Taxes 4 U / The Accounting Department

As a QuickBooks Certified ProAdvisor, I receive every new release of the software.  The main reason users update to the latest version is to have access to the correct payroll calculations tables.  Accessing new features in the software is often an afterthought. Many small business owners don't even look at the new features of the latest QuickBooks release since the bookkeeping task is a hurry up and get it done type of activity. 

Also, I do not recommend that QuickBooks users upgrade to a new release right when it comes available. The reason customers do the upgrade right away is to ensure the correct payroll calculations but it is not necessary since QuickBooks always releases a payroll table update for the prior year version.  So if you are using the 2011 version, you do not have to upgrade to the 2012 version until June 2012. By waiting, you ensure that any glitches are discovered by other people(not you) and are fixed through the update releases. The 2012 version is currently on its 5th update release. And by waiting you also avoid long wait times for support if you run into problems since you can choose an off-peak time to upgrade.

Now, that said, the past few upgrades of QuickBooks have been a yawn!  Nothing really exciting to talk about so if you have upgraded due to payroll needs, you most likely didn't notice much change at all.  And if you don't use QuickBooks payroll functionality, there hasn't been any exciting new features worth spending on a new version.  But that has changed with the 2012 release!

There are a number of significant new features available in the 2012 version that, depending on your business, may be worth looking into. I will summarize a couple of them here but I have not yet finished looking at the new version so I will let you know if I find some more in the future.

1. You can now open 2 QuickBooks files at the same time.  This is a huge advantage if you have 2 companies and are involved in intercompany transactions. This feature is enough of a benefit in that scenario that I have previously implemented Simply Accounting rather than QuickBooks for this type of client. Now there are some limitations on what you can do in the 2nd company file. You cannot operate payroll for example in the 2nd company file. 
2. Batch invoicing. I have already used this function with a client and it is great.  Here's how it works. You group similar customers into billing groups.  Then you select that group and build an invoice with items, prices, descriptions, classes and even invoice comments.  You can set up in the customer record whether the customer prefers receiving their invoice by email or by mail. The batch invoice process will use this preference to create a print batch or email batch from the invoices created.  The invoices themselves are no different from individually created invoices and can be edited and reprinted as required. This function is great for membership dues, rent, licenses, or any billing that is for the same items and amounts for multiple customers.
   There is also a batch timesheet function which allows you to enter multiple timesheets for employees or subcontractors who worked the same times and jobs. 
3. Mass changes to list items. This is a great feature for changing item descriptions en masse. The function is very similar to Excel in that you can select multiple items to change or you can change the first item and then copy down the changes.
4. Email invoices and reports using web based email like GMail, Hotmail, or Yahoo mail.  You can also email using Outlook Express and Windows Mail or use your POP mail settings.  Of course, you can still email using Outlook. 
5. There are some other new features in the interface like a Collections Centre and a Calendar view.  Using these types of changes is usually a personal preference of the user, sometimes you like them, sometimes you don't.  Have a look at these types of visual changes to see if they help you do your work faster or get information quicker. They are not the types of changes that make you buy a new version but are an added bonus when you do. 

I would love to hear your thoughts on the new 2012 version or any questions you have about upgrading to this version.  You can comment here or email me at susan@accountingdepartment.ca

Susan

Comments (0)     

The majority of our business clients are sole proprietors.  And inevitably I get asked by each of them whether they should incorporate.  And the answer is ~ maybe.  It depends on several factors and involves legal, tax and estate planning considerations.

Comments (0)     

You have several options when selecting how to prepare your taxes.  There are pros and cons to each.  Factors that help you decide include price, knowledge, availability, and dependability.  I will outline each option and then give you some tips in deciding.

Do it Yourself

The DIY category actually falls into 2 parts - paper or electronic. 

For the simplest of returns, you can pick up the tax package at the post office and complete the information yourself. The form included in the package is the T1 SHORT,  a one page form that covers the most basic employment and pension scenarios.  For more complex tax returns, you will need the complete T1 return which can be requested from the Canada Revenue Agency (CRA).   

Electronic options include both online and purchased software. If your total family income is very low (less than $20,000) Ufile will let you file online for free.  They also have free options for dependents with the same mailing address and students as long as they are the Family Head.  More info is available at Ufile . TurboTax (previously QuickTax) offers free options for students and taxpayers with simple T4 only income.  See if you qualify at TurboTax's website.

The benefit of DIY tax preparation is that it is relatively inexpensive and readily available.   For the simplest of returns, it can be painless too!  However, if you have certain situations like small business income or pension splitting, the DIY method may not be the best fit. Also, except for the simplest returns, the paper form requires lots of calculations and carryforwards that can get messed up fairly easily.  The software route may not be the best for the computer illiterate.

Tax Preparation Chain (HR Block/Liberty Tax/ etc)

This is one step up from DIY. Depending on the location you visit, the preparer may have only had several hours of tax preparation instruction. The person does not have the experience to know what information may be missing or to advise you on future actions to minimize your taxes. Also, you most likely will never see the same person twice so there is no learning opportunity for the preparer to truly understand your situation.  The draw of these places is often the cash back feature, where you can walk out with your refund in your hand. In this day of fast turnaround by the CRA, this is no longer as valuable as it once was. CRA usually has about a 10 day turnaround for direct deposit.  The fees that these places charge for cash back are astronomical and don't reflect the level of service. Also, these chains often charge by schedule completed so this can add up very quickly and they can't tell you the fee until they are done.  The only time I can recommend someone to do cash back is when they absolutely need money before the end of February.  Efile for preparers does not begin until mid February and the processing can take an additional 2 weeks. If you can wait, the cash back option is just a big rip-off.

Other tax preparers

There are often people with no formal training who hang out a shingle and prepare taxes. These people come from many walks of life.  They may have worked for HR Block or an accountant and decided to venture out on their own.  The knowledge of these preparers can range from none to extensive but you have no way of knowing this in advance. Also, these individuals are not registered with any professional association and are therefore not held to a code of ethics or required to keep up with their tax knowledge. There have been many convictions by the CRA lately of preparers making fraudelent claims including faking charitable donation receipts. These unscrupulous preparers can start up under a new name once they have completed their sentence. And if your taxes are prepared by such a person, you will be reassessed and charged penalties and interest on top of the declined deductions.  CRA publishes these convictions on their website which you can access here.

Accountant

There are 3 types of accountants in Canada ~ CA, CGA and CMA.  Historically it has been the CGA who performed tax preparation for individuals but today, you will see all 3 designations.  I am a CMA (Certified Management Accountant).  As a designated accountant, I am required to meet several conditions including continuing education in the area of taxes, adherence to a Code of Ethics, and Errors and Omissions Insurance.  I am subject to a review by my licensing body.  These conditions are the same for all 3 types of accountants. These requirements ensure that your tax preparer will be ethical and knowledgeable  in preparing your return. If the preparer is not, you have the right to complain to their governing body and have an inquiry done on the matter.  Accountants are not necessarily more expensive than independent preparers and their fee depends on a number of factors. Even if they are a bit more expensive, consider the extra cost insurance to make sure you are not subsequently pursued by the CRA.  Using an accountant doesn't guarantee you won't be audited but it is very unlikely that a professional accountant will create a situation that results in you being charged for tax evasion.  As I tell my clients, my role is 2 fold.  First to ensure we minimize your tax payable, and second to ensure you are not exposed to prosecution. 

Volunteer preparers

I am adding the volunteer preparer to my list as this is a great alternative for taxpayers who are in a low income situation but are not comfortable preparing their own returns. Every year the CRA operates tax preparation clinics staffed by trained volunteers.  These are similar to the franchise operations except there is no fee to prepare your return. These clinics are usually held in public libraries and other community facilities.  You can access a list of these volunteer clinics here.

Comments (0)     

Are you confused yet?  Since the TFSA was introduced a couple of years ago, taxpayers have a choice for setting aside money for the future. But sometimes too many choices create confusion rather than opportunity.  So I am throwing my 2 cents in for your consideration.

First, lets review the elements involved in each option.

How they are the same

The key attribute to both the RRSP and the TFSA is the fact that any income earned by the investment while in the account is tax-sheltered. That means the money can work harder, since every penny earned can be reinvested to earn even more. By the way, the RESP and RDSP plans also share this.  In this day, the interest earned by investments is relatively low so the importance of this feature is not as obvious as during times of high returns. It is this concept of compound interest that financial planners use to demonstrate the power of investing early.

Another similarity between the RRSP and TFSA is the fact that the amount of contributions is restricted to certain limits.  If this limits are exceeded, there are heavy penalties calculated which can eliminate the benefits of the plans.

How they differ

1. The first important difference is the tax advantage of RRSP contributions. However, this feature is aggressively promoted by banks and financial advisors with little explanation to taxpayers how this really works. So many people blindly throw money into an RRSP with no understanding of potential issues in the future.
   
   An RRSP allows for tax DEFERRAL rather than tax SAVINGS. The underlying assumption for this model to work is that you are earning more when you contribute than when you withdraw. Obviously not everyone falls into that scenario.  The most common exception I see are taxpayers with rich pension plans. Examples are teachers, police officers, OPG and Hydro workers.  When these people retire, their combined income from pension and CPP often equals almost the same as their working income. So when retiring, withdrawals from their RRSP results in a tax liability equal to the tax refund previously received. And they have to come up with the cash to pay the tax. So they need to withdraw more than they need just in order to cover the taxes. If they leave the money alone as they don't need the money to live on, at age 71 they are FORCED to withdraw a minimum amount per year regardless of financial need. 
   
   Previously, RRSP's tax deferral benefit was the only way that spouse's could achieve income splitting with their spouse. For a taxpayer with a lower earning or homemaker spouse, the couple could maximize the tax deduction by having the higher wage earner contribute to a spousal RRSP.  After 3 years, any money taken out of the RRSP by the spouse is taxed in the hands of the spouse who has no other income so could effectively eliminate taxes payable on the withdrawn money.  The risk is that in the event of marital breakdown, the money belongs to the spouse and not the contributor. In the past few years, taxpayers with pension income can allocate a split of the income with their spouse when preparing their returns. This allows each year to be handled as best for the couple, almost like reverse tax planning.  With the spousal plan, the earlier contributions can't be changed in the event of a major life change in the family. 
   
2. The limit for a TSFA is $5000 per year starting in 2009, regardless of income.  Assuming you have never contributed to a TSFA since they were introduced, you would now have $15,000 contribution room. This is for each individual so for a spouse, the total would be $30,000.
   
   RRSP limits are calculated based on the prior year's earned income to a maximum of 18% or the annual limit set by the government (currently $22,000). So low wage earners, homemakers, and individuals without earned income (like dividend income) do not have any room to contribute to an RRSP. Very high income earners are limited by the amount they can set aside.  And taxpayers with pension plans have their room calculation reduced by an adjustment for the amount contributed to the pension plan.  So these individuals cannot even contribute much to a spousal plan as the contributions are limited by the contributors room, not the spouse's. And in the event you have a private company pension plan (as opposed to a government plan), your pension could be wiped out by a bankruptcy and you will have neither a pension nor an RRSP. Just ask the former employees of Nortel who thought they could retire at 55 and now are starting over from scratch.
   
3. RRSP room used is gone forever while TFSA room returns.  This feature has caused a lot of issues for taxpayers and banks who found the original legislation confusing in the explanation of the TFSA limits.
   
   As an example, let us assume a taxpayer has maxed the RRSP contribution limit each year.  Then due to financial adversity, he makes a decision to withdraw $30,000 from his RRSP.  Of course, there is tax payable in the year of withdrawal equal to his tax rate. Next year, things are back to normal and he wants to put the $30,000 back in his RRSP.  He can't.  He is limited by the 18% earned income restriction to a maximum set by the government.  This money will have to sit in a tax exposed account until the room gradually increases. (I am ignoring the TFSA option for this scenario).
   
   Now assume the same scenario but the money is taken from a TFSA account.  The TFSA limit is like a bucket of water.  When the money is taken out, the water level goes down but the bucket is the same size. Next year, he can put back the money taken out (plus an additional $5000 amount added during the year).  No taxes are payable when withdrawn so the taxpayer has the entire $30,000 to use.  The dilemma some taxpayers have found themselves in is they put the funds back into the account the same year they were withdrawn. The legislation stipulates the room returns the year following the withdrawal. Because the legislation seemed unclear, the tax department is allowing the slip up for 2010 only but you have to write a formal request. Otherwise you will be penalized for overcontributions.
   
4. RRSP and RRIF withdrawals affect income tested benefits like Old Age Security.  TFSAs do not.  This means your OAS benefits could be clawed back if your withdrawals push your income higher in a particular year. This effectively wipes out the tax advantage previously realized. This also creates a cash flow issue as the OAS repayment is calculated on the personal tax return and is payable at that time. There are other benefits which are income tested, some from the government and some not. Things like the GST credit, Seniors Property tax grant, reduced prescription fees are calculated based on taxable income which includes RRSP and RRIF withdrawals. Also some rental properties allow income indexed rent and nursing homes may require copayments based on income.  These are all safe from TFSA withdrawals.
   
5. When you die, all accounts are deemed liquidated.  If you have a large balance in your RRSP or RRIF account, the ENTIRE amount is added to your taxable income for the year that you die unless you have a spouse to whom it is transferred. So if you have $300,000 in your RRSP at the time that you die, your final tax bill will be at least $138,000.  This is calculated at the tax rate of 43%.  If you contributed while in the 31% tax bracket while working, you have now paid more tax than you deferred originally.  This occurs for taxpayers who die well before they planned and had accumulated a sum of RRSP funds expected to last many years.  If you planned a retirement stream of income lasting 20 years and you pass away after 5 years, essentially you are paying tax for 15 years calculated as if earned in a single year.
   
   TFSAs pass tax free to their beneficiaries.  In the above scenario, the full $300,000 would be inherited.   This is one of the key benefits that will come to light over time as baby boomers who have bought into the RRSP propaganda pass away and have their accounts taxed heavily.

What should you do?

My advice is always to plan for the worst, and hope for the best. You need to understand all of the elements of any future financial needs and determine the various outcomes.  Some advisors say that TFSAs should be for short term saving vs long term but that is too simple.  I have advised young clients who have potential significant pensions (eg. teachers) to contribute to either a personal or spousal plan if they are thinking of having children in the future and might take time off work for a year or two.  This allows the person staying home to withdraw money while in a low income situation thus saving the difference in taxes.  For single taxpayers with a pension, I don't recommend RRSPs at all.  Self employed individuals may be better to pay themselves in dividends and forego the earned income needed for RRSP contribution room and set money aside in a TFSA. 

The best advice I can give is to have a good financial planner who can work the scenarios for you and the best outcome.  Currently interest rates are low and the TFSA contribution room is still relatively small so the impact is minimal but over time this will become more significant in the overall retirement planning process. 

Comments (0)     

Have you received a letter from the CRA (Canada Revenue Agency) recently? Did it have the word AUDIT in it?  We have had a couple of calls from clients stating they have received a letter and weren't sure how to proceed. 

These letters are most likely the result of the CRA's new Letter Campaign Initiative.  They are not audit requests but there are 2 versions of the letter.  The first is outlining what the criteria is for recent deductions claimed by the taxpayer.  The 2nd letter adds the fact that your return may be selected for audit. They seem to be focusing on returns with business and rental income.  I have posted the entire news item about this campaign on the TAXES page.

Comments (0)