Why do I have to pay tax by Installments?

Personal Installments

You have to pay tax by installments for the same reason that most people have tax withheld from their income throughout the year. If you earn income that has no tax withheld or does not have enough tax withheld for more than one year, you may have to pay tax by installments.

This can happen if you earn rental, investment, or self-employment income, certain pension payments, or income from more than one job.

Who has to pay?

If your net tax owing is more than $3,000 in 2014 and either in 2013 or 2012.

When payment are due?

For current year, payments are due on Mar 15, Jun 15, Sep 15 and Dec 15

Penalties

You may have to pay a penalty if your instrumental payments are late or less than the required amount. CRA apply this penalty only if your installment interest charges for 2014 are more than $1,000.

Corporations Installments

Corporations generally make monthly or quarterly payments called installments towards their tax liability. There are three options you can use to calculate the least amount of tax you have to pay in installments for the current tax year.

Monthly installment payments

You can calculate your monthly installment payments using one of the following options:

• Option 1 – One-twelfth of the estimated tax payable for the current tax year is due each month of the tax year;
• Option 2 – One-twelfth of the tax payable from the previous tax year is due each month of the current tax year;
• Option 3 – One-twelfth of the tax payable from the year before the previous tax year is due in each of the first two months of the current tax year. One-tenth of the difference between the tax for the previous tax year and the total of the first two payments is due in each of the remaining 10 months of the current tax year.

Are you eligible to make quarterly installment payments?

• A small CCPC is eligible to make quarterly installment payments if, at the time the payment is due:
  • - it has a perfect compliance history;
  • - it has claimed a small business deduction for the current or previous tax year;
  • - together with any associated corporations, for the current or previous tax year:
•                                     – it has taxable income of $500,000 or less; and
•                                     – it has taxable capital employed in Canada for the tax year of $10 million or less.

When you do not have to pay installments

Tax payable of $3,000 or less

You do not have to make installment payments on your federal taxes if the total of your taxes payable under Parts I, VI, VI.1, and XIII.1, determined before taking into consideration specified future tax consequences prior to the deduction of current-year refundable tax credits for either the current or previous year, is $3,000 or less [subsection 157(2.1)].

If your Part XII.3 tax is $3,000 or less in the current or previous year, you do not have to make installment payments on this tax.

Similarly, you do not have to make installment payments on your provincial or territorial taxes if the total of your provincial or territorial taxes for the current or previous year is $3,000 or less; however, you have to pay your taxes, if any, on your balance-due day.

New corporations

Except for Part XII.1 tax, you do not have to make installment payments for a new corporation until you have started your second year of operation. However, for your first year of operation, you have to pay any tax you owe on or before your balance-due day for that tax year.

This information is extracted from Canada Revenue Agency Website. For more information click following links

Personal tax installments
Corporation installments 

Improving Cash Flow Strategies

Cash Flow Importance

Why is cash flow so important for a business? A simple answer to this question is, without proper cash management no business can survive and resultantly leads to trouble with creditors and ultimately in bankruptcy. Therefore, it is safe to say that cash is the lifeblood of a business. A very popular saying is “cash is king” in every business.

It is important for a business to understand the requirement of its cash flow which allow in making wise investments and protecting the company’s future growth. How do you know that you have enough cash to survive?  Some of the strategies can be utilized to manage cash includes monitoring daily cash position, utilizing proper accounting techniques for receivable and payables, budgeting, cash forecasting, preparing monthly or even weekly cash flow for medium to large size businesses.

A well planned cash flow management will help a business to:

• - Maintain its liquidity to pay its debts and payable
• - Comply with bank covenants
• - Helping during the downturn time
• 
  

Warning Signs

• - No positive cash flow for several months
• - Receivables are over 60, 90 days
• - Payables are over 60+ days
• - Unable to pay yourself
• - Borrowing against credit cards
• - Inventory levels are going up
• - Dipping into your retirement savings plan to overcome the cash shortages
• - Home refinancing to meet routine expenses
• 
  

Tips to improve cash flow

• - Maintain your books regularly, invest in a proper accounting system
• - Utilize net 30 days option to pay your bills
• - Invoice regularly and collect them faster or offer some discount incentives so customers pay your bill faster
• - Maintain your inventory, don’t invest too much cash unless there is a strategic reason for that
• - Check your prices, a proper pricing strategy can be adopted to make sure that you are maintaining your sales
• - Strategically evaluate renting vs. leasing and/or buying vs. manufacturing options.

 

Most small businesses close their business doors after one year because they failed to manage or implement a proper cash management system.

CNC can help you to evaluate your cash-flow needs and implement a strategy to manage your cash flow effectively and efficiently which is critical for your business survival and growth.

Income Splitting with Minor Kids

One way to reduce your taxes is to split income with your family. This is one of the popular tax planning strategy. Under this strategy, you hire your children and pay them salary which is deductible to your business as long as wages are reasonable in relation to the services they have provided. CRA checks the reasonability of the amount in terms of what would you pay to an arm’s length party for similar job.

Some of the jobs that a kid can perform including:

-          Cleaning office

-          Washing automobile

-          Mailing letters

-          Products delivery

-          Data input

In some cases these expenses can be denied by CRA.  In one of Tax Court Case Bradley v The Queen, TCC 2006 500), CRA challenged the expenses. In 2001, Nancy Bradley, employed her daughter who was 8 year old and her son Mathew who was 12 years old. She paid them salary $2,000 and $5,000 respectively. Nancy claimed these payments as salary expenses on her taxes. CRA said these payments were not based on the duties they performed or the hours they worked and lastly, they are not reasonable, therefore, CRA denied these expenses. Nancy and kids said these are legit and payments were made however, judge ruled in the favor of CRA since mom had the control over funds withdrawal and kids did not have full control over the funds. So a lesson we learned is:

-          Payments should be reasonable

-          Work description should be in place ….. what they did

-          Working hours record should be maintained

-          A separate bank account should open under the kids name on which they should have a sole discretion to withdraw the funds

Foreign Income Verification Statement (Form T1135)

Canada Revenue Agency announced a change to form T1135 Foreign Income Verification Statement for taxation years ending after June 30, 2013. The purpose of this move is to crack down on international tax evasion and aggressive tax avoidance as laid out in the 2013 Economic Action Plan. Individuals, corporations, trusts, and certain partnerships, that, at any time during a year, own specified foreign investment property costing more than $100,000 must file a Form T1135 by the filing due-date of their income return . This applies even if the taxpayer has no tax payable during the year. If you own specified foreign property in excess of $100,000 and fail to file Form T1135, you could be subject to late filing penalties of $25 per day to a maximum of $2,500 per year. For more information read here

B.C. Early Childhood Tax Benefit

Budget 2014 proposes to introduce the B.C. early childhood tax benefit (BCECTB) as a tax-free monthly payment, effective April 1, 2015. Benefits from this program will be combined with the federal Canada Child Tax Benefit (CCTB) and the B.C. family bonus program into a single monthly payment.

The BCECTB provides a benefit of up to $55 per month per child under age 6. Benefits are based on the number of children in the family and the family's net income. The BCECTB will be reduced if the family's net income exceeds $100,000 and will be zero once the family's net income exceeds $150,000.

Complete budget www.gov.bc.ca/budgettaxchanges

Medical expenses for tax purposes

An individual may claim a medical expense tax credit for the amount determined by the formula in subsection 118.2(1) in Income Tax Act. Under the formula, the lowest tax rate percentage (15% for 2012) is multiplied by the total of two calculated amounts. The first calculated amount relates to medical expenses paid in respect of the individual, the individual’s spouse or common–law partner and children under 18 years of age. The second calculated amount relates to medical expenses paid in respect of other dependents of the individual.

Say for example, that you have incurred $3,000 in total eligible medical expenses and your total income on line 236 is $51,000 from all the sources so according to the formula:

Medical expenses                                                                         $3,000

Minus lesser of 3% of 51,000 or $2,109 (annual threshold)                  -1,530
Subtotal                                                                                     1,470

Allowable medical expenses credits 15% of 1,470 = $220.50    

                  

Subsection 118.2(2) describes the types of medical expenses that are eligible for the medical expense tax credit. Additional requirements for paragraphs 118.2(2)(m) and (n) are provided in sections 5700 and 5701 of the Regulations, respectively. If a particular expenditure is not described in subsection 118.2(2) (or does not satisfy the additional requirements in sections 5700 or 5701 of the Regulations, here paragraphs 118.2(2)(m) or (n) as applicable, are relevant), the expenditure is not eligible for purposes of claiming a medical expense tax credit, even though the expenditure may have been incurred for medical reasons.

Gluten-free food

The incremental cost of acquiring gluten-free food products compared to the cost of comparable non-gluten free food products may be eligible medical expenses under paragraph 118.2(2)(r). The cost must be incurred on behalf of a patient who has celiac disease and who has been certified in writing by a medical practitioner to be a person who, because of that disease, requires a gluten-free diet. 

Medical marihuana

If a patient is authorized to possess marihuana for medical purposes under the Marihuana Medical Access Regulations orsection 56 of the Controlled Drugs and Substances Act, the cost of the medical marihuana or marihuana seeds may qualify as medical expenses under paragraph 118.2(2)(u).

Cosmetic Procedures

An amount that may otherwise be an eligible medical expense described under subsection 118.2(2) may be denied pursuant to subsection 118.2(2.1) if the service was provided purely for cosmetic purposes. 

Receipts

Generally, all expenses claimed as eligible medical expenses must be supported by proper receipts. A receipt should indicate the purpose of the payment, the date of the payment, the patient for whom the payment was made and, if applicable, the audiologist, dentist, medical doctor, medical practitioner, nurse, occupational therapist, optometrist, pharmacist, physiotherapist, psychologist, or speech-language pathologist who prescribed the purchase or gave the service. A cancelled cheque is not acceptable as a substitute for a proper receipt. In addition to receipts, proof of payment or proof of support may be required in situations where an individual claims the medical expenses tax credit for amounts paid in respect of a dependant who is 18 years of age or older at the end of the year.

A complete list of eligible medical expenses is available on Canada Revenue website http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/330/llwbl-eng.html

Home office expense against employment income

Some employees are allowed to deduct home office expenses on their tax returns if employers allowed and complete T2200 form, declaration of condition of employment expenses. You can include a portion of the rent, utilities bills in proportion to your office space. In some cases office supplies and cell phone bills are also allowed. Your deductible home office expense cannot exceed your income from the employment.