Questions and Answers

What are the limits on charitable donation deductions for a Canadian business?

If you are a sole proprietorship or partnership, you can claim charitable donations up to 75% of the total net income on the T1 Personal Tax Return. However, the total claim cannot create a net loss or increase a net loss - any unused amounts can be carried forward for up to five taxation years. These rules also apply for corporations.

When an individual dies, the charitable donation deduction limit is 100% of his or her net income in the current taxation year and the year before.

Is business promotion a legitimate tax deduction?

Business promotion costs, such as the cost of flyers and brochures, are tax-deductible to the extent that they relate to Canadian media content only (e.g. newspapers, television stations, websites). Also, only half of the promotional cost is tax-deductible if the promotion involves meals and entertainment expenses to entertain potential customers.

Are there specific income tax deductions for home-based businesses?

Home-office expenses are deductible only to the extent that the home is being used regularly to cater to customers and to earn business income. Furthermore, such expenses must be reasonable and apportioned accordingly to the business-related space (e.g. electricity, heating, insurance costs). These expenses can offset business income, but cannot result in a loss - the difference can be carried forward to offset business income in a future tax year. These expenses are reported on Form T2125 Statement of Business or Professional Activities as part of an personal tax return filing.

I incurred business expenses that I no longer have the receipts for. Can I claim these on my income tax?

Reporting information for tax purposes without supporting documentation exposes you to fees and penalties (and possibly, legal action) should you end up being subject to an audit by the Canada Revenue Agency. Typically, you may be subject to an audit for a return filed as far as three years back. However, if it is found that an error or omission was made out of neglect, carelessness or willful default, the CRA can go back as far as possible.

At the same time, if you can offer some other proof to support business expenses, you can still make a claim, but at your own risk.

I just started a business recently, but I incurred business expenses before the business started. Can I claim these on my income tax?

Generally, business expenses can be claimed to the extent that they relate to a business that is already operational. Expenses incurred before a business starts is not considered a business loss or a non-capital loss, and therefore cannot be carried back or forward to offset taxable business income.

However, there are certain start-up costs, which can be claimed and deducted over time similar to the concept of the Capital Cost Allowance for capital property. Such start-up costs include expenses of incorporation, reorganization or amalgamation; trademarks, patents, franchises, and licences; and customer lists, among others. These costs are considered to be Eligible Capital Expenditures and a portion is claimed over several taxation years.

My business made no money this year. Can I still claim business expenses?

You can still claim business-related expenses even when no income was generated in the year. This will create a non-capital loss which can be applied to offset taxable business income on past taxation years (up to three years back) or can be carried forward to offset future taxable business income.

What business expenses can a Canadian business claim on income tax?

Generally, all expenses incurred for the purposes of earning business income are deductible for tax purposes. However, the amounts paid must be reasonable and must not include those paid for capital property.

Some examples are: Advertising, Marketing, Courier fees, Postage, Office Supplies, Office Rent, Utilities, Property Taxes, Telephone Expenses, Wages, Cost of the goods sold, Repairs, Maintenance, Transportation costs, Parking, Bank Charges, Interest paid on business loans, and many other expenses.

How long does the Canada Revenue Agency have to decide to audit my business taxes after I file them?

Typically, you may be subject to an audit for a return filed as far as three years back. However, if it is found that an error or omission was made out of neglect, carelessness or willful default, the CRA can go back as far as possible.

How is an Internet business taxed?

An Internet business is taxed just like any other business. If the business is a sole proprietorship or a partnership, the individual must complete Form T2125 Statement of Business or Professional Activities as part of their T1 Personal Tax Return filing. If the business is a corporation, a T2 Corporation Income Tax Return must be filed.

How do I change my fiscal year end?

Typically, consent must be obtained from the Canada Revenue Agency in order to change the fiscal year-end of your business. This involves writing a letter to the appropriate tax centre, including the reason for the change.

For a self-employed individual, the fiscal year-end is typically December 31. However, the alternative method may be used (i.e. non-calendar year fiscal year-end), but is only permitted on a case-by-case basis.

There are certain cases where a corporation does not require consent to change its fiscal year. These include the corporation going through a wind-up or immigrating to another country where it may or may not be subject to taxes.

If there are any changes to fiscal year-ends, Form T1139 Reconciliation of Business Income for Tax Purposes must be completed.

What is the Profit Test and how might it affect my Canadian income tax?

The profit test is used by the Canada Revenue Agency to determine whether or not an individual is operating a business with the reasonable expectation of generating a profit. If so, it would be deemed as a business for income tax purposes and can claim business-related expenses.

There are several factors to consider such as the profit and loss experienced in past years, the amount of time spent in the activity, personal qualifications, and the relevance of expenses incurred, among other factors.

How long do I have to keep my business records?

Typically, a business must retain its records and supporting documents for audit purposes for a period of six taxation years. Key documents regarding business amalgamation, shares issued, and the like should not be destroyed

What is business income?

Business income is any income generated from a business with the intention of operating for profit. Income earned for employment purposes is not business income.

I don't really have a business, but I make a few bucks from my hobby. Do I need to declare this income?

You are required to report all worldwide income on your tax return. You should use Form T2125 Statement of Business or Professional Activities to qualify for deductions.

Some of my business income is from other countries. How do I handle this on my Canadian income tax form?

Foreign business income is reported similarly to business income earned in Canada. If denominated in foreign currency, the information must be converted to Canadian dollars using the average exchange rate for the reporting tax year. A foreign tax credit may also be claimed if taxes were paid in the other country.

Individuals who have business income or expenses should complete Form T2125 Statement of Business or Professional Activities. Information for each business must be reported on a separate Form T2125.

My business is a partnership. Is there a special Canadian income tax form I need to fill out?

If you have a partnership income or expenses, you should use Form T2125 Statement of Business or Professional Activities. Furthermore, each partner should receive a Form T5013 Statement of Partnership Income, from which the percentage of ownership is indicated among other partnership-related information. Information for each partnership must be reported on a separate Form T2125.

How do I report my business income and which Canadian income tax forms do I need?

Individuals who have business income and/or expenses to report must complete Form T2125 Statement of Business or Professional Activities. Information for each business must be reported on a separate Form T2125.

We have a partnership and taxes are hard for us. How do we split things up so its fair? There are special advantages from being a corporation - but we are a partnership. Can we be a corporation? Is it a good idea?

You should obtain the services of a Chartered Accountant. Consult with one immediately before you get yourself into difficulty with Canada Revenue Agency. He/she can provide answers to all of your questions as there are no clear cut simple responses that I can provide to you in a few short sentences. Note that income taxes are hard for everyone, both in terms of compliance with our relatively complex tax system and also in paying the statutory required balances owing. You may be surprised at how low your overall tax liability is after consulting with a Chartered Accountant. Barry J. Watson CA. Direct Line 604-714-1999

What should I do in terms of bookkeeping? Why do I need to bother - I just add it all up at the end of the year - it goes on my personal return

I assume that you have not incorporated your business activities. As such, there is no statutory requirement that you prepare financial statements. However, you are required to maintain adequate records to support the information that you report on your annual income tax filings. The services of a Chartered Accountant may assist you in claiming .perhaps additional expenses that you may not be aware of when tabulating your information and filing your personal income tax return. Barry J. Watson CA. Direct Line 604-714-1999

I started my business two years ago and have not done any tax returns because I have not made any money. But now maybe I will be making money in 2012 but I do not want to pay tax. Thanks a lot for any ideas.

You should meet with a Chartered Accountant. He will inform you that very few people want to pay tax but that our country is dependant upon and mandates that all taxpayers are to comply with the Income Tax Act, report their taxable income and pay the required statutory income taxes. It is the Law. Assuming that you have incorporated a company to run your business, you should get your accounting records brought up to date for the first two years of operations. A bookkeeper will of great assistance to you here. If you have incurred losses over those two years, you are able to carry these losses forward and offset them against your current year income within your corporation.

If you are running an unincorporated business, then you should still report the gross income and the underlying expenses on your prior years income tax returns. You will be entitled to refundable tax and GST/HST credits if your taxable income is low enough. These credits will vary by provincial jurisdiction. Barry J. Watson CA. Direct Line 604-714-1999

I have two businesses. I am a consultant and I also sell some products. I have no expenses in my consulting. My products business makes almost nothing this year. What is the best thing to do about taxes? Can I do just one tax return?

Yes. The company reports as a whole. The separate divisions net income are combined for income tax reporting purposes. You should hire a bookkeeper and get your accounting records brought up to date. Assuming that your businesses are unincorporated, the two business operations will be reported on your personal income tax return. You may find that a professional account can identify some expenses like travel, vehicle, home office, telephone (to name a few) which can be utilized to offset your consulting income. Barry J. Watson CA. Direct Line 604-714-1999

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