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/

1. You can claim 15% of your renovation expenses as a non-refundable tax credit.
2. Your expense has to be more than $1000, or less than $10,000. 
3. The based amount is $1000, that means the first $1000 you spend gets no credits
4. You can split the expenses and claim the maximum amount of credits as a family unit.  A family unit is usually considered as a spouse, common-law partner, children under 18 years of age. However you can only claim one credit for each family unit.  E.g. If your eligible amount is $6000, you can split that expenses to claim the tax credit of $3000 in each spouse tax return. 
5. This tax credit is only for personal use expenditures, not for rental or business property
6. The following will NOT be eligible for claim:
• Furniture, appliances, electronics
• Tools
• Any routine maintenance such as duct cleaning, lawn care, etc
• Financing costs, such as interest on the money you borrow to do pay for the renovation
7. If you own multiple properties, for example a primary home and a cottage, you can only claim maximum of $10,000 on both properties renovation because this tax credit is by "family unit", not by property.
8. If your property you do renovation on are own by more than one person, e.g. if you and your brother each has 50% share of the house, each of you can apply for the tax credit separately.
9. Receipts have to be presented as proof of your expenses.  You will not need to submit these receipts to CRA, however they requests them in a later day.

Although furniture and appliances are not eligible expenses, air and heating system such as air conditioners and furnace are eligible items.  So if you want to replace any of these items, maybe switch to a energy saving one, this is the time to do it. 

Remember, this tax credit only last till Jan 31, 2010.

You can find more examples on the CRA website: http://www.cra-arc.gc.ca/tx/ndvdls/sgmnts/hmwnr/hrtc/xmpl-eng.html

If you haven’t received your T4 and wasn’t able to get a hold of anyone now, most likely you are not going to get one.  Your employer is probably so busy trying to negotiate loans, asking friends and family for help, trying hard to sell the business, or busy talking to a bankruptcy lawyer.  Obviously they won’t have the time and the emotional energy to deal with your complaints.

So what should you do? How can you file your income tax without the T4 slip?

Your T4 slip (if you would have gotten one) should looks like the diagram shown below.  The arrows show you the most common fields required for you to file your tax return.  For example: Field 14 – Employment Income – line 101.  This field is the total income you have earned.  Read on and I will show you how you can get those numbers to fill in your tax return.

T4

1.  Call CRA at 1-800-959-8281. Ask the CRA agent if your employer has submitted your T4.  If your employer did, ask them to give you the information on your T4 to fill out your tax return.  If not, following the step below.

(Note: The following instruction is only suitable for you if you work full time, or part time within the year, and your EI, CPP and Tax has been deducted from your paychecks)

2. Estimate how much you earn over the year (Box 14 – line 101)

Just an estimate is good enough if you didn’t save your paystub. It is not uncommon that people do not keep their paystub.  If you annual salary was $40,000,  this is the earned income for the year.  If you received hourly wages at $20 per hour, estimate how many hours you work each month for all twelve months to derive your total income. 

3. Estimate how much you paid Tax over the year (Box 22 – line 437)

To calculate your taxes, use this formula: (Estimate income – Basic personal tax credit) * tax rate

• Estimate income is derived from Step 2 above.
• Basic personal tax credit for year 2008 is $9,600. Other year basic personal tax credit can be found in line 300 of Schedule 1 in your tax package for the year.
• Your tax rate can be found in wizebiz.ca/tax-rate-2008, or go to http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-py-eng.html for all other year’s tax rate

4.  Estimate how much CPP you paid over the year (Box 16 – line 308) (Or QPP if you are in Quebec Box 17)

To calculate your CPP paid, use this formula:
(Estimate Income or Max. Annual Pensionable Earnings whichever is smaller – Basic Exemption) * Employee Contribution Rate

In 2008,

• Basic Exemption: $3,500
• Max. Annual Pensionable earnings: $44,900
• Employee Contribution Rate: 4.95%

For other year’s CPP rates, go to http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/clcltng/cpp-rpc/cnt-chrt-pf-eng.html 

5.  Estimate how much EI you paid over the year  (Box 18 – line 312)

To calculate your EI paid, use this formula:
(Estimate income or Max. Annual Insurable Earnings whichever is smaller) * EI rate

In 2008,

• Max. Annual Insurable Earnings: $41,100
• EI Rate: 1.73%

For other year’s EI rates, go to http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/clcltng/ei/cnt-chrt-pf-eng.html

6.  Estimate RPP (Registered Pension Plan) contribution over the year (Box 20 – line 207)

If you contribute to your company’s pension plan, you will need to include that into your income tax return.  The amount of contribution are set by you, so if you do not know you have a pension plan, most likely you don’t have one, just ignore this line.  If you do have one, add up all your contribution over the year, and this value will be your RPP contribution value.

7.  Estimate Union Due you paid over the year (Box 44 – line 212)

Most union due are being deducted from your paycheck directly for a fix amount. If you belongs to a union, you probably know what is your union fee.  If you don’t know, ask around your co-workers to find out.  If you are not sure if you belongs to any union, most likely you are not in any union, just ignore this line.

8.  IMPORTANT: Write a letter to explain your situation and your calculation

This step is very important.  Since all of your calculations are only estimates based on the best of your knowledge, it is crucial to let CRA knows how did you derive your number.  Most importantly you want to let them know why do you need to calculate your own T4 information. 

Type or write up a brief letter, briefly explain your situation.  Indicating that despite your continuous effort to contact your employer, you still cannot get your T4 or any income information from your employer. Provide your employer’s company name, the boss name if you know, and the address of the business. Then briefly explain how you estimate your income for the year.

Do File Your Tax, It Is Illegal Not To Report Your Income

Although it is tempting to just say “I never get any T4 from my employer, so I don’t file my tax”.   It is very important that you report your income every year if you in fact have earned any income.  It is a criminal offence not to report your income, and the penalty can include jail time.  So just follow the steps above and file your income tax.  After all, most likely you will get some tax refund, why pay more than you need to?  You have worked hard, and have paid enough tax over the year, why not spend a little time to figure out a few numbers, fill out the tax return form to get your money back?

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 submitting you tax return to CRA are as follows:
Deadline for Individual: April 30, 2009
Deadline for Self-Employed: June 15, 2009

Deadline for all payment due if you owe any tax: April 30, 2009

Yes, that’s right. Even though you maybe self-employed, and don’t need to file until June, if you owe tax, you are still required to pay on or before April 30, otherwise interests and penalty will apply to you.

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

Summary of Budget 2009 related to tax benefits:

Propose effective from Jan 1, 2009

• Basic personal amount (this is the amount of tax free money everybody is entitled): $10,320
• First personal income tax bracket, 15% tax rate: 20,000 to $40,726
• 22% tax rate: $40727 to  $81,452
• Low income family can earn an additional $1894, and still receive maximum national child benefit
• Increase age credit by $1000
• 15% home renovation tax credit for spending from $1000 to $10,000
• Home buyer’s plan (HBP) can withdraw from RRSP limit from $20,000 to $25,000
• First time home buyer tax credit of 15% will be applied to a $5000, and $750 tax relief
• Corporate income tax rate to 19%
• Small business federal tax will be 11% with limit of $500,000 from $400,000
• 50% CCA rate to investment in manufacturing or processing machinery and equipment in year 2010 and 2011
• Two years 100% CCA rate for computers
• 15% mineral exploration tax credit extend to 2010

Reference: http://www.budget.gc.ca/2009/pdf/budget-planbugetaire-eng.pdf

What is TSFA?

According to the CRA (ref to http://www.cra-arc.gc.ca/E/pub/tg/rc4466/rc4466-e.html#P44_1110): “a tax-free savings account is a new way for residents of Canada to set money aside tax free throughout their lifetime.  Contributions to

To make long story short, here is the characteristics of a TFSA:

• You can put money in (contribute) up to $5,000 a year beginning in year 2009
• You can rollover any unused contribution amount indefinitely
• You can take money out at anytime
• Your return on investment (e.g. interests earned from the $5,000 you put in) is tax free
• You must be 18 or older, resident of Canada and have a valid SIN card

So What’s the Catch?

Here it is, the major catch: The amount you contribute to the TFSA, is not tax free.  Only the return on investment is tax free.  If that’s not clear enough to you, here is an example:

Example: 
Mary earns an annual income of $30,000 in 2009, to simplified matter, assume tax rate is 22% without any other tax credits or tax benefits, nor CPP or EI on the annual income.  Mary put $5,000 into the tax-free saving account with 1% return on investment by the end of year 2009.
1.  Mary earned $30,000
2.  Mary paid $6,600 tax, leaving her $23,400
3.  Mary put $5,000 in TSFA
4.  Mary earned 1% interest in TSFA, $50
5.  Mary withdrew all her money, $5,050 from TSFA in year 2010, she now has $23,450
Total Tax Paid: $6,600
Note the $50 is tax free. Unlike RRSP, Mary does not get a tax benefit on any of her $5,000 contribution

With the same senario, but this time she puts her $5,000 into RRSP
1.  Mary earned $30,000
2.  Mary contribute $5,000 in RRSP
3.  Mary paid $5,500 tax (tax of 22% on only $25,000 taxable income)
4.  Mary earned 1% interests, $50
5.  Mary cannot take them out until retired.  Let say she retired, and withdrew $5,050
6.  Mary needs to pay tax on the whole amount $5,050 (assume tax rate is constant of 22%), which is $1111, leaving her $3939
Total Tax Paid: $6611
Note that although the result came out that Mary would be paying $11 more on tax as a result, however since RRSP investment are of long term and for retirement purposes, investment goals can be a lot different than using a TSFA.  It also does not account for the many tax benefits for retirees are entitled as well. 

So RRSP or TSFA? It is all about Timing

As you can see from the above examples, there are differences between RRSP and TSFA.  Most importantly, do not mislead by commercials and advertising thinking that you will get tax deduction from TSFA just like RRSP.  In my opinion, it is all about timing.   You can certainly take advertage of the TSFA for short and mid term investment goals where you can take out the money as well as your return on investment tax free at any time.  Or if you use TSFA to satisfy your retirement goals when you have already maxed out your RRSP contribution space.

If you search the web or asked a few accountants, you will probably get the idea that the easiest way to pay yourself is to reimburse yourself.  I did not mention anything about reimbursement In the How to Pay Yourself article, it is because paying yourself involves giving money to yourself for personal expenses, while reimbursement only deal with business expenses, hence it is for your business, not paying yourself.

What is Reimbursement

Reimbursement is when an employee paid for business expenses out of their own pocket, which are after tax earnings, the employer paid the employee those spending without taxing the employee.  Or, if you run a consultant business, and you charge your clients all expenses related to the clients, you bill them your business expenses, and those incomes are considered Reimbursement income for you, and they are not taxable.

Example 1: 

Amy, an employee, gets salary of 2000 after paid income tax from her pay check for 200 for the month. She used her 2000 dollars after tax money to buy a flight ticket for a business trip.

Amy notified the employer that she paid for her business trip out of her own pocket, and requested a “reimbursement” of the 2000 dollars with the proof of business spending of the flight ticket itinerary. 

Next month, Amy gets a salary of 2000 after paid income tax from her pay check for 200, along with the 2000 dollars for the flight ticket business expense.

In total, she received 6000 dollars from the company (4000 from salary, 2000 for flight ticket expense), but she only paid 400 dollars tax which applies for her 4000 salary.

How to Reimburse Yourself

So what happened if you are the owner of the company? The rule of thumb is: for all business expenses you pay from your personal income, record as a “reimbursement expense” to yourself.   Regardless if you are an employee who draws salary, paying yourself dividend, or paying yourself nothing from the business, you can use this method.  The point is that money use for business expenses should not be taxable, regardless of who is paying for it.

Example 2:

You are the owner of company ABC.  You paid 1000 by interact on your personal checking account for photocopying machine for your office.

Using Quickbook to record Reimbursement

If you are using quickbook, it is easy, all you need to do is to fill in the cheque form:

1. Use the cheque form, select Petty Cash or Checking account from the select drop down box.
2. In the No. field, enter “Reim”.  In the Payto field, pay to yourself. 
3. In the Account select field, select “Office Supplies”
4. Enter 1000 in amount field and select the correct tax field, Quickbook automatically calculate the correct GST and PST. 
5. Save

Manually record Reimbursement

To manually record into the book, you Decrease Petty Cash account (Asset), Increase Reimburse – Office Supplies account (Expense). 
[Table=6]

As you can see, reimbursement only works when you are paying for business expenses, you cannot reimburse personal expenses.  

Need Help in Bookkeeping?  We offer consultation on the phone, email, or face-to-face appointment.  Contact us today and see how we can help. 1-416-628-2036, info@wizebiz.ca

Related Articles:

How To Pay Yourself – Corporate
Mix Personal and Company Spending
Mix Personal and Company Spending – using Quickbook
Debit and Credit