2006 Federal Budget
July 1, 2006 GST Changes

The May 2, 2006 Conservative federal budget was a mishmash of policies that accomplished little. The big news was that the GST was decreased to 6% on July 1, 2006. Harper opted for a reduction in the GST rate over breaks on personal taxes. The Conservatives failed to follow up on their campaign promise of a tax deferral on capital gains for taxpayers who repurchase “similar” real estate or stocks within 6 months of a sale. With luck, we will get such a provision in the 2007 budget.

Some relevant points on the May 2006 federal budget:

1. The first federal personal tax rate is going back up by 1/2 per cent to 15.5% for 2006. The Martin government had dropped it from 16% to 15% for the 2005 tax year.

2. Parents will receive a Universal Childcare Benefit of $100 per month in a tax credit for each child under the age of 6 which is available to all parents. It is in addition to the monthly Child Tax Benefit payments which ARE based on household taxable income.

3. The pension credit is going up by $1,000 to $2,000
annually for the 2006 tax year.

4. The basic personal amount will increase to $10,000 by 2009 as was promised earlier by the Martin Liberal government.

5. Effective July 1, 2006 taxpayers buying monthly or annual public transit passes will get a new tax credit of 15.5% of the cost of the passes.

6. Taxpayers donating publicly listed shares to charities will be exempt from capital gains tax and get a donation deduction for the FULL value at the date of contribution.


GST

The GST change to a 6% tax on July 1st will create bookkeeping problems for 2006. Self-employed taxpayers will need to track revenue and expenses for two six-month bookkeeping periods. The GST rate was 7% for the January 1 to June 30, 2006 period and is 6% for the last 6 months of 2006. Our firm has prepared spreadsheets to cover each 6-month period with automatic annual totals. It can be downloaded for free from our website at www.taxperts.on.ca.

PENALTIES AND INTEREST

The Canada Revenue Agency (CRA) charges interest on
personal taxes AND GST balances payable at a rate of prime plus 4%. This rate applies when a taxpayer fails to make tax or GST installment payments or makes deficient payments. It also applies to tax and GST balances payable at the filing deadlines.

The CRA assesses penalties on late-filed personal tax and
GST returns. Self-employed taxpayers who file GST annually and their spouses have until June 15th each year to file both tax and GST returns. In the case of personal tax returns only, late-filing penalties are a maximum of 17% on the total of Federal, and provincial taxes and CPP premiums payable. For a subsequent late personal tax filing within 3 years, the penalties are increased to a maximum of 50%. Taxpayers who are unable to meet the April 30th or June 15th filing deadlines should make ‘Top Up’ Payments to the CRA before their respective filing deadlines which can reduce or completely eliminate penalties even if filing late.

Individual Pension Plans (I.P.P.s) are beneficial for owners of profitable small companies. Contributions are paid by the corporation and are fully deductible. IPPs are an alternative to RRSP contributions but provide much higher contribution room than with a regular RRSP plan.

The Principal Residence Exemption may be claimed to exempt from taxes the full gain on the sale of your home as long as the home is used primarily - - at least 51% - - for personal usage. In this case, renting out part of the home or claiming a home/office expense is classified as “incidental business usage” and does not prejudice the exemption.

TAX AUDITS

Late-filed tax returns are much more likely to be audited.
Receipts and vouchers for expenses must be categorized and totalled. Attach names of clients to all gift, dinner and event expenses. Spouses, if paid as administrative assistants, MUST be on payroll and paid on a fair-market-value basis. Expenses will be disallowed if the CRA concludes that they are “insufficiently documented”.

KEEP GOOD RECORDS.


Real estate agents with extensive driving can cite the Quereshi decision to support claiming 90% or more as business usage of their car even if they fail to maintain a car logbook. Agents may claim a home-office expense so long as their home is their “primary place of business”. There is no requirement for them to meet clients in the home. The only requirement is that they perform the majority of self-employed activities in the home which can include MLS searches, banking, booking appointments etc. In January of 2006, the Federal Court of Appeal ruled in the Stapley decision that gift certificates for restaurants and events are subject to the 50% limitation on deductibility for dinners/events even if the agent is not at the dinner or event. A bad decision.

William Howse, B.A., LL.B.
(President of Taxperts)

 

NOTES ON TAXPERTS FORM “INCOME, EXPENSE AND GST SUMMARY FOR SELF-EMPLOYED AGENTS”

We provide a separate spreadsheet to track commissions and broker fees as these are key amounts. You can find this separate spreadsheet in the list of downloadable spreadsheets on our website at www.taxperts.on.ca.

The July 1, 2006 CHANGE IN GST will complicate bookkeeping for the self-employed. Our 2006 RED/BLUE/BLACK spreadsheet makes bookkeeping easier. Use the RED sheet for transactions from January to the end of June (the Liberal 7% GST), and the BLUE sheet for July until December (the new Conservative 6% GST). The BLACK sheet automatically combines the RED & BLUE sheets to give you totals for the 2006 year.

The blacked-out boxes are for expenses which do not include GST such as expenses for banks, insurance, government and payments to those not registered for GST. All expense entries are made in the columns to the right of the globalized sheet. GST will be extracted from expenses
which include GST.

Line 1 for commissions and Line 2 for broker fees should be tracked in the separate spreadsheet discussed above. Be thorough when tracking these amounts. When agents receive a T4A slip from a broker with a commission amount ntered in Box 20, it should NOT include the broker share of commissions. The Box 20 amount SHOULD NOT include GST

but should total only the agent's portion of commissions. Many agents receive only an annualized statement of commissions and expenses from their broker. That is sufficient to prepare tax and GST returns. Agents MUST enter their expenses for the first 6 months of 2006 with 7% GST separately from expenses for the last 6 months of 2006.

Line 2: Your Broker statement of annualized fees billed to you by the broker and the annual TOTAL of such expenses should be entered as a single entry including GST in Column 2 to the right of the summary sheet.
DO NOT break out figures from the Broker annual summary into other expense categories on the spreadsheet. The Broker statement serves as your receipt for a CRA audit.

Line 8: Enter the 100% figure for business meals and event expenses in Column 8. The program will break out 1/2 of the GST as an Input-Tax Credit for your GST remittance. The software for your personal tax return will reduce the 100% amount to the 50% deductibility limit in the business
statement. (Use the same approach at Line 14 for travel meals - - when out of town - - as they are also only 50% deductible.)

Lines 16 & 17: You can customize these lines for certain expenses. Use Line 16 for expenses with GST and Line 17 for those not including GST.

Line 20: Private health premiums - - for the entire family - - have been fully deductible since 1998.

Line 22: Spouses must be on salary with taxes and CPP withheld at source and a T4 slip must be prepared annually by the agent.

Capital Purchases: There is a column for each of computers, software, equipment/furniture and car purchases. All purchases exceeding $500 including taxes must be capitalized. Purchases under $500 should be entered at Line 10 under "Office Supplies" as fully deductible.

The business portion of vehicle and home office expenses should be discussed and an allocation determined at the interview to prepare GST and tax returns.