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Pay Down Your Mortgage or Make a RRSP Contribution ?

by Sarb Sandhu,CPA

 
 

One of the most frequent questions asked by my clients at this time of the year is, "Should I invest in

a RRSP or pay down my mortgage ? " This simple question is usually very difficult to answer, as it

depends on the circumstances of each individual. 

 

If the individual is in the highest tax bracket of 45.8%, then I would recommend that he contribute to an

RRSP and use the tax refund to pay down the mortgage.  For example, every $ 1,000 RRSP

contribution, entitles you to $458 tax refund.  This tax strategy is not solely for the well-off.

Individuals earning $ 87,124 to $104,755 a year are in the 40 percent tax bracket.   This means

that for every $1,000 RRSP contribution, you get back $400 in tax.

 

But maximizing RRSPs isn't for everyone.  For example, individuals earning between $11,038 and

$37,568, are in the 20.1 percent tax bracket.  This means you will not get as great a tax benefit,

therefore you should pay down your mortgage.  Remember any gains you realize at the time of sale

of your home is fully tax-free because the principal residency rule applies..

 

To avoid costly mistakes and maximize the benefits of an RRSP, an individual should seek

professional advice of a Chartered Professional Accountants.

 
 

Sandhu & Company

Chartered Professional Accountants

Tel : 322 - 7576

 

 

 

 

Business Organizational Structures

by Sarb Sandhu,CPA

 
 

From a legal standpoint, there are three main types of businesses: sole proprietorship,

partnership, and corporation.  The type of business structure you choose has a significant effect

on the way you report your income, the types of returns you complete each year, and many other

issues you should consider.

 

A sole proprietorship is an unincorporated business that is owned by one person.  This is the

simplest form of business to setup.  When operating as a sole proprietorship, the owner assumes

all the risks of the business.  The business and the owner are treated as one, therefore the

owner's personal property is at risk.  For example, a creditor who has a claim against a sole

proprietor would have a legal right against all the proprietor's assets, whether business or

personal.  This unlimited liability is the biggest disadvantage of a sole proprietorship.

 

The second business structure, partnership is created when two or more persons join together to

form an association.  Each partner contributes money, labour, property, or skills to the

partnership.  These resources are combined by the partners in the business with the intention of

making a profit.  The business profits earned or losses incurred will be divided among the

partners based on the terms agreed in the partnership agreement. A partnership agreement

should be drawn up with the assistance of a Chartered Professional Accountants to ensure all important

issues are documented.  This will protect the partners in the event of a disagreement or

dissolution of the partnership.  A partnership does not pay income tax on its operating profits and

does not file an annual tax returns.  In a partnership each partner files their individual annual

income tax returns as usual and includes his or her share of the partnership income or loss.  Like

proprietorship a partnership also has unlimited liability.  Each partner is personally liable for all the

debts and obligations of the partnership, including the actions of the other partner.

 

The third business structure is corporation.  This is a limited company created through a process

called incorporation.  In the eyes of the law, a new legal entity is created.  This new entity is

separate and distinct from its members (the shareholders and directors).  Here a creditor with a

claim against the assets of the company, would normally have no claim against the shareholders of

the company.  Professional advice should be sought to ascertain the liabilities assumed by

the corporation, its shareholders, directors, and employees.  One of the advantages of incorporating

is the flat rate of tax for active business income of about 13.5% up to $500,000.  This tax rate is

obviously favorable compared to the personal higher incremental tax rate of about 45.8%.

 

Each of the business structures have different and important implications for liability, taxation

and succession.  One should seek professional advice from a Chartered Professional Accountants. 

Through proper tax planning, by such means as income splitting, an individual can keep more

of their hard earned money away from the Tax Man.

 

Want your accounting and tax related questions answered in future articles, please call Sarb

Sandhu, CPA at 322-7576.

 

 

 

Get The Most From Your Business Losses

by Sarb Sandhu,CPA

 
 

Business loss occurs when expenses exceed revenue from the operation of business.  If your activities

generate losses for a number of years, Revenue Canada is inclined to view it as a hobby

rather than a business.  Therefore, you must maintain detailed records to demonstrate

that you have a "reasonable expectation" of a profit from the business.

 

The courts will find in favour of the taxpayer in cases dealing with the deductibility of

business losses if the following conditions are present : there is a reasonable expectation

of a profit, the expenses occurred are reasonable, and there is adequate supporting

documentation.  (Relevant Case: Hugill, R. Vs The Queen, 95DTC 5311).

You should ensure that you have a bone fide business (i.e. not just for tax purposes).

Your company records should be complete and in order.  The estimates for profit you make

should be based on sound planning and on market conditions.

 

Proprietorship and partnership business losses can be applied against the individual's

personal employment income, interest income, capital gains, etc.  These non-capital  losses

that are not utilized in the current year can be carried back 3 years and forward 20 years.  The deduction

of business losses is optional, not mandatory.  As a result, you have opportunities for tax planning.

For small unincorporated business, an individual should apply

business losses to those years that he or she is expected to be taxed at the higher marginal

tax rate.  This will result in the largest tax savings.  An individual should also be cautioned in that

loss carryovers should never be used to reduce taxable income below the $11,038 level.

Other items an individual should be aware of:   Business losses can not be created by claiming

home office expenses;  for rental property losses can not be created by claiming capital cost

allowance ; and there are several restrictions on farm losses.

 

Incorporated businesses  have a disadvantage in that business losses stay in the

company and therefore, can not be used of offset personal income.  Remember,

corporations are legal entities separate from its shareholders. Again, non-capital losses

can be carried back 3 years and forward 20 years.  Since the deduction of business

losses is optional and not mandatory, there is room for tax planning. Small business

corporations should utilize losses against income that exceeds $500,000 only because after

this level, corporations are taxed at a higher rate.

 

Where tax loss carryforwards are about to expire, one should seek professional advice

from a Chartered Professional Accountants to increase taxable income in the current year.  A

taxpayer can increase income by reducing a number of discretionary deductions, such

as capital cost allowance or the capitalization of interest.

 

For your accounting and tax related questions answered in future articles, please contact

Sarb Sandhu, CPA at 322-7576.

 

 

 

Distinction Between Business Income and Property Income

by Sarb Sandhu, CPA

 

The rental income you receive from real estate can be classified as either income from business or

income from property.  This distinction is necessary because there may be different tax

treatments to this income.

 

The Income Tax Act does not specifically define the term "business income" or "property income."

Business and property are both defined in very broad terms, therefore it is difficult to distinguish

between income from business and income from property.

 

If the renting of real property is incidental to your business, the renting will be regarded as business

income.  Merely renting suites in an apartment block constitutes income from property.  The

more services you provide to your tenants, the greater the likelihood that you are earning income

from a business.  For example these services may include office cleaning and protective

services.  The services you provide have to go beyond the customary services that are usually

provided.

 

Why all the fuss to determine the distinction between business income and property income?  Well

here are few of the different tax treatments depending on this distinction.  An individual cannot

deduct capital cost allowance to create or increase a rental loss, if income is considered as

property income.  If it is business income the capital cost allowance can be used to create or

increase a loss.  This loss allows you to reduce other types of your income like employment

income.

 

If the income or loss is from a property that you have transferred to your spouse or to a minor child, it

is deemed to be your income or loss.  This attribution rule only applies to income from property

not income from business.

 

For the purpose of calculating your allowable Registered Retirement Savings Plan, income from

property is not qualified as "earned income."  RRSP allowable contribution is  computed

as 18% of your previous years "earned income."

 

If the income is from a farming business, then an individual may qualify for the $800,000 capital

gains exemption when this business is sold.

 

There are several other issues related to the distinction of business income and property income

that may effect your tax liability,one should seek professional advice from a Certified General

Accountant.

 

Want your accounting and tax related questions answered in future articles, please call Sarb

Sandhu, CPA at 322-7576.

 

 

 

Home Office Expenses

by Sarb Sandhu, CPA

 
 

With growing trend of  downsizing by big business, many individuals are choosing to be

in business for themselves.  When an individual makes the switch from being merely an employee

to being self-employed business, there is much room for tax planning.

 

If the self employed individual maintains an office in their personal residence, he or she may be able

to deduct certain costs associated with owning and maintaining the residence.  To determine if

you qualify for any deductions for home expenses, the Income Tax Act provides two tests,

for which you must meet at least one :

 

- The work space is the individual's principal place of business or

-The work space is used exclusively for the purpose of earning income from business

and is used on a regular and continuous basis for meeting clients, customers,

or patients of your business.

 

If you meet one of the above conditions for deductibility, you must apportion the expenses

between business and non business.  This allocation of the expenses must be done on a

reasonable basis, usually on the basis of floor space used.  Pro rata deductions can be made

for rent, mortgage interest, property taxes, property insurance, utilities and various operating costs.

You may also be able to deduct capital cost allowance on the pro rata share of the property.

I usually do not recommend that you claim this CCA expense because it is likely to cause

the business portion of your residence to lose its principal residence status.  This may result in

a capital gain and recapture when you dispose of the property.

 

One important point to remember is that you can not use your home office expenses to create

or increase a loss.  The expenses you may deduct is limited to your income from the business

before claiming any deductions for the work space in your home.  Any expenses that you were not

able to deduct due to this rule may be carried forward from year to year and applied against income

generated from the same business.

 

Expenses such as telephone, office supplies, and any other similar expenses that are related to the

business, are not considered  work space expenses.  Therefore these expenses are not subject to the two

tests, and can be used as deductions to create or increase a loss.

 

Before 1988, there used to be some confusion that arose from case law.  Here Canada Revenue Agency

intended to support that separate workspace must be set aside and not used for any other purpose.

However Interpretation Bulletin 514 specifically states that work space which qualifies under the

two test rules, does not need to be used exclusively in the business.

 

Through proper tax planning, by such means as the deduction of home office costs, you can keep your

taxes payable to a minimum.  To avoid costly mistakes, an individual should

seek the professional advice of a Chartered Professional Accountants.

 

Want your accounting and tax related questions answered in future articles, please call Sarb

 

Sandhu, CPA at 322-7576.

Employee or self-employed

 

by Sarb Sandhu, CPA

 

 

 

My clients, who are employees of a business, are often very disappointed with the limited tax

 

deductions that are available to them.  On the other hand, my clients who are self-employed are

 

able to deduct all reasonable expenses of doing business from the their revenues.  Obviously,

 

there are more tax planning opportunities for the self-employed individual.

 

 

 

When employees are paid by their employer, taxes are withheld at source.  These taxes which

 

may include Canada Pension Plan, Employment Insurance, and Income Tax, are remit to

 

Canada Revenue Agency by your employer.

 

 

 

For these individuals that are self-employed, Canada Pension Plan contributions and Income Taxes

 

are computed at the time the Income Tax Return is prepared.  These self-employed individuals

 

have no liability for Employment Insurance because they do not qualify for the benefits

 

provided by this plan.  There are exceptions to this rule.

 

 

 

Sometimes it is very difficult to distinguish between employees and self-employed individuals.

 

As a consequence, there has been much litigation surrounding this issue.  Through these

 

litigation's, several guidelines have surfaced to distinguish between employees and  self-employed

 

individuals.

 

 

 

The first guideline includes the concept of control.  Here the courts determine who has control

 

over the hours of work and whether the individual can hire assistenances to help.  For an

 

individual to be considered self-employed they must be able to set their own hours of work,

 

hire assistance's as required, and be able to perform the duties without specific instructions

 

from the employer.

 

 

 

The second guideline includes the concept of specific results.  Here the courts determine if a

 

specific outcome or result is expected from the individual.  If a employer hires you for a specific

 

performance or result then you are considered self-employed.  For example a Chartered

 

Professional Accountant hired to perform an audit of a company's financial statements would be

 

considered self-employed because the CPA is hired for a  specific purpose (the audit) with a

 

specific result ( the audited financial statements).

 

 

 

The third guideline deals with the concept of economic reality.  Here the courts determine if the

 

individual can profit or is exposed to a risk of a loss and if the individual uses his own tools

 

and funds to venture.  For example if a construction worker is hired to build a specific

 

structure, with his own tools, and  at a fixed amount of remuneration, he is considered

 

self-employed.  This individual is in a position to profit or lose depending on how efficiently he

 

performs to complete the structure.

 

 

 

The fourth and final guideline deals with the concept o f integration.  Here the courts determine if

 

the individual is an integral part of the business on a separate individual is an integral part of the

 

business on a separate individual entity.  For example in a retail clothing store, a sales person

 

would be considered an employee because he is part and parcel of the retail store.

 

 

 

If any doubt arises regarding the individual's status as self-employed, a business

 

using the services of this individual should seek professional advice from a Certified General

 

Accountant to avoid any costly contractions by Canada Revenue Agency.

 






About Us

Sandhu & Company, a CPA (Chartered Professional Accountants) accounting firm, was established in 1998 to provide full service accounting and taxation services to local businesses. Our practice is focused on the needs of the small business corporation and owner-manager businesses.

Sandhu & Company, CPA is committed to the highest level of integrity, quality and professionalism and provides clients’ with solutions in the area of accounting, audit and tax services.

Sandhu & Company, CPA is a progressively growing Vancouver accounting firm. We continue to grow due to the referrals we receive through word of mouth from our existing clients’.

Ease the unnecessary stress that comes with filing your taxes by leaving it in the hands of the Vancouver tax team at Sandhu & Company, CPA. Our Vancouver accountants offer business solutions targeted at making your business successful by staying competitive. Be successful having our trained professional accountants by your side.

We look forward to meeting you soon.

Contact Info

SANDHU & COMPANY, CPA
Chartered Professional Accountants

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Vancouver Office
101, 2529 Kingsway, Vancouver, BC V5R 5H3
Surrey Office - by appointment only
Suite 103 - 12030 80th Ave. Surrey, BC V3W 3M1

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Tel: 604-322-7576
Email: info@sandhutax.com
Website: www.sandhutax.com

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Vancouver Accounting, Tax, Book keeping, and Payroll Services by CPA

Sandhu & Company, CPA is a full service firm of Vancouver accountants providing Vancouver accounting, Vancouver bookkeeping, and Vancouver tax preparation services. Our main goal is to provide due care and diligence in our work at very reasonable rates. We work to understand your business and personal needs. Understanding your business ensures that our advice is practical and addresses your business challenges. We want to work with you and exceed your expectations. With two locations, our Vancouver accounting firm and Surrey accounting firm have the professional tax accountants with the experience and education to provide quality work. Need a Vancouver Accountant or Surrey Accountant, think Sandhu & Company, CPA.

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At Sandhu & Company, Chartered Professional Accountants, we know how hard it is to earn a dollar and we work hard to help you keep as much of it as possible. The highly-skilled Vancouver tax accountants are committed to proving the best taxation advice and services. Our Vancouver tax accountants have worked with a variety of clients’ representing various sectors of the business community. We are always available to answer client questions, whether simple or complex. We work with our clients’ their success is our success. Our aim is to make the taxation process as simple and hassle-free as possible. We have trained Vancouver accountants who understand the business and financial challenges of small businesses. Our Vancouver tax accountants are expertly suited to help you reach your financial goals. Every industry has its own business critical success issues and our Vancouver accountants pride themselves in understanding those issues and how they impact the Vancouver accounting, Vancouver bookkeeping and Vancouver tax preparation services by Vancouver accountants.

Let our highly trained tax accountants help you with your tax problems with the Canada Revenue Agency! Sandhu & Company has all your needs covered by Vancouver accountants.