Income Tax Filing Alert: Important Changes Beginning in 2016

  • By Ronald Klayman
  • 13 Jan, 2017

Be aware of the changes that affect your 2016 income tax filing and beyond.

As you gather your 2016 tax data together for your CPA, take a few moments to read about the following changes and assess the impact they may have on you and your family’s filing for 2016 and after.

 

Principal Residence

There has been a significant change in the CRA’s policies regarding principal residency that must be followed by all taxpayers. Prior to 2016, there was a requirement to fill out form T2091 to designate your home as a principal residence. The form required you to designate the years in which the home was your principal residence. Although this form was required to be filed in the year of disposition, most individuals never filed the form because the resulting capital gain was often fully eliminated by claiming the principal residence exemption. Administratively, the CRA had waived this requirement to file if the exemption eliminated the gain.

Significant Rule Changes

For the taxation years that end on or after October 3, 2016 (e.g., the 2016 calendar year), if you sell your principal residence, you are required to report the sale and the resulting capital gain or loss on Schedule 3 of your T1. You are also required to file the form T2091 if you are claiming the principal residence exemption. These requirements are imposed regardless of whether or not the gain is fully exempt as a result of the designation.

A failure to file and disclose the information will have serious implications. Firstly, there is no limitation period (i.e., after which your returns are considered “statute-barred”) on the CRA’s ability to reassess in the future. Therefore, the deadline which would otherwise restrict the CRA’s ability to re-open the tax return would not start unless the information had been fully disclosed in the year of disposition.

Secondly, the principal residence exemption itself will only be allowed if the sale and the designation of principal residence are reported on your income tax return. Should you realize subsequent to the year of sale and filing of your income tax return that you did not file the sale of your principal residence , the CRA is not obligated to accept a late filing that designates the sale as a principal residence sale . Even if the CRA accepts the late filing, the taxpayer will be liable for penalties that are the lesser of $8,000 or $100 for each complete month from the original filing due date to the date the required information was received by the CRA in an acceptable format.

Since these rules will be effective for the 2016 calendar year, you should remember to report the sale of your principal residence if you had a disposition during the year.

Basic Personal Amount

The Federal Basic Personal Amount will increase to $11,474 for 2016, up from $11,327 in 2015. For 2017, the amount will be $11,635.

Marginal rates remain the same in 2017.

Marginal Rates

There have been no changes in the overall federal marginal tax rates; however, the thresholds for taxable income have been changed as indicated in the comparison table below. Keep in mind that these rates do not include the provincial rate nor do they include the various credits and deductions that may reduce the overall income tax for which you may be liable.

Other Changes

  • The 15% children’s fitness and arts tax credit, as well as the education and textbook tax credit, will be eliminated effective January 1, 2017. For 2016, the maximum Children’s Fitness and Arts tax credit will be 50% of the previous allowable amounts. Unused textbook and education tax credits from previous years may be carried forward and applied to reduce future taxable income.
  • Teachers and early childhood educators will be able to purchase up to $1,000 of eligible school supplies for use in the classroom. From January 1, 2016, a 15% tax credit will be available on those purchases. For instance, if $500 is spent, a tax credit of $75 would become available to reduce taxable income. Teachers and early childhood educators should familiarize themselves with the allowable expenses and prepare a summary supported by the original receipts to assist in meeting Canada Revenue Agency’s guidelines.
  • Prior to January 1, 2016, if a couple was supporting a child under the age of 18, the couple was able to split income to reduce the overall family tax liability. Effective January 1, 2016, income splitting is no longer available.
  • Northern residents will have their residency deduction increased for the 2016 taxation year. The northern residency deduction will increase from $8.25 to $11 per day (or from $16.50 to $22 per day for living in a self-maintained dwelling) if you lived in Zone A for at least six consecutive months. If you lived in Zone B, the intermediate area, the deduction will increase from $4.125 to $5.50. ($8.25 to $11 per day for living in a self-maintained dwelling). The zone for deductions is determined on a province-by-province basis. Thus, to ensure the appropriate tax deductions are available to you, consult the CRA website, click on your province’s name, and search for your place of residence. Make sure your CPA is aware you resided in a zone that provided deductions for line 255 of the tax return.

Check with Your CPA for the Required Documents

There have been changes in personal tax issues in the 2016 year, but none are as important as the principal residence rules. If you have sold your principal residence in 2016, contact your CPA to find out what documentation is required to ensure you are meeting the CRA reporting requirements.

By Klayman & Company 16 Aug, 2017

Because lighting, heating and cooling represent 19%-25% of the cost of operating a commercial business, control of energy costs is essential to improving profit margins. A reduction of even 10% in these costs can produce a significant improvement. But, because Canada is located in a part of the world where temperatures can range from 40C below zero to 35C above, it is inevitably expensive to keep internal temperatures at levels needed to maintain comfortable working conditions through the changing seasons.

By Klayman & Company 16 Aug, 2017

Setting the price point for your product or service is not simply the process of determining the cost of production then adding a mark-up. It is more a matter of understanding the price the consumer will accept as the value of your product or service and keeping the costs of production to a level that will give you a profit at that price.

By Klayman & Company 16 Aug, 2017

The significant rise in the cost of equipment, vehicles, real estate, and inventory has prompted many businesses to increase business debt. Low interest rates, combined with the ability to obtain larger loans with extended payment terms, have allowed businesses to operate in a “business as usual” mode with less consideration for the actual cost of borrowing.

To give some idea of the effect of even low interest rates on an owner-managed business, the following key elements of most businesses have been put forward as an example of the effect of interest costs on a business. The effect of domestic borrowing has been added to show the full impact of current interest rates on the owner-manager. Since lending rates vary widely depending on a variety of factors such as risk, item to be funded and the term, and are usually negotiated, the interest rates used below have been chosen at random from Internet sources; calculations are approximate and for illustrative purposes only . All loans have been made effective June 1, 2017.

  • Commercial mortgage: $600,000 over 25 years at 3%
  • Two work vehicles: $120,000 financed over five years at 6%
  • Equipment loan: $200,000 financed over five years at 5%
  • Operating line of credit: $50,000 at 3% a year
  • Credit card debt: $10,000 at 15% a year on the outstanding balance

By Klayman & Company 16 Aug, 2017

For those already thinking about their 2017 income taxes, the following summarizes some of the changes from 2016.

By Klayman & Company 16 Aug, 2017

The use of cut-out and email coupons to create consumer awareness of your business and your products has been around for a long time, but their effect on your revenue and profit is notoriously hard to measure. Some marketers are now hoping to get around this problem by offering WiFi services to their in-store customers to get them to stay within the store environment. This idea is based on the well-tested principle that the longer a person stays in the store, the more likely they are to buy something. In fact, a recent survey has shown that 62% of customers will linger longer in shopping environments that provide free WiFi. The same study showed that half of those customers actually spend more money while they remain in the store.

By Klayman & Company 16 Aug, 2017

“The government gave me money back” is a common phrase often heard after the April 30 or June 15 filing deadline. The truth is that the government is not being charitable; it is only refunding the tax that you or your employer had overpaid throughout the year.

Because the rate of tax withheld at source throughout the year may be different than the tax rate applicable to your actual taxable income (after taking into consideration all other income and deductions), you might have remitted more money to Ottawa than was necessary. Your "tax refund" is the difference between your remittances and your actual tax liability.

One of the biggest misconceptions is that, upon filing of their personal income tax returns, people with a lower income will likely receive a tax refund while people with a higher income will usually end up owing tax. This is not necessarily true because the tax refund/liability is not based on your income level but rather on the difference between the remittances paid compared to the actual tax liability.

By Klayman & Company 16 Aug, 2017

Fred Tarasoff loves music. In fact, he used to own a record store, but had to go out of business in 1989 in large part because of inventory losses through shoplifting. Then he was assaulted by a shoplifter while he was running a health food store. Since that time, he has devoted himself to researching shoplifting and the retail industry in order to develop training programs to prevent and detect shoplifting. He currently works closely with law enforcement, industry associations and security firms to fight this crime. In the course of this work, Mr. Tarasoff has developed a simple way to calculate the losses suffered from shoplifting.

According to Mr. Tarasoff, even if your business has excellent controls, you can expect losses will approximate 1% of gross sales. Thus, if your retail store sells $600,000 a year, at least $6,000 will be missing from your sales figure. But, if your business does not have good controls, losses could be as high as 8% or $48,000 on $600,000 of gross sales. If your store works on a 20% gross margin your business is out $38,400 (i.e., 80% the sales loss of $48,000).

By Klayman & Company 16 Aug, 2017

Liberalisation of Canada's marijuana laws appears to be imminent. The Cannabis Act is currently expected to become law in 2018 and will decriminalize certain activities and make marijuana more widely available under a controlled production, distribution and sales system. Whether or not you agree with the intent of the proposed Cannabis Act , the loosening of the laws governing the sale and use of marijuana raises important questions for businesses regarding health, safety and legal liability.  

Most provincial and territorial occupational health and safety regulations require an employer to take all reasonable means to ensure the protection of their workers. The employer also has a reasonable expectation that employees should not be impaired on the job. The question then becomes when are employees impaired and whether, if they believe themselves to be impaired, they are required to inform their employer.

By Klayman & Company 21 Mar, 2017

Our need for passwords to access everything in our life has become pervasive. Every agency, every computer, every credit card, every smartphone requires an exponential explosion of letters, numbers, and symbols to secure all information from hackers, whether it is personal data or corporate information.

To complicate matters, it is no longer permissible (or advisable) on many sites to use a simple password that is easy to remember, such as a word or name. Instead you must create a password with numbers, special characters, upper and lower case letters, and a minimum length.

One study suggests the average individual has at least 25 Internet-accessible accounts with passwords, while other sources suggest that number could be substantially higher. Is it any wonder that most individuals will, whenever possible, assign the same password to as many accounts as they can? Hackers know this and once they compromise one account, it often doesn’t take long to gain access to your other accounts.

Use Different Passwords

The best means of protecting your personal information is to use a different, unguessable password for every account. Most password management software includes the ability to generate passwords, and then store them for you. The beauty of using a password manager is that you only have to remember one password to access all of the passwords you need to remember.

High-end password managers support multiple languages and are able to tie in passwords with hundreds of websites. Two-factor authentication is usually required (and should be!) to protect data in the event someone finds your password and logs in on your device or tries to log in on a new device that is not registered.

Set Up

Setting up a password management app generally requires you to download and install the software and add browser extensions for each browser you use. If you use multiple devices, you will need to load the app on each one. To set up an account, you will use your email address and will need to come up with a master password or passphrase (i.e., one long, hard-to-guess password to rule them all).

One primary password gives you access to all your passwords.

After creating the master password comes the arduous task of entering data about the various accounts or sites you need to access.

Some password managers will import your user names, auto fill standard information, and pull passwords from your existing browsers, although, if you haven’t saved the passwords in the browser, the data will have to be entered manually. The password manager will typically assess the strength of your current password, and prompt you to generate a new, stronger password (typically at least 16 characters) for that site. Experts also suggest that you revisit your security questions and determine whether you want to change them as an added security measure.

Don’t Forget Your Master Password

Unlike a typical website with a “forgot password?” feature, the master password is often not recoverable in that way. There are very few password manager systems that provide a “hint” to enable you to try to rebuild your password. For most, you will have to start all over and rebuild the passwords for every site and every account keystroke by keystroke. Commit your master password to memory; do not click “remember my password” for your master password; typing it often will help you to remember it.

Cost Factor

Most of the providers of password manager software provide free trial subscriptions; several offer a limited version of their software for free, with the ability to upgrade for additional features and support for an annual fee. Freebie options aside, password manager services typically range in price from $20 to $60 annually.

In Case of Emergency …

If a person is incapacitated or dead it will be impossible for someone else to access the accounts. It is important to ensure that the software used provides the ability to set up an emergency contact to inherit your passwords. Some providers allow you to set a waiting period before a trusted individual can access the codes so that the accounts cannot be accessed while you are alive. If someone tries to access your accounts, you will be notified by email. Other providers allow you to designate specific accounts, such as the business account, that can be accessed by specific people, such as your business partner, or to designate personal accounts to a trusted relative or friend.

Large Benefit for Small Cost

Strong passwords are a necessity for everyone, and we all tend to use passwords that are easy to crack; this makes us easy targets for nefarious people looking to steal our information, money or identities. Using a password manager is an inexpensive way of ensuring access to the ever-growing number of sites we must access in our interconnected world while making it difficult for anyone else to gain access to our personal and financial information.

By Klayman & Company 21 Mar, 2017

No matter what the economic conditions, some business worries never go away. Here are a few tips on how to handle some of these eternal problems.

Cash Flow

Customers will continue to extend payments over 90 days.

Understand your cash flow. At the end of each week, review accounts receivable, and accounts payable and make sure you know what you must pay in withholding taxes. Do not use your source deductions to pay suppliers unless those deductions are actually in the bank. Send requests for funds to suppliers before the end of the month.

Owner-Manager Fatigue

Overworked and underpaid will continue to be the mantra.

Learn to pace yourself. Work to make money not save money. Work at what you do best and delegate the rest. Consider that if you work 2,000 hours per year and your business has sales of $400,000, you are effectively generating $200 of revenue per hour. Ask yourself why you are trying to learn how to do something a subcontractor can do in a day.

Maintaining Customer Base

Maintaining clients while working to get new ones is going to be a challenge.

In tough times, even long-time customers may ask you to cut your costs or they may cut back their orders. Review the profit on your best customers, not just their sales volume. Visit the customer and find out their expectations for the coming year. Consider limiting services to marginally profitable customers.

Employers

Finding and keeping good employees is never easy.

Older employees may retire and good employees may leave. New, inexperienced employees do not solve short-term problems.

Happy employees are loyal and productive. Be approachable. Let employees tell you what they need. Employees always appreciate a bigger pay cheque, but a good working environment and feeling valued will also go a long way to keeping employees.

Overhead

The cost of everything will continue to rise.

Capital asset costs, fuel, property taxes, light, heat, power, insurance, and maintenance will continue to rise and put pressure on your cash flow. The same cost pressures will also affect the standard of living of your own family and the families of your employees.

Evaluate all aspects of business costs and perks. Look at discounts, value added and other incentives provided to clients. Review perks to employees and determine whether there are more economical solutions that will retain the good will of the employees but not put more pressure on your cash flow.

Technology and Changing Demands

Keeping up with new developments will be a challenge .

Changes in technology, process, or client needs require training and financing to transition from the tried and true. Budget for the inevitable or you risk being outflanked by the competition.

Social media is changing the entire marketing process.

Marketing and Advertising

Connecting with customers will continue to be a challenge.

Maximizing your brand is difficult at the best of times; unfortunately, social media is making the entire marketing process even more problematic. Analyze your market and decide whether the best way to reach potential customers is: one-to-one contact, social media, online advertising, television, radio, newspapers, or magazines. You may find that more and more dollars have to be spent to create a cross-media presence that provides the same information without any guarantee of a return on investment.

Consider a short-term contract with a marketing specialist to review your company and its client base to help determine the best combination of media to reach your target market. Then, develop a plan to deploy your advertising budget to the appropriate media.

Maintaining Control

Managing all sectors of the business will continue to be a challenge.

Managing sales, manufacturing, ordering, marketing, human resources and administration as well as dealing with the considerable number of regulatory agencies will continue to become more complex. Trying to do everything yourself will undoubtedly lead to failure in one or more areas.

Control your business by managing rather than doing. Find the best person to run each particular part of the business. Define their responsibilities with a detailed and accurate job description and schedule regular reports. This will enable you to understand what is happening within the organization, solve problems and improve operations. Have faith in your subordinates.

Regulations

Red tape is and will continue to be the nemesis of small business.

Research suggests that these compliance issues consume eight weeks of employee time per year.

Because collecting and providing information to governments and regulators cannot be avoided, owner-managers should institute in-house procedures and write manuals. Reduce the use of employee time and associated costs by purchasing reporting software. If you do not have in-house expertise, arrange for a third party to prepare regular reports. Filing reports correctly and on time eliminates the cost and stress that follows from non-compliance.

Plan Ahead

The size and complexity of these and similar issues will move forward in lockstep with the business. Analyzing each potential conflict area and developing a process to stave off potential problems is an excellent offensive tactic that will lessen the cost and uncertainty of moving forward for the balance of 2017 and beyond.

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