Who To Call for HST Questions?

CRA has taken serious step to assist business on this transition.  Even Canada Day they are still working to serve us.  If you have any questions regarding HST you can call 1-800-959-5525 from 9:15am – 8:00pm.

HST Tax Benefits for My Business?

You may find that the government are preaching the benefits of HST with a lot of tax benefits.  It can be very confusing to some as what does the HST bring us other than changing our invoice to our customers. 

There will be tax cuts, but you won’t see them related to HST.  When you file your business tax return the end of your fiscal year after July 1st 2010, you will notices there are small tax rate decrease here and there.  You wouldn’t even know these tax cuts have anything to do with HST.

Small Business Transition Credit

The only one that will directly effect your business is the Small Business Transition Credit.  For businesses that annual revenue less than $2 million will be eligible for this credit up to $1000.  While not too much, it is something.

HST Rebates

There are a lot of rebates opportunities to bring about tax benefits.  There are a lot of rebates apply for specific industries.  You can find the list here http://www.cra-arc.gc.ca/gncy/hrmnztn/pblctns-eng.html.  Simply put, the previous GST credit (ITC) how becomes HST rebates.  This implies that you now can claim more Input Tax Credit (ITC). 

Example:

What you used to do with GST rebate:

1.  If you are in Ontario, and You used to sell your product of $100, you collected GST of $5 and PST of $8.  Note that you need to pay $13 in total when you file GST and PST.

Product	$100
GST	$5
PST	$8
Total	$113
GST Collected	$5
PST Collected	$8
Taxes need to be pay	$13

2. You bought boxes of paper for your business, you paid GST of $5

Boxes of Paper	$100
GST	$5
PST	$8
Total	$113
ITC credit	$5

3. When you file your GST, the ITC credit of $5 offset the GST Collected of $5. Hence you do not need to pay GST.  Note that you do not get any credit for the $8 PST you have paid.

Total Tax Paid	$13
Total Tax Credit	$5
Grand Total Tax Paid	$8

What you do with HST:

1.  You used to sell your product of $100, you collected HST of $5

Product	$100
HST	$13
Total	$113
HST Collected	$13

2. You bought boxes of paper for your business, you paid GST of $5

Boxes of Paper	$100
HST	$13
Total	$113
ITC credit	$13

3. Now you can see that you are claiming the whole amount you have paid

Total Tax Paid	$13
Total Tax Credit	$13
Grand Total Tax Paid	$0

What to Charge HST and What Not To Charge?

For most businesses, the amount to charge for HST will be exactly the same as before really.  For example, if you are charging GST and PST for the items you are selling, now to charge HST which are the same as the combination of GST and PST. 

There are some exceptions, here are the most common ones that will change for Ontario

There are variance between BC and ON.  For an extensive list, go to http://www.rev.gov.on.ca/en/taxchange/taxable.html for Ontario, and http://hst.blog.gov.bc.ca/wp-content/uploads/2010/05/GST_PST_HST_List_v04.pdf for BC.  These lists covers most of the items which may or may not impact by HST.  However if you need even more information, you can go to the GST/HST Technical Information Bulletin at http://www.cra-arc.gc.ca/E/pub/gm/b-103/b-103-e.pdf.

How and When to File HST?

Filing HST will be EXACTLY THE SAME as filing GST.   The only different is that your business will no longer need to file PST to your provincial ministry of finance.  The GST and HST form in fact is the same form.  If you have overlapping period, your record the GST collected and GST ITC amounts before July 1st, and anything after July 1st you calculate using HST. 

For example: You file GST Quarterly with fiscal year end in Feb 31st.  The quarter of June – Aug will include both GST and HST calculation. 

References

HST for Ontario – http://www.rev.gov.on.ca/en/taxchange/taxable.html  
HST for BC – http://hst.blog.gov.bc.ca/ 
HST Publication – http://www.cra-arc.gc.ca/gncy/hrmnztn/pblctns-eng.html
GST/HST Technical Information Bulletin – http://www.cra-arc.gc.ca/E/pub/gm/b-103/b-103-e.pdf

Right now we in Ontario are paying both GST and PST in some items, while other items we only pay GST, such as most services.  With the HST, for services and items that we are paying only 5% GST now, we will be paying 13% HST instead. A total of 8% increase. 

While all the rules are not set and done, even the motion is not officially approved, we do have an idea that this will become the reality.

On Yesterday, Friday the 13th, the Ontario Premier Dalton McGuinty announced that there will no more further tax exemptions on the HST.  After this announcement the news are all over newspaper, TV and radios, and so does the debuts started just a few minutes after the announcement!

The immediate effect of this combined sales tax HST is obviously increase of things we purchased.   I am not going into the positive or negative effect in terms of the government and the long term forecast on the economy.  Like the majority of the people, I want to find out how this tax will affect me immediately and personally.

How HST affect Home Buyers and Real Estate Investors

The biggest concern for the people comes from home buyer.  Only GST are being charged for lawyer fees and taxes on house purchases.  With the HST, home buyer can expect to pay 8% more, that’s a big amount.

Due to this concern, Ontario is proposing a tax rebate up to $24000 on new homes purchase as primary residence, however this only applies if you purchase a home less than $400,000.

The effect?  Let see it this way.  If a Torontonian wants to buy a house which costs 1 million dollars (which is not uncommon by the way, given the housing cost in Toronto), he/she will need to pay 13% taxes instead of 5% now.  Remember all the transfer tax and lawyer fees how also required 13%, you can expect to pay approximately $200,000 on taxes alone to purchase that 1 million house.

This certainly is not a good news for some real estate investor.  Although there is a tax rebate up to $24000, 8% of $400,000 is $32,000, plus all the other legal costs involve, you are still paying more tax. So if you are planning to buy a home, you would probably want to do it before July 1 next year.  Having said that, the government claims that you will pay no more, or even less tax than under the PST system.  The detail of how the tax rebate or tax credit is not ready yet, so we will see what will happen.

How HST affect Business Owners

HST actually benefits business owners.  For a business owner, the collection and tax credit of GST/PST is the same, accept there is no two tax files and no need to track two separate taxes.  For business owners who collects only GST, now you collect HST, exact same process with the tax rate changed.  This actually save business owners a lot of time and money current use on filing and tracking separate taxes.

Ontario has been trying hard to reduce paper works and cut costs on processing time and resources needed for handling taxation matters.  Starting from 2009, Ontario has already combined the tax filing for corporation into one.  Previously all corporation in Ontario needs to file a separate taxes, one for federal and one for provincial.

By combining PST and GST into HST, once again Ontario government eliminates a lot of resources to manage two separate taxes. With the money saved, our tax dollars can be spend somewhere else more productive and beneficial to Ontario citizen.

Subjects exempt from HST

The following items are not currently taxed, they will not be taxes in the future. 

• Basic groceries
• Prescription drugs
• Some medical devices
• Municipal public transit
• Health and most education services
• Legal aid
• Most financial services
• Child care
• Tutoring
• Music lessons
• Residential rents
• Condo fees
• HST does not apply to resale homes

Subjects exempt for the 8%

• Children’s clothing and footwear
• Children’s car seats and car booster seats
• Diapers
• Feminine hygiene products
• Books (including audio books)
• Prepared food and beverages sold for $4.00 or less
• Print newspapers

References:

1. http://www.rev.gov.on.ca/en/taxchange/index.html
2. http://www.thestar.com/news/ontario/harmonizedsalestax/article/725442–no-more-hst-exemptions-mcguinty-says
3. http://www.theglobeandmail.com/news/national/ontario-strikes-populist-note-to-soften-the-hst-blow/article1361770/

Personal Income Tax Rates

Federal Tax

15% on the first $37,885
22% on the next $37,884 (income from $37,885 to $75,769)
26% on the next $47,415 (income from $75,769 to $123,184)
29% on over $123,184

Provincial / Territorial Tax

Corporate Income Tax Rate

Federal Tax

Provincial / Territorial Tax

References:
What are the income tax rates in Canada for 2008? – http://www.cra-arc.gc.ca/tx/ndvdls/fq/2008_rt-eng.html
Corporate tax rates – http://www.cra-arc.gc.ca/tx/bsnss/tpcs/crprtns/rts-eng.html
Income Tax Return TP-1-V – http://www.revenu.gouv.qc.ca/eng/formulaires/tp/tp-1-v.asp
BC – Budget 2009 – Income Taxes – http://www.sbr.gov.bc.ca/msbr/budget/income_taxes.htm
Calculation of the Income Tax of a Corporation CO-771-T - http://www.revenu.gouv.qc.ca/documents/eng/formulaires/co/co-771-t(2008-12).pdf
Alberta Corporate Income Tax – http://www.finance.alberta.ca/publications/tax_rebates/important_dates_corporate.html

Deadline for T4 and T4 Summary: Last Day of Feburary, 2009

You can file your T4 online, just go to
http://www.cra-arc.gc.ca/esrvc-srvce/rf/t4/menu-eng.html. 

You can also download the form and mail it in or drop off to the closest tax service center near you.
T4 slip form: http://www.cra-arc.gc.ca/E/pbg/tf/t4_flat/t4flat-fill-06b.pdf
T4 summary: http://www.cra-arc.gc.ca/E/pbg/tf/t4sum/t4sum-fill-08b.pdf

The procedure to submit is pretty the same as last year.  If you are like most business owners, you probably don’t have time to figure out what to do until the last minutes.  You may want to check out this article
Filing T4 at the Last Minutes.  Just spend a little time to read it thru, follow the step by step instruction and you will done in no time.

Reference:
http://www.cra-arc.gc.ca/E/pub/tg/rc4120/rc4120-08e.pdf

So what is the different? Which one should you use?

Netfile is intented to use for personal or family use only. Each Netfile software or web application only allow each personal to file 20 tax returns. Tax preparers are not recommended to use Netfile, but to use Efile instead. This is because tax preparers who are allow to use Efile required to go thru CRA screening process before they are allowed to use Efile to serve the public.

If you found your way to this article, I am assuming you are planning to file you own tax, or even file taxes for your family and friend. Then Netfile is for you.

A lot of small tax preparers use Netfile to help their clients to fill in their tax form due to reason such as waiting for government to approve your efile application. Also good Efile software tends to be very expensive and sometime it is too expensive for a small company who are just starting up. However if you are a small tax preparer planning to file for your client, you are just helping your client to fill out the form in this case, it is required that your client is the one who actually press the submit button, that your client is the one who file his / her tax, not you.

Efile is intented to use for professional tax preparer only. If you are planning to file tax for the public this should be the option to use. You can find a list of efile software here http://www.efile.cra.gc.ca/eol-software2008-e.html. But first you need to register at https://apps.cra-arc.gc.ca/ebci/efes/emod/sec/EmodRegisterEfileRender-e.

Filing in Paper Form – Recommend for small amount of T5-slips

1. Calculate how much your company contribute
2. Fill in the T5 Summary for the amount total amount distributed.
3. Fill in the T5 slips  for each shareholders (contains 3 slips per page).
4. Send one T5 slip, along with the T5 Summary to:
   Ottawa Technology Centre
   P.O. Box 9633, Station T
   Ottawa ON., K1G 6H3
5. Keep the rest of the T5 slip (one should be for your company’s record, and one for you to file your individual income tax return)

Filing T5 Electronically

Unfortunately there are not many software avaliable to produce small amount of T5 slips.  You can find this software by just typing in the search engine T5 software.  However there is no enforcement to ensure this software satisfied the CRA requirements.  They may or may not satisfied the CRA file format standard, you use it at your own risk. 

The only way you can file electonically is to produce XML files format specification according to the CRA standard for each T-slips.  You can find the XML specification here http://www.cra-arc.gc.ca/eservices/magmedia/programmers/specs/2008actual-e.html.

For large amount of T5, most accountant professional tax software can generate the electronic files for you, such as Intuit’s ProFile FX module.

If you are interested in the details, you can get more information on how to file a T5 on the Canada Revenue website T4015 T5 Guide – Return of Investment Income.

Related Articles:
How to Pay Yourself – Corporation
Pay Yourself Dividend
T5 Penalties and Interest

Interest on penalty for late filing:
Compounded DAILY at prescribe rate on the total amount of penalties and interest outstanding. 

Although the prescribe rate table doesn’t seem to be clear on this category, you can see the rates are mostly the same for all amount owing to the government.  For example, the rate for 2008 first quarter is 8% for most category, it is your rate for that quarter.

Example: You are late for 2 days on filing on 2 slips
You owe the government $25 * 2 days = $50 per slip for 2 slips = $100
First day late:
First day of late penalty is $25 * 2 slips = $50
First day interest = $50 * 8% = $4
Total penalty and interest on the first day late = $54

Second day late:
Second day of late penalty is $25 * 2 slips = $50
Total penalty and interest so far = $54 (first day late) + $50 = $104
Second day interest = $104 * 8% = $8.32
Total penalty and interest on second day late = $104 + $8.32 = $112.32

Related Articles:
Pay Yourself Dividend
Filing T5 – Paying Dividend

What is Dividend?
Dividend is the return on investment from the business you invested in. There are two types of dividend: eligible and other than eligible dividends.

What is Eligible Dividend and Other-than-Eligible Dividend?
Legislative Proposals on Dividend Taxation issued in year 2005 provides the following definition in subsection 89(1) stated:

“eligible dividend” means a taxable dividend that is received by a person resident in Canada, paid after 2005 by a corporation resident in Canada and designated, as provided under subsection (14), to be an eligible dividend;

and subsection (14) states:

A corporation designates a dividend it pays at any time to be an eligible dividend by notifying in writing at that time each person or partnership to whom it pays all or any part of the dividend that the dividend is an eligible dividend.

Simply put, it is dividend paid after year 2005 from a Canadian public company or Canadian-controlled private company to Canadian residents. Any other dividends are considered “Other-than-Eligible”.

Eligible dividend: Fed tax credit : 18.9655%
Non eligible: Fed tax credit: 13.3333%

Pros

• You don’t need to go thru payroll process throughout the year. Simply calculate how much you draw from the company at the end of the year as dividend.
•  Dividend tax credit can be applied in your personal income tax return
• Dividend income is your taxable income, hence your RRSP room will increase
• Since you have income, your personal credit are also improve when you go for a loan from most financial institution
• It is more flexible on how much you draw from the company

Cons

• Dividend distribute to owners are after tax money.
• Dividend you received from the company is taxable as investment income.

So you pay double tax, why do you want to even pay yourself dividend then? You don’t really pay double tax. The Canadian federal government apply tax cut to dividends. In year 2006, the federal government has even cut more tax on some dividends a person received.

Here’s how it is calculated:
Note: Using rates from year 2007 taxation year

For eligible dividend:
Taxable amount = 45% more than the dividend amount (dividend amount * 1.45)
Dividend tax credit = 18.9655% of the taxable amount

For other-than-eligible dividend:
Taxable amount = 25% more than the dividend amount (dividend amount * 1.25)
Dividend tax credit = 13.3333% of the taxable amount

Example:
If dividend you paid is $10,000 and it is eligible dividend

For eligible dividend:
Taxable amount = $10,000 * 1.45 = $14500
Dividend tax credit = $14500 * 18.9655% = $2749.9975

Amount of tax you need to pay for this income as dividend:
For eligible:
Taxable Income * tax rate – Tax credit = $14500 * 15% – $ 2749.9945 = (574.9945)
You get back $574.99 tax refund

Amount of tax you need to pay for this income as salary:
Taxable Income * tax rate – Tax credit = $10000 * 15% – $0 = $1500
You pay $1500 to the government

Using the tax rate of 2007 an assume you are in the lowest tax bracket

As you can see in the example, if you are in low income and apply 15% tax rate, and you have 18.9655% tax credit, you will actually get money back. If you pay yourself salary, you will be paying $1500 on tax. 

Using the above example, if you are in a higher income tax bracket:
If you pay salary of 10,000, you will need to pay $2200 to the government. If you pay yourself 10,000 as dividend, you will pay $440 (14500 * 22% = 3190 – 2749.9945 = 440.005).

Since the company already paid tax, and company tax rate are lower than the individual tax rate, this tax amount is to offset the extra tax you owe the government between the company and personal tax. This is to avoid double tax.

So in the end, if you are a small business owner and you draw money out to yourself, there is not much different on how much tax you pay to the government.

Related Article:
How to Pay Yourself

Reference:
T4015 T5 Guide – Return of Investment Income 2007
5000-G General Income Tax and Benefit Guide 2007 – All Provinces Except Non-Residents

What do you need to file:
1. T4 slips for all your employees
2. T4 Summary form

You can download forms from:
T4 slips paper form in http://www.cra-arc.gc.ca/E/pbg/tf/t4_flat/README.html
T4 Summary paper form in http://www.cra-arc.gc.ca/E/pbg/tf/t4sum/README.html

Information You Need to File
- Employee’s Name
- Employee’s Address
- Filing Year
- Box 10 – Province
- Box 12 – SIN
- Box 14 – Total Employment Gross income over the year
- Box 16/17 – Total Employee’s CPP / QPP you remitted over the year
- Box 18 – Total Employee’s EI you remitted over the year
- Box 20 – RPP (Pension Plan) contributions
- Box 22 – Total income tax deduction (without EI and CPP) you remitted over the year
- Box 24 – EI insurable earnings
- Box 26 – CPP/QPP earnings
- Box 28 – Exempt (CPP/QPP, EI and PPIP)
- Box 29 – Employment code (If employee is not on fix salary)
- Box 44 – Union Due
- Box 46 – Donations
- Box 50 – RRSP number
- Box 54 – Your BN
- Box 55 – Employee’s PPIP
- Box 56 – PPIP insurable earnings
- Box 40 – Other

See RC4120 Employer’s Guide – Filing the T4 Slips and Summary 2007 on how to fill in each box properly according to your business nature.

File at the last minute by Paper
The fastest way to file, is to either file online or drop off your paper directly to the closest Tax Services Office. You can find your closest tax services office in http://www.cra-arc.gc.ca/contact/tso-e.html

Depends on your tax services office, they will collect from the drop-off boxes each hour or each morning, they will also collect your paper during open hours. You can find that information right on their drop-box. They will stamp your envelop as the day you filed as they collect them. Of course you can always go line up if they are opened, you will get your envelop stamp right in front of you. You can image how long the line-up will be on the last day of filing all T-slips.

Example:
If your tax services office’s drop-box said they collect mail from that drop-box every 8:00am Monday to Friday, and the deadline is on Friday, you wants to drop off your paper before 8:00am that Friday.

File at the last minute Electronically
This is the fastest and most convinent way to file. Just press the button at the last minute at your own home and you are done without penalties. BUT, this is applies if you have your web access code.

What is Web Access Code?
If you filed payroll last year, you should receive a pre-filled T4 Summary form from the mail from CRA this year, on the top of the form you should see your Web Access Code. Use that code to file online.

What if you don’t have Web Access Code?
If this is your first year filing your T4, or whatever happened to Canada Post and you never receive your pre-filled form from CRA, you don’t have the Web Access Code. The only way you get your access code is to CRA Help Desk at 1-877-322-7849. But don’t expect you will get your access code right away. After you call them, they will mail you the pre-filled T4 Summary form. If you are filing at the very last minute, you won’t receive your web access code on time to file online.

If you don’t have Web Access Code, I suggest you to drop off your files directly to the closest tax services office.

I have Web Access Code, Now What?

File 1 to 3 slips
You can file your slips on the CRA website directly. Just go to http://www.cra-arc.gc.ca/eservices/iref/t4/t4web/file-e.html to start filing.

Note that although it is an internet service, it is not available 24 hours a day. There are usually a system shut down time for maintainence during the early morning. For Ontario, it is available 6 am to 3 am, and it is available from January 7th 2008 to December 8 2008. You can find the hours of service for your province in http://www.cra-arc.gc.ca/eservices/iref/hours-e.html

File 1 to 70 slips
You can file your slips with the CRA free software available for download on their website or use your commercial payroll / accounting software. 

If you choose to use the CRA free software, you can go to http://www.cra-arc.gc.ca/eservices/iref/t4/desktop/download-e.html. Download t4_install.exe . Follow the instruction on the website to install the software.

After you install the application, you can start filling in your T4 and T4 Summary. The software is very easy to use and very intuitive, however if you have difficulty using the software, you can find the user instruction on http://www.cra-arc.gc.ca/eservices/iref/t4/desktop/instructions-e.html.

After you finish filling in all the information, save the file. You will see the file is in .t4 extension. You should always print a paper copy on your T4 slips and T4 summary, these file should be keep in your file for 7 years.

After you print your forms, click on the XML icon to save the file in XML format. You will see the file name is the same as the .t4 file, but now it is .xml. Once you have your .xml file ready, go to http://www.cra-arc.gc.ca/eservices/iref/t4/desktop/file-e.htmland follow their instruction to submit your .xml file. There you go you have filed your T4.

File 1 to 3500 slips
This is the amount of slips you can file using XML format file using commercial software, e.g. Quickbook and Intuit Profile software. After you have save the XML file, go to http://www.cra-arc.gc.ca/eservices/iref/other/ift/ready-e.html and submit your file.

Over 3500 slips
If you are the employer, congratulation on your accomplishment. If you are an accountant working for the company, I am sure your company have a software (build in-house or large ERP system) to manage producing XML file. CRA prefer such large submission in CD / DVD. Drop off or mail in the CD / DVD to the tax centre.

Reference:
http://www.cra-arc.gc.ca/tax/business/topics/payroll/returns/t4/menu-e.html

Related Articles:
Late T4 Penalty
T4 Deadline
How to Pay Yourself – Corporation

Not surprisingly, not too many people know that simply printing the record of an electronic purchase or e-invoice is not enough. According to CCRA regulation as off 2007, the electronic copy has to be saved in an electronic format. It is required that an electronic format copy has been stored somewhere and is readable to CRA when requested, even though you have a printed paper copy.

Consider the new can of worm being open with electronic copies. Emails, e-invoice, e-commerce transactions, accounting software system, e-bill, electronic bank statement, pos system, telephone purchase are just some of the example an electronic records are required to be stored securely and without damage within a long period of time.

The headache comes when most vendors do not store the e-invoice, e-bill, etc, for longer than a few month or even few weeks. It is you, the business owner’s responsibility to ensure the captured of those records in a safe place. Consider you have stored all email confirmations for your electronic purchases for last month in your computer hard disk. A thunder storm came and your power bar didn’t do a good job, some of your files were corrupted due to a sudden shut down on your computer.

What to do if that happened? You either do nothing and pray that the auditor will not be requesting those records. You probably still have you bank account statement to proof the purchases, and hopefully that particular transaction has a good enough description on which vendor you purchased it from. You can try to contact the vendor to send you a copy of the e-receipt, e-bill, etc. You can do an adjustment to your accounting records to reflect that you do not have those e-bills for references; hence they are not tax deductible.

I strong suggest you make a copy and a back up copy of your electronic records into a trustable medium (CD/DVD/Tape) frequently, and store the original and the backup in different places. Just in case disaster happens in one storage place, there’s still a backup copy somewhere else. If you use a bookkeeper or accountant, you would want to let them see those records so they can record into your book correctly.