Answers to these questions are not an exhaustive treatment or analysis of such subject(s) and related law. Accordingly, information herein is not intended to constitute accounting, tax, legal, investment, consulting or other professional advice or services. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser. Use of information is at your own risk.

1. Employee and Payroll Expenses
   1. My business hired some workers who are supposed to be self-employed. Do I need to pay payroll expenses on fees paid to these workers?

      If the Canada Revenue Agency (CRA) forms an opinion that these workers are not your employees, there is no payroll expenses on fees paid. While some business relationships are clearly not of an employer-employee type, others are not so obvious. CRA actively challenges this type of business relationship, especially in some industries such as construction. CRA uses the following tests in determining whether there is an employer-employee relationship: whether the worker receives a fixed pay periodically and reports to an employee of your business who gives directly instructions, evaluate performance to determine remuneration; whether the worker has registered a business (GST) number and is doing for or seeking work from other businesses simultaneously; the extent of independent control the worker has regarding what work will be done and the manner in which it will be performed; whether the worker supplies equipment or tools required to perform and/or covers insurance, repairs and maintenance for this equipment whether the worker may subcontract work or hire assistants whether the individual incurs any fixed ongoing costs or expenses that are not reimbursed the degree of autonomy and independence in management of the worker's business; whether the worker could earn a profit or suffer a loss if work expectations are not fulfilled; for example if the individual has the right to negotiate the price of services and the right to offer those services to more than one organization. Be mindful that CRA considers a number of, not a single, factors in determining whether there is an employer-employee relationship. This is a question of fact. If the CRA later determines that self-employed workers are indeed your employees, your business will be held liable for failure to remit employment insurance and Canada Pension Plan premium along with penalties and interest. For more information on this issue, please refer to CRA guide titled "Employee or Self Employed? (RC4110(E)". [This answer was added on May 4, 2009.]

2. Incorporation
   1. When is now a good time to incorporate a limited company to run a business?

   Generally speaking, if a small business is earning more profit than what its sole proprietor needs personally, incorporation may be a good idea. Incorporating gives its shareholders more options for the distribution of income, tax and estate planning. Another advantage is that the protection of personal assets from potential creditors. [This answer was added on April 9, 2009.]

   2. Can incorporating my business protect my personal assets?

      Incorporation provides certain degree of protection of personal assets by limiting liability from potential creditors. However, in most cases financial institutions (a main creditor to most small businesses) require a personal guarantee from the principal shareholder(s) of a small business corporation before granting credit. This severely limits this advantage to incorporation. Moreover, personal assets are not protected against certain types of tax liabilities. [This answer was added on April 9, 2009.]

   3. I am employed now. Can I incorporate to reduce my tax burden?

      Technologies have changed our lifestyle and work habit. Some of us do not have to work in the office every day. This muddles a typical employer-employee relationship and gives rise to the issue of "incorporated employee" if an individual taxpayer runs a business in form of a corporation and provides services to a small number of clients. By incorporating, one may pay less tax because of more deductible expenses and/or a lower small business corporate income tax rate. To curb this scheme, Canada Revenue Agency (CRA) argued unsuccessfully that these corporations were a puppet of the employee and effectively a sham. The individual taxpayer should hence be taxed directly on the income earned by his corporation. However, tax courts disagreed and ruled that if the corporation was formed properly, it was not a sham and the income was taxable to the corporation. The Personal Services Business (PSB) rules were then introduced as a result of these court cases to prevent individuals from gaining access to the small business deduction. If CRA is successful in arguing that a corporation is carried on as a PSB, there are two tax consequences: Small business deduction, both federally and provincially, of the corporation will be disallowed. In Québec, the PSB income will be taxed at 16.25% rather than at the 8.9% rate that applies to business income in general. When computing income from the PSB, eligible deductions will be restricted to: Remuneration and benefits for the incorporated employee; If the incorporated employee is a salesperson receiving commissions, expenses paid by the corporation that would have been allowed as a deduction to the individual personally as a commissioned salesperson had he/she incurred the expense; and Legal expenses incurred by the corporation in collecting amounts owing to it on account of services rendered. If you earn your income by providing services to a small number of businesses, you always need to carefully determine whether you are an employee or self-employed. Tax treatments of eligible expenses for income tax purposes are different. There will be tax consequences if your status is misclassified. If you incorporate, the stakes are even higher. If it turns out that you are an incorporated employee, the tax cost will also multiply. Seek professional advice before implementing your plan and filing your tax return. [This answer was added on December 31, 2010.]

3. Activities Involving Research and Development
1. Is there any tax incentives to encourage research and development activities?

   For qualifying scientific research and experimental development (R&D) expenditures in new products and processes, there are three major tax benefits: a full tax deduction in the year the expenditures are incurred, even if they are capital in nature; the ability to "pool" R&D expenditures, which enables taxpayers to carry over deductions to the extent that they are not needed currently; and eligibility for attractive refundable investment tax credits. These tax benefits are available to both incorporated and unincorporated businesses. In addition to the aforesaid federal tax incentives, many provinces have their own R&D tax incentives. Tax rules in determining R&D benefits are complicated and often attracts the attention of tax auditors as the refundable tax credit is quite generous. It is advisable to consult a tax professional before making a claim. [This answer was added on May 5, 2009.]

4. Others
   1. Can I change my fiscal year end? If yes, how?

      Sole proprietorships, members of a partnership in which all the partners are individuals and corporations are the only forms of business that can have a fiscal year end other than December 31st. If you do your business in any one of the aforesaid form, you can select your fiscal year end when you file your first tax return. Once you have selected a fiscal year end, you may not change it without approval from Canada Revenue Agency (CRA). Approval will not be granted unless there are sound business reasons such as a business wanting to change its fiscal year end date to coincide with a seasonally slack period or a corporation changing its fiscal period so that its fiscal year end date is the same as its parent company. This is to prevent undue tax minimization by changing fiscal year end, hence taxation year end. It is noteworthy to remark that changes to your fiscal year period that occur because the fiscal year period is "revised by operation of law" do not need to be approved. For instance, if your business's fiscal year period changes because a sole proprietor dies or sells the business, because a partnership ceases to exist, or because a corporation goes bankrupt, you don't have to request approval for a change in your fiscal year end. Reference: IT-179R Change of fiscal period [This answer was added on December 18, 2010.]

   2. There is a loss (negative net income) in my incorporated business. Can this loss be carried backward and forward?

      Losses resulting from business operation are non-capital losses. A corporation may carry these losses according to the following rules: back 3 years and forward 7 years if the loss was incurred in a tax year ending prior to March 23, 2004; back 3 years and forward 10 years if the loss was incurred in a tax year ending after March 22, 2004; back 3 years and forward 20 years if the loss was incurred in a tax years ending after 2005. However, this extension does not apply to a non-capital loss resulting from an allowable business investment loss (ABIL). Instead, a non-capital loss resulting from an ABIL arising in tax years ending after March 22, 2004, that has not been used within ten tax years will continue to become a net capital loss in the eleventh year. Furthermore, a non-capital loss resulting from an ABIL arising in tax years ending prior to March 23, 2004, that has not been used within seven tax years will continue to become a net capital loss in the eighth year. [This answer was added on December 19, 2010.]

More information on this topic can be found in our article titled "Foreign Assets Reporting". This article is available for purchase in our e Store.

1. Who must report foreign assets?

Canadian resident individuals, corporations, partnerships and trusts who have offshore investments totaling more than Canadian $100,000 in cost or book value (not the fair market value in the year of reporting) at any time during the taxation year must report these assets to CRA in their income tax return, regardless of whether these assets have generated any taxable income. Details of where the assets are held are generally not required. However, taxpayers must indicate the value by checking off the appropriate asset category box in the form. [This answer was added on April 10, 2009.]

2. What assets must be reported?

They include: foreign bank account holdings; shares of Canadian corporations held outside Canada; shares of non-resident corporations held by the resident taxpayer or on deposit with a Canadian or foreign broker; real estate (land and buildings) located outside Canada; precious metals, gold certificates and futures held outside Canada; interests in mutual funds which are organized in a foreign jurisdiction; patents, copyrights or trademarks held outside Canada; and other income-earning foreign properties. Interests in or rights to specified foreign property, Canadian property that is convertible to specified foreign property, and debts owed by non-residents such as government or corporate bonds, debentures, or mortgages must also be reported. [This answer was added on April 10, 2009.]

1. I am not a Canadian tax resident. I earn rental income in Canada. Do I need to pay Canadian tax?

Yes, non-tax residents are required to pay 25% on amounts they receive as rental income on real property in Canada or as timber royalties earned in Canada as income tax. This 25% tax is usually considered the final tax liability. However, a non-resident can elect to pay tax on the net income instead of the gross income by filing an income tax return under Section 216 of the Income Tax Act. In most cases, the tax payable on an income tax return filed under section 216 is less than the 25% tax withheld on the gross rental income because rental expenses become deductible. However, you need an agent (known as NR6 agent named after the form NR6) to undertake filing a Section 216 income tax return which is due for filing by June 30. Any tax owed is due on April 30. [This answer was added on May 6, 2009.]

2. I paid a special assessment for repair on my rental condo. Is this payment deductible against my rental income?

No. Despite the nature of the special assessment is for repair, CRA takes the position that major repair will enhance the economic life of the building and therefore is of a capital nature. At the point of writing, we are not aware that CRA's position is successfully challenged in court. [This answer was added on May 8, 2009.]

1. Child Care Expenses
1. I have a 3-year-old child in my custody. What is the maximum amount of child care expenses that I or my spouse can claim?

   The maximum allowable claim for eligible child care expenses is the lesser of: $7,000 total child care expense paid two-thirds of your earned income The maximum dollar amount is reduced from $7,000 to $4,000 for children between the ages of seven and sixteen. It is increased to $10,000 if the child of any age is disabled. [This answer was added on April 9, 2009.]

2. I work full time. My spouse is a homemaker and has no income. Can I claim any child care expense?

   No. Except in some special circumstances, only the lower income spouse can claim child care expenses. If you try a creative scheme like paying her a fee for looking after your child, this is not allowed either. [This answer was added on April 9, 2009.]

2. Children's Fitness Tax Credit
1. What is Children's Fitness Tax Credit?

Effective in 2007, a non-refundable Children's Fitness Tax Credit (up to $500 per year for each child under 16 years of age, or, if eligible for the disability tax credit, under the age of 18, at the beginning of the year in which the expenses are paid) for eligible fitness expenses in a prescribed program of physical activity is allowed. Tax incentive is provided to reduce child obesity. [This answer was added on April 9, 2009.]

2. What programs qualify for this credit?

   An eligible fitness expense is the cost of registration or membership of an eligible child in a prescribed program of physical activity. Generally, such a program must: be ongoing (either a minimum of eight consecutive weeks long or, for children's camps, five consecutive days long); be supervised; be suitable for children; and include a significant amount of physical activity that contributes to cardio-respiratory endurance, plus one or more of: muscular strength, muscular endurance, flexibility, or balance. Under the Income Tax Regulations, the definition of physical activity includes: horseback riding; and if the child is eligible for the disability tax credit, activities that result in movement and in an observable use of energy in a recreational context. An activity for which a child rides on, or in, a motorized vehicle as an essential part of the activity does not qualify for the children’s fitness tax credit. Expenses paid for piano, language lessons do not qualify. [This answer was added on April 9, 2009.]

3. General Tax Questions
1. Are there any income not taxable in Canada?

Surprisingly yes. The following types of income are not taxed in Canada (the list below is not exhaustive): capital gain from disposition of principal residence; child support from ex-spouse required by agreement signed after April 30, 1997; gifts and inheritances; rewards from Crime Stoppers to informants whose tips led to conviction; lottery winnings; winnings from betting or gambling for simple recreation or enjoyment; strike pay; compensation paid by a province or territory to a victim of a criminal act or a motor vehicle accident; certain civil and military service pensions; income from certain international organizations of which Canada is a member, such as the United Nations and its agencies; war disability pensions; RCMP pensions or compensation paid in respect of injury, disability, or death; income of First Nations if situated on a reserve; capital gain on the sale of a taxpayer’s principal residence; provincial child tax credits or benefits and Québec family allowances; working income tax benefit; the Goods and Services Tax or Harmonized Sales Tax credit (GST/HST credit) or Quebec Sales Tax credit; and the Canada Child Tax Benefit. The method by which these types of income are not taxed varies significantly, which may have tax and other implications. Some forms of income need not be declared, while others are required to declare and then immediately deducted in full. Income which is declared and then deducted, for instance, creates room for future Registered Retirement Savings Plan deductions. [This answer was added on May 6, 2009.]

2. Is inheritance taxable in Canada?

No, unlike in the United States, there is no inheritance tax in Canada. However, there is probate fee ranging from 0.5% to 1.5% of the estate's assets, depending on the size of the estate and the province in which the probate takes place. In British Columbia, where the gross value of all real and personal property subject to probate does not exceed $25,000, there is no probate fee.  Where the gross value exceeds $25,000, probate fees are: for the portion of the gross value over $25,000 up to $50,000  $6 per $1,000 or portion (0.6%) for the portion of the gross value over $50,000    $14 per $1,000 or portion (1.4%) There is also an administration fee of $208 for estates with a gross value exceeding $25,000. Probate fees are calculated on assets, not net worth (or equity). In addition, if these same assets are transferred to your spouse, probate fees would be due again the second time around when the assets were transferred through your spouse's will. There may be increased fees if a lawyer is retained to cross-examine the asset list or if the executor charges a percentage of the assets to do the work. Properties that pass outside of a will through joint tenancy or a living trust is not subject to probate. Probate is time consuming, expensive and can be avoided by: pay-on-death designations, ie. when you die, the property is transferred to the person you named, free of probate (you retain complete control of your property when you are alive, and you can change the beneficiary if you choose); joint tenancy on real properties; a living trust or inter vivos trust (the trust is created by executing a trust deed or document and transferring property into the name of the trust, without giving up any control over the trust property; when you die, the trust property can be distributed directly to the beneficiaries you named in the trust document, without the approval of probate court); gifts (assets you give away during your life doesn't have to go through probate). Note that avoiding probate fee is not illegal. [This answer was added on May 26, 2009.]

3. I have no taxable income. Should I file income tax?

Even if you have no taxable income and are certain that you owe no income tax, it may still be to your best interests to file your income tax return for the following reasons: You want to receive a tax refund (be mindful that there is refundable sale tax credit in most provinces). You want to apply for the Goods and Services Tax/Harmonized Sales Tax (GST/HST) credit. You may qualify for non-tax related benefits such as Medical Service Plan premium assistance and you need to file your income tax return for verification purposes. You or your spouse or common-law partner want to begin or continue receiving Canada Child Tax Benefit. You may have incurred a non-capital loss and you want to be able to apply in other years. You want to carry forward or transfer the unused part of your tuition, education or textbook amounts to another eligible person. You want to carry forward the unused investment tax credit. Interested parties (such as potential creditors, government agencies like Immigration Canada) may require previous year income tax returns to prove your residency in the future. [This answer was added on May 28, 2009.]

4. How long do I have to keep my business records for tax purposes?

Any taxpayer (including a individual, a corporation, a trust, a registered charity, a registered Canadian amateur athletic association, and a non-profit organization) must keep business records relating to a taxation year for a minimum of six years after the issue date of the corresponding notice of assessment. If you have filed a tax objection or appeal, you should keep your records until the issue is settled, and until the time limit for filing any further appeal has expired (which may mean keeping records for a particular fiscal year longer than six years). These records include source documents such as sales invoices, purchase invoices, cash register receipts, formal contracts, credit card receipts, delivery slips, deposit slips, work orders, dockets, cheques, bank statements, tax returns, and general correspondence whether written or in any other form. Note that records in electronic format (such as microfilm) of the original source documents are acceptable provided that they are readable, reliable and authentic. If you want to destroy your business records before the six year minimum period is over, you need to get written permission from the director of your tax services office. The form to use for this is T137 Request For Destruction of Books and Records. This is not advisable as it will likely draw attention for the tax authority. Reference: IC78-10R5 Books and Records Retention/Destruction [This answer was added on December 18, 2010.]

4. Immigrating to Canada
1. I immigrated to Canada in the middle of a year. Will my income earned before landing be taxed on my first Canadian income tax return?

   Generally, only worldwide income earned after you established residential ties in Canada will be taxed. However, if your income prior to landing are Canadian-source employment income, business income or scholarship income, or capital gains from the disposition of taxable Canadian properties (including real estate in Canada, excluding publicly traded shares), it will be taxed as well. [This answer was added on April 10, 2009.]

2. Before immigrating to Canada, is there anything one can do to reduce tax in his first Canadian income tax return?

   If you receive lump-sum payments (for example, a retirement allowance or severance from your employer), you should receive them before you establish residential ties in Canada to avoid being taxed. You may also want to transfer some of your investments to relatives and to a non-resident trust before you leave your home country. As long as the income is retained in the trust, it will not be taxable in Canada until you have been here for five years. [This answer was added on April 10, 2009.]

5. RRSP related questions
1. What should I do if I over contribute my RRSP?

   Generally, you made excess contributions to an RRSP under which you or your spouse or common-law partner is the annuitant if your unused contributions [B in your notice of (re)assessment] from prior years + your current calendar year contributions > your RRSP deduction limit (A) in your latest notice of (re)assessment + $2,000 Over contribution is subject to a 1% penalty per month until your RRSP contribution is brought below the penalty threshold. However, if your unused contributions resulted from mandatory group RRSP contributions or from contributions that you made before February 27, 1995, you may not have to pay this 1% tax on all your unused contributions. You may begin by submitting form T3012A Tax Deduction Waiver on the Refund of Your Unused RRSP Contributions to request RRSP withdrawal without tax withheld. Once CRA knows about a potential over contribution case, you probably will be asked to file a T1-OVP Individual Tax Return for RRSP Excess Contributions (for 2008) to calculate the amount of the over contribution and penalty tax. This form must be filed, and the tax remitted, no later than 90 days from the end of the year. You may request a waiver of the penalty if: the excess amount arose as a consequence of an uncontrollable error (for example, your employer gives a bonus in RRSP after you make your RRSP contribution that kicks you over your limit); and you can demonstrate that you are taking reasonable steps to eliminate it. If you have over-contributed, you should withdraw the excess amount without delay to minimize penalty. Alternatively, if you have an outstanding Home Buyers' Plan balance, you may use the excessive RRSP contributed to repay this plan. If your financial institution withholds tax, use Form T746 when you file your tax return to claim the offsetting deduction and a credit for the tax withheld. This linked article published by Canwest News Service offers an alternative approach in dealing with this RRSP over contribution problem. [This answer was added on April 9, 2009.]

2. What are the tax consequences of contributing to spousal RRSP?

   If you contribute to spousal RRSP, you get the same deduction as if you had contributed to your own subject to your own RRSP limit (not your spouse's). Legally speaking, the RRSP belongs to your spouse, so when the money is withdrawn from the RRSP, your spouse will have to report it, therefore allows income splitting at that time. Withdrawals from a spousal RRSP will be attributed back to the contributor to the extent contributions were made to any spousal RRSP during that year or the immediately preceding two years. In the event of marital breakdown, this is a serious consideration as the contributor will lose the legal ownership of the investments and bear the tax consequences of such withdrawals. [This answer was added on April 9, 2009.]

3. What will happen to my RRSP when I retire?

   At the end of the year in which a RRSP holder turns 71, the RRSP must be cashed or be converted it into a registered retirement income fund (RRIF). RRSP withdrawals are taxed in the year they are withdrawn. Unlike RRSP, RRIF holders must withdraw a minimum prescribed amount each year from RRIF. [This answer was added on April 13, 2009.]

6. Support Payments to Spouse in Marital Breakdown
1. I received child support from my ex-spouse. We have a separation agreement dated 2008 stipulating that payments are solely for child support. Are these payments taxable in my hands?

   No. If your agreement was signed after April 30, 1997, the amounts you received for child support are not taxable to you. Your ex-spouse cannot claim this payment either. [This answer was added on April 13, 2009, revised on April 29, 2009.]

2. I received spousal support from my ex-spouse. Are these payments taxable in my hands?

   Spousal support payments (payments made solely for the support of spouse) are taxable to the recipient and deductible to the payer if the payments are made periodically (as opposed to a lump sum) and pursuant to a court order or agreement. If an order or agreement stipulates a global amount of support to be paid for a spouse or common-law partner and a child living apart, the full amount is considered support for a child. [This answer was added on April 29, 2009.]

3. I pay child support to a woman whose child I fathered. Can I claim this as a deduction?

   If you never lived with the woman, the payments would only be deductible if you paid them pursuant to a court order (not a written agreement) dated before May 1997. [This answer was added on April 13, 2009.]

4. I paid my ex-spouse a lump sum payment as part of our separation agreement. Can I claim this payment?

   No. Lump sum payments are not deductible except when the lump sum payment was made to catch up on arrears payments for regular periodic spousal support amounts. [This answer was added on April 13, 2009.]

5. After marital breakdown, my ex spouse sold the principal residence (our former matrimonial home) which I have an interest. I was given a portion of the sale proceeds. Is the money given taxable in my hand?

   It depends on many factors. A couple can only designate one residence as principal residence. Estranged spouses need to decide how the capital gain exemption will be used when more than one residence are held. The separation or divorce agreement/order should specifically address how the principal residence designations will be claimed on future sales. If the home sold is a designated principal residence, there will be no tax consequence on any capital gain. [This answer was added on April 29, 2009.]

Tax Audit

More information on this topic can be found in our article titled "CRA Tax Audit". This article is available for purchase in our e Store.

1. What is CRA tax audit all about?

A CRA tax audit is an examination of an individual or corporation's tax return, to verify its accuracy and compliance of tax law and regulations. There are three types of tax audits: correspondence audits (also known as desk audits, CRA mails a request for additional information or documentation support); office audits (an interview is conducted at a local CRA office), and field audits (an interview is conducted at a taxpayer's place of business or residence). All of these audits can result in serious penalties if a tax auditor finds sufficient grounds to justify non-compliance or tax evasion. [This answer was added on April 23, 2009.]

2. What should a taxpayer do when the tax man knocks on your door?

First of all, confirm that the person is indeed a CRA auditor by asking for proper identification. Listen carefully what the auditor is seeking. If you do not understand what they want, seek professional help without delay. Answer only what is asked, nothing more and nothing less. Since there is always the chance of a tax audit, it is advisable to keep good accounting records to support all the information in a tax return. Be mindful that taxpayers bear the onus of proof in many cases. [This answer was added on April 23, 2009.]

3. I did not report all of my income in my last year income tax return. What should I do?

Don't panic. CRA has a Voluntary Disclosures Program that allows taxpayers to come forward and rectify incomplete or inaccurate information previously filed without penalty and prosecution (arrears interest still applies) before CRA commences a review or tax audit. This program is applicable to returns related to income tax, goods and services tax (GST), the Softwood Lumber Products Export Charge Act and the Air Travellers Security Charge Act. If CRA has not acted at the time of filing your voluntary disclosure, you need not to worry about penalty and prosecution. Given the intricacy of tax law and regulations, it is advisable to seek professional advice before you take advantage of this program. [This answer was added on April 23, 2009.]

4. What is a tax review?

A tax review is a process used by tax authority to verify the accuracy and the authenticity of information provided in a tax return. The following are some known CRA review programs: Pre-assessment Review Program (the peak period is January to July): The CRA reviews deductions and credits claimed in a tax return before issuing a Notice of Assessment. Processing Review Program (the peak period is June to November): The CRA reviews deductions and credits claimed by the taxpayer after issuing a Notice of Assessment. Matching Program (the peak period is September to March): The CRA compares information on a taxpayer’s tax return to the information provided by third-party sources such as employers, banks and educational institutions. Items of particular interest to the CRA include verification of employment income, investment income, Guaranteed Income Supplement (GIS); Registered Retirement Savings Plan (RRSP) purchase and withdrawal, child-care expenses, tuition fee and education amount. [This answer was added on May 6, 2009.]