Are You Unknowingly Part Of The Underground Economy?

"Can't I just pay my employees with cash?" We still hear some version of this question now and then.

Moonlighting or "working under the table" is the basis for the underground economy in Canada. According to the Canada Revenue Agency (CRA), this can include:

bartering, failing to file tax returns, omitting an entire business activity from your tax return, skimming a portion of business income from what you report on your taxes, and not reporting a portion of employment income, like tips and gratuities.

CRA is actively searching for and fighting these activities. Click here to read more about this important topic.

If you aren't sure if your small business might be unknowingly contributing to the underground economy, stop now and give it some serious consideration.

Do you have questions about how to set up your small business so you can keep yourself safe? Get in touch.

Should I Buy or Should I Lease My Next Vehicle?

As a business owner, I have debated this question many times over the years. I have both leased and purchased, and I like to get a new vehicle every 3 or 4 years... whether I really need it or not.

My advice about making this decision is: speak with your accountant.

There are many ways to handle both the usage and the HST (Nova Scotia) you can claim. Factors, such as whether you are a Sole Proprietor or Corporation, will impact this decision.

• Purchased vehicles become assets and part of your net worth.
• Lease payments become expenses which can be written off using the CRA rules.

Lease payments are generally lower than your payments if you buy, which makes them attractive. Buying might have higher payments but you are making payments on an asset that eventually will be paid off, meaning you will be debt free until you require a new vehicle.

Ideally you don't want to take out a loan to pay off a vehicle that is not expected to last at least as long as the term of the loan. Dealerships may offer longer terms for repayment to make you think the cost is reasonable (smaller payments), however after 5-6 years, the warranty is gone and problems start. A vehicle will depreciate if it's an asset, and generally by 30% in the first year.

Leases have mileage limitations so, based on your future use of the vehicle, this must be considered. There are also penalties if you wish to get out of a lease sooner that its term. Sometimes the lease rates are higher than purchase rates.

Here is a calculator from CRA which will help you compare the costs.

Meals vs. Food as Business Expenses

When you're just getting started in business, you may not know how the CRA feels about meal expenses. Here's an excerpt from the CRA's website under business expenses:

The maximum amount you can claim for food, beverages, and entertainment expenses is 50% of the lesser of the following amounts:

• the amount you incurred for the expenses; or
• an amount that is reasonable in the circumstances.

Of course, you need to capture this non-standard transaction appropriately in your bookkeeping records.

Recently a client asked me, "What about when I'm paying for food to be brought in when I'm putting on a training workshop?" In that case the food becomes part of the total workshop expenses because you are (or should be) recouping the cost as part of the workshop registration fee. In effect, you are reselling the food - much different than noshing steak and beer on the waterfront.

File HST Returns even for Zero Sales

After you register for an HST number when setting up your business, you are required by law to send in your remittances even if you have zero sales.

When you start a business, unless you are expecting sales right away, or under $30,000 in sales for the first year, you do not need to register your business to collect HST. When you do decide to register, here's a story you should know about.

A recent client of mine had registered their business two years ago with the intention of proactively looking for business. This client had not had any sales in those two years. However, when they called CRA to register for HST, the start date was backdated instead of beginning when he called. We are uncertain why. This client was then responsible to file returns for the previous reporting periods. Because they didn't know this, CRA assessed him for what they believe they owed them. They received a bill in the mail they were expected to pay. When they finally realized they had to file all the returns backdated, they filed all of the zero returns so they could claim HST on expenses they had incurred for the start up. Because they hadn't filed previously, CRA took their credit and applied it to the outstanding amount. When they called asking why they owed money on a zero sales return, CRA said it was because of the penalties for not filing his returns!

Lessons learned?

1. Always file your HST returns, even if there are no sales!
2. When calling to set up an HST account number, ensure they date the paperwork for the date you are applying. Keep an eye on the mail and check for confirmation of the reports due.
3. Although it does look professional when you charge HST, unless you are over the $30,000 mark in revenues there is no point in registering before you are ready unless you want to claim HST for expenses.

Just Because You Know How to Do Your Own Bookkeeping...

Are you still insisting that you do your own bookkeeping because you know how?

It is imperative that you maintain a current set of books. Canada Revenue Agency can audit you at any time with little notice. If you are not keeping up, think about the things happening around you that are causing you such unnecessary stress.

CRA is likely hounding you because you haven't filed last year’s taxes or, worse, HST and payroll remittances. They have likely decided to send you an assessment of what they feel you owe and it is due just like any other bill.

Your cash flow is suffering and now you need to take a loan out to cover expenses until your backlog of receivables and payables are cleared up. But, wait, you don't have any statements to show the lender. Your accountant is telling you to hire a bookkeeper if you can't keep up... in the end causing much stress and money that didn't have to be spent trying to get things caught up.

You haven't reconciled your bank accounts in months. Oopsie, was that an NSF charge on the last statement?

Your vendor won't ship your orders because you haven't paid for the last few. You swear you did but can't prove it.

Your clients are loving their extended credit terms! (Good for them, not you.)

Does this sound familiar? Don't try to be the expert in everything. Very few people can handle everything in a timely fashion and they are normally those workaholics we never want to be.

Just because you know how to do your own bookkeeping, doesn't mean you should.

Are You in Danger of Missing Your Business Income Tax Deadline?

Do you know when you are required to file income tax returns for your business with the Canada Revenue Agency (CRA)? The following is a guideline to use to make sure you file in time to avoid penalties.

If you are a solopreneur or self-employed, the deadline is June 15th whether you owe tax or not. If you owe, you should pay by April 30th to avoid interest. Keep in mind that if the date falls on a weekend or holiday, it is due the following business day. This also becomes the effective date for any spouse or common-law partners as they are unable to file without your income. There are many software applications online for free to file these returns. Keep in mind that the software won’t know all of the tax benefits you can take advantage of. For this you need the advice of an expert.

If you are a corporation, you must file your tax return within 6 months of your corporate year end, however you should pay within 3 months to avoid interest. So if your year end is December 31, you must file by June 30. If your company owes tax and you don't have the funds to pay it off, file anyway! If your filing date ends on a weekend or holiday, it is due the following business day.

For information on penalties, refer to the CRA website. In short, you want to avoid these.

Keep in mind, no matter what type of business you have, you must keep your records for 7 years in good order in case the CRA decides to audit you. Having systems in place for records is imperative.