ACCOUNTAX LETTER
Prepared by
H & T Accounting Services
1493 Bathgate Road, Mississauga ON L5M 4B1
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www.HandT.ca
handt@handt.ca
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Tel: 905-858-0775
Fax: 905-858-8645
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Manager: Teji Singh, MASc.-Mgmt.Sc.
Certified Management Accountant |
Feb 2011 |
... we provide... the...
support you can acCount on
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| This newsletter is to assist you in maximizing after-tax returns from your earnings and businesses. To be brief, only important information is provided. Major decisions should be made only after consulting with us. All clients are encouraged to read this newsletter. |
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Some tax saving plans (TSPs) for small business owners/managers
This provides brief descriptions of plans; for more information on most of the plans, read pertinent Articles on our website/ newsletters or simply contact us.
For Partnerships, proprietorships and Corporations
Accounting fees: Some tax payers are not sure how much of the fees paid an accountant is deductible. Except for some 45 to 85 dollars fees for preparing the personal tax return, most other fees are deductible. For example, if you paid $865, of which $65 was for the tax return and the remainder for the accounting of your investments, business or rental operation, you would take a deduction on $800.
Audit trails –tax efficient: Audits can cost a fortune unless you take proper and timely actions. They should be prevented from, and thwarted after starting. To thwart audits, you should have proper trails for all claims. Books and tax returns we prepare are highly audit preventive and audit thwarting.
Bad Debt: To save tax, inform us the accounts receivable unlikely to be collected.
Bookkeeping – tax efficient: Unprofessionally prepared books cost you much tax immediately, and more later—when audited. Our bookkeeping integrates sorting, journalizing and archiving. Ask us to show you an amazing sample.
Business use of residence (BUR): Corporations are not eligible for this plan. They claim Occupancy cost instead. Others can claim parts of their home expenses for having offices at home. You can base your claim on the number of residence rooms or area (e.g. square feet) used exclusively for business; choose the way better for you.
Clothes: Their purchase and cleaning costs are deductible if they are crucial to generating income, e.g. clothes of stage actors.
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Compensation to family members: Pay reasonable compensation to family members in low tax bracket for helping the business in ways no matter how small.
Computer and software purchases: These are lately fully deductible in the year of purchase; this should help you decide when to buy.
Depreciation: To claim 6 months depreciation on fixed assets owned for just a few days, purchase your assets just days before your fiscal year ends.
Dispositions of fixed assets: Those resulting in income should be deferred to next fiscal year if possible. Those resulting in loss should be advanced to happen this year.
Employees versus subcontractors: You can save payroll taxes by hiring help as subcontractors instead as employees. You will have problems if they work like employees but are paid as subcontractors. Ask us the necessary conditions for subcontracting relationship. While the Canada Revenue Agency may accept a relationship as subcontracting, the Work Safety Insurance Board (WSIB) may not. Their conditions are harder and different.
Entertainment: Fifty % of expenses paid on entertainment enjoyed in vendors’ or customers’ company are deductible.
Fiscal year end: It determines proper timing of many actions, to save you much tax. It is December 31 for most partnerships.
Financial statements –tax efficient: Unprofessionally prepared statements tend to trigger audits—which often cost you a lot—and harden the terms of your borrowing—if at all approved.
Fines and penalties -saving: Most government and court fines including parking tickets are not deductible.
Income Splitting: This can be done in many ways to save tax; for some ways, read paragraphs Compensation to family members and Management Company.
Interest on loans/mortgage: If you borrowed funds through a loan or a line of credit to invest in business, interest on this loan is deductible. This plan can be used to make even the
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interest on your mortgage deductible by doing transactions and setting up audit trails properly
Meals: Fifty % of expenses on meals taken in the company of vendors or customers are deductible.
Missing papers (MPs) -locate: MPs usually leads to missing deductions and hence paying more tax. If you have some papers missing when preparing books or tax returns, include estimates of the amounts—that were to be found on those papers. To save penalties, do not delay filing returns. If estimates turn out far off, the amounts can be fixed later by filing adjustments to returns. An important category of MPs is Notices of Assessment. We strive to—and help you—procure the MPs somehow. If it is hard or impossible to procure a specific paper we will tell you which alternative substitute may suffice.
Missing information (MI) -identify: Many times you do not know you are missing papers and which ones. Missing information (MI) helps you determine which papers are missing. Unprofessional bookkeepers and tax return preparers undertake none or minimal MI determination because it takes time and requires special skills. We strive to procure the MI somehow.
Notices of Assessment (NOAs) –for saving taxes: After filing your personal, corporate or other tax returns, you receive from government offices—e.g. the Canada Revenue Agency—documents called Notices of Assessment. Send us copies of your NOAs as soon as you receive. They help us confirm that all amounts we used in preparing your returns have been accepted. If we find any discrepancies, we discuss these with you. We also inform you of their effect on your taxes payable or refunds receivable. Unprofessional tax return preparers do not care to do all this because it takes much time. Also, NOAs contain important information to prepare your future returns properly—mostly to save more taxes for you. NOAs also help you apply for loans.
Obsolete inventory: To save tax, you can deduct a part of the inventory turned useless.
Personal use of business –account for: For using any business resource for personal purpose, e.g. automobile and cell phone, the personal portion of expenses must be separated out when the fiscal year ends. Unprofessional bookkeepers and tax return preparers avoid such separating because it takes time and requires special skills.
Tax returns –tax efficient: Unprofessionally prepared returns cost you much tax immediately and more, later when you are audited. Our tax returns are comprehensive and include efficient archiving and hence become audit thwarting. Ask us to show you an amazing sample.
Travel Log: Law requires it but most of you do not have it. If an automobile is used for both business and personal purposes, a Travel Log is required to show a breakdown of all driving. If you have not been doing we have easily implementable solutions that may work for you, even in audits.
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Vehicles -expensive: Leasing is usually better —than buying—an expensive vehicle. Full price is usually not deductible if you buy such a vehicle.
Vehicles -buy versus lease: Leasing is usually better in starting days and buying, in the ending days of a fiscal year.
Vehicles -two or more in the family: Prefer using more expensive ones for business and the other ones for personal purposes. Also read under Travel Log.
For Corporations only
Bonus payable: It is your income next year but corporation’s expense this year if implemented properly. This powerful TSP is mostly useful to corporations with fiscal year end between July 1 and December 31.
Corporate funds withdrawals -tax effective: To take funds out of your corporation use tax effective ways like dividends, non taxable-capital dividends and return of capital.
Corporate funds withdrawals -tax free: Take funds from your corporation & pay no tax: Usually you must pay personal taxes on any funds you take out of your corporation. You may not have to pay this tax if funds are taken for certain special purposes. Proper audit trails must be set up for the transactions necessary for these tax savings. If this strategy is applicable to your situation, you may save tens of thousands of dollars.
Corporate tax installments: Reduce payments if you think this year’s income may be less than last year’s.
Corporate tax installment-yearly final: Pay this within 90 days of the year end to avoid penalties and interest.
Management Company: Consider your spouse set up a corporation to provide management and administrative services to your business. Thus a part of your income gets transferred to your spouse thereby reducing family’s taxes.
Occupancy cost: Recover some of your home expenses by charging the corporation for using—for its office—a part of your home.
Retain earnings in corporation: If your corporation made much more income than you need for your personal expenses, defer receiving compensation—especially if you are in high tax bracket.
Salary/dividend integration: Compensate members of the family for their services with a mix of salary and dividend to minimize taxes.
Small business deduction (SBD): You can save up to $85,000 yearly income tax as long as your corporate taxable income (TI) stays under $500,000. To defer losing SBD when you are about to exceed the TI limit, consider paying interest on the shareholder loans to the corporation and paying—or even just declaring—bonus. As your TI is approaching the limit, you should keep increasing your knowledge of this, big TSP.
Small business shares-sale of: Learn more and more about the necessary conditions to procure up to $750,000 capital gains exemption—a powerful TSP.
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