3 taxable income $50,000, of which $5,000 is a taxable capital gain (L127)
Year – 2 taxable income $80,000, of which $7,000 is a taxable capital gain (L127)
Year – 1 taxable income $100,000, of which $10,000 is a taxable capital gain (L127)

Using the above numbers, we see that he had enough gains that he could carry back his current year’s loss to any one of the preceding three years.

3. Find his tax brackets: Federal and Provincial

As we all know, we have federal taxes and provincial taxes here in Canada. And they change every year. Go here to find yours for this year or previous years: Income tax rates in Canada (tax brackets)

Federal tax brackets:

  • 15% on the first $41,544 of taxable income, +
  • 22% on the next $41,544 of taxable income (on the portion of taxable income between $41,544 and $83,088), +
  • 26% on the next $45,712 of taxable income (on the portion of taxable income between $83,088 and $128,800), +
  • 29% of taxable income over $128,800

BC enjoys 4 tax brackets:

  • 5.06% on the first $36,146 of taxable income, +
  • 7.7% on the next $36,147, + 10.5% on the next $10,708, +
  • 12.29% on the next $17,786, +
  • 14.7% on the amount over $100,787
Ontario is lucky to only have 3:
  • 5.05% on the first $37,774 of taxable income, +
  • 9.15% on the next $37,776, +
  • 11.16% on the amount over $75,550

But Alberta only has 1: a flat rate of 10%. Looks like I found the one I’ll be using for my example.

4. Calculate tax refunds

I’m going to assume my friend is from Alberta and enjoys a flat-rate provincial fleecing of 10%. So let’s calculate the different possible refunds.

Carry loss back to Year 3 (taxable income $50,000):
Federal taxes = $5,000 x 22% = $1100, AB taxes = $5,000 X 10% = $500
Total Refund= $1,600

Carry loss back to Year 2 (taxable income $80,000):
Federal taxes = $5,000 x 22% = $1100, AB taxes = $5,000 X 10% = $500
Total Refund= $1,600

Carry loss back to Year 1 (taxable income $100,000):
Federal taxes = $5,000 x 26% = $1300, AB taxes = $5,000 X 10% = $500
Total Refund= $1,800

Suspicion Confirmed

As we suspected, he will be better off to carry his loss back to Year 1. He will gain an extra $200 by doing so in this particular case.

However, if we do this, we will forever lose access to the gains in Year 3 (remember, you can only carry capital losses back three years). So if we are pretty sure we are going to have capital losses next year, we may want to carry the current year’s losses all the way back to Year 3, since there is only a $200 difference. But if this year’s loss is a rare event, it makes more sense to get the biggest bang for the loss and carry it back to the year with the highest taxable income.

March 6, 2012 Posted by | loss carryback, Personal Tax, tax, tips | , , , , , | Leave a comment

Where do I enter tips on my tax return? What percentage do I report?

Where do I enter tips on my Canadian tax return?

Put them on Line 104: Other Employment Income. But before you do this, double check that your employer does not report any of your tips on your T4.  Some employers pay a set amount of tips to their employees and will usually include these amounts in Box 14 on your T4 slip. Sometimes they may include those amounts that customers leave as tips on credit cards. Having to report them once is bad enough.

Do not enter tips on Line 130: Other Income, unless you’ve got a crush on your local CRA auditor. (Hey, it could happen).

What percentage of my tips do I have to report?

100%. If you don’t know exactly how much in tips you received during the year, estimate as accurately as you can. Don’t estimate it as 10% of your annual wages (Gross Pay) because Stan Superserver told you that’s what he does, and he has never had a problem.

Read this post on tips for more details.

Help out your fellow servers by taking this 1-question survey about how much your tips are.

February 6, 2012 Posted by | canada, Personal Tax, Random Questions, tips | Leave a comment

How do I write off gifts for clients?

Where do I record gifts for clients on my tax return?

Thanks for e-mailing and asking Jean. I’m sure you’re not the only one wondering this right about now. I have seen gifts put into two categories on the T2125 by small business owners, but there really is only one correct (and by that I mean “advantageous to the business owner”) place to put it.

Meals and Entertainment Expense:
This is the category most often used for entertaining clients. The problem with putting a gift of something like a bottle of wine in here, is that the total of this category is reduced by 50% before being calculated as an expense on the T2125. So for a $20 bottle of wine, you only get a $10 deduction.

Advertising Expense:
This is the best place to put gifts for clients, or people you “hope” will someday be clients. You get a 100% deduction in this category.

What if I don’t have a business but I buy my accountant a bottle of wine for Christmas–can I write it off somewhere?

Nope. But don’t let that stop you 🙂

December 15, 2011 Posted by | Random Questions, Running Your Business, tax | , , , | Leave a comment

How do I write off a capital loss from a previous year?

Which forms and lines should I be using to offset my 2011 capital gains with capital losses from previous years?

We have Jeff to thank for this post. He emailed me and asked this question. I like hearing from people like him because sometimes it’s tough for me to know exactly what kinds of things would be useful for folks out there. So don’t be shy people! Send me your questions and if I know the answer I’ll make a post of it.

So…here is the situation: You have a capital gain in 2011 and you have capital losses from a previous year (or years) and you want to use them to offset your 2011 capital gain.

If you are using TurboTax (or any other software really), open up the Forms explorer and type in “loss” in the keyword search box. One of the matching terms that come up should be “Loss Worksheet”. That’s where you want to go.

Once you’ve found the Loss Worksheet, scroll down a little more than half-way to the section called “Net Capital Losses”. Look at that table and see if there is a record of the old loss in the first or second column. You would then go to the “Claimed in 2011” column in line with it and enter how much of that old loss you want to use to offset your 2011 gain.

However, if there is nothing in one of those first two columns, then it means one of two things:

1) You have not been using the same software each year and so it hasn’t updated your carryforward loss amounts. If this is the case, contact CRA and request your “Net Capital Loss carryforward amounts”. Then plug these numbers in.

OR:

2) You never reported the loss in the year it occurred. If this is the case, you must adjust your tax return for the year in which the loss occurred before trying to use that loss to offset current year gains. (so you have to file a T1 Adjustment Request).

Keep this post handy…tax season is always closer than we like to believe!

December 5, 2011 Posted by | Personal Tax, Running Your Business, tax | , , , | Leave a comment

What do I do with a capital loss?

The next few posts I’m going to talk about capital gains and capital losses.

The most common examples of capital property include stocks, mutual funds, and real estate.

Capital gains are reported on Schedule 3 of your Income Tax Return. If there is a gain, it flows through to Line 127. If there is a loss it is kept track of by the Canada Revenue Agency and your tax software for future (or past) uses.

To calculate a capital gain you can read about it all here. But really, all you need to do is enter the “proceeds” (money you received), the “Adjusted Cost Base”, and “carrying costs” on Schedule 3 and let TurboTax do it for you.

The tricky part is deciding what to do with a capital loss. You can use a capital loss to offset capital gains in any future year (not salary income unfortunately!). But what most people fail to realize is that you can also carry that loss back to any of the preceding THREE years. And generally, this is the wisest thing to do. Go back as far as you can and eat away at those gains before they become untouchable (ie. after three years).

To do this, you will need to file a T1A form as part of your current year tax return (included in TurboTax). You do not need to go back and re-do the tax return of the year that had the gain.

I’ll do another post about how to fill out the T1A in detail. Oh one more point! Always record your capital losses in the year in which they occur. Don’t say “I lost a bunch of money in stocks so no need to report it on my tax return.”

If you don’t record your losses in the current year it will screw up your Net Capital Loss carryforward amounts that the Canada Revenue Agency keeps track of.

Next post I’ll talk about how to use your past losses to offset capital gains in the current year.

 

Related Post:

What year should I carry my capital loss back to?

November 22, 2011 Posted by | Personal Tax, Running Your Business, tax | , , , , | 8 Comments

Employee or Self-employed contract worker?

As a small business owner you will often need to hire outside workers for short periods of time. Generally, it is much “easier” (interpret that as “cheaper”) to hire a “contract worker” because you pay them a fixed amount and don’t have to worry about payroll deductions, like CPP contributions, EI, and income tax withholdings. Unfortunately, there are rules about how to determine whether a worker is an employee or a self-employed contract worker.

So, when you’re drawing up a “contract worker” agreement for your kid to come in and clean your office, you might want to keep the below differences in mind.

If you are in doubt, you can always ask CRA to make a ruling on your particular case. For more info go here.

 

Indicators that the worker is an employee

  • The relationship is one of subordination. The payer will often direct, scrutinize, and effectively control many elements of how the work is performed.
  • The payer controls the worker with respect to both the results of the work and the method used to do the work.
  • The payer determines and controls the method and amount of pay. Salary negotiations may still take place in an employer-employee relationship.
  • The worker requires permission to work for other payers while working for this payer.
  • Where the schedule is irregular, priority on the worker’s time is an indication of control over the worker.
  • The payer determines what jobs the worker will do.
  • The worker receives training or direction from the payer on how to do the work. The overall work environment between the worker and the payer is one of subordination.
  • The payer chooses to listen to the worker’s suggestions but has the final word.

Indicators that the worker is a self-employed individual

  • A self-employed individual usually works independently within a defined framework.
  • The worker does not have anyone overseeing them.
  • The worker is usually free to work when and for whom he or she chooses and may provide his or her services to different payers at the same time.
  • The worker can accept or refuse work from the payer.
  • The working relationship between the payer and the worker does not present a degree of continuity, loyalty, security, subordination, or integration, all of which are generally associated with an employer-employee relationship.

RC4110(E) Rev. 11

November 4, 2011 Posted by | Random Questions, Running Your Business | , , , | 2 Comments

Is my website an asset or expense?

Before answering this question we need to specify what costs we are talking about. Having a website generally incurs the following costs:

  1. Site Design Services
  2. Domain Registration
  3. Ongoing Hosting
  4. Site Updates/maintenance

There are different ways to look at these, and if you were to ask two different accountants you would probably get varying responses, but generally this is what I do:

Site Design Services
You kick out $2,000 to have someone design and put up a site for you. You plan to use this site for more than a year, so it is definitely a capital asset. You need to amortize this (depreciate its cost over a number of years). Usually, I would put it in Class 8 (20% deduction per year).

Domain Registration
You “buy” a domain name. Usually this is a paltry amount ($10-$20 per year) that you have to pay every year or two. I would just put this under Advertising Expenses. However, if you paid more than $400 for this name (because someone knew you were going to need it and beat you to it, then sold it to you) you will need to capitalize it under “licenses” or classify it as an “eligible capital expenditure”. Talk to your accountant if this is the case.

Ongoing Hosting Fees
Add up the amount you pay during the year and put it in Advertising Expenses.

Site Updates/maintenance
I’m going to summon up my Magic Rule #1 to help me here. If you pay less than $400 to have someone work on your site during the year, put it in Advertising Expenses. If you have the entire site revamped and have to pay more, then add it to Class 8 (or whatever class you originally put the website under).

October 20, 2011 Posted by | Random Questions, Running Your Business | 8 Comments