Tracking Auto Expenses for the Tax Department

When does an individual need to keep track of their automobile expenses? Generally, a person should be keeping a detailed record of all expenses incurred and the amount of kilometers driven in a log book if they are claiming them as a business deductible. The individual must show that the expenses were incurred for the purpose of earning business income and were reasonable. Note that travelling from home to your workplace is not considered to be business related. Here are a few examples that the tax department considers to be business travel:

  • Travelling from your home to a client’s place then back home
  • Travelling from your home to a client’s place then back to work
  • Travelling from your workplace to a client’s place then home

Generally, eligible deductible automobile costs include the following: gasoline, repairs and maintenance, oil changes, car washes, insurance, licenses, registration fees, parking charges. Lease payments and interest expenses for purchased vehicles are subject to special rules. If a person uses their automobile for both personal and business use, they must allocate their total expenses between the two. The allocation is usually done on a pro-rated based on kilometers travelled. However, if an individual receives an automobile allowance from their employer that is considered to be reasonable they cannot deduct any automobile expenses. The tax department considers an allowance reasonable if it does not exceed the following:

  • 55¢/km for the first 5,000 km driven
  • 49¢/km after that

In the Northwest Territories, Yukon, and Nunavut, there is an additional 4¢/km.

Books and Records Retention

How long are you legally required to keep your tax records? Generally, record retention requirements are outlined in the Income Tax Act as follows:

  • Records must be kept for a minimum of 6 years from the end of the latest year to which they relate to.
  • If in electronic format, they must be kept in a electronically readable format (accessible and usable copy)

In some situations, you must retain your records for different periods of time. Below is a list of these situations, as well as the retention periods that apply to them:

  • Records concerning long-term acquisitions and disposal of properties, the share registry, other historical information that would have an effect on sale, liquidation or wind-up of the business – must be kept indefinitely
  • If income tax returns are filed late – records must be kept for 6 years after the date the return was filed
  • If you filed an objection or appeal, all necessary records until the latest of the dates: – the date the objection or appeal was resolved – the date for filing any further appeal has passed or – the 6 year record keeping period has passed
  • When a non-incorporated business or other organization ends – records must be kept for 6 years from the end of the tax year the business ended
  • When a corporation is dissolved, it must keep the following records for 2 years after the date of its dissolution: – all records and supporting documentation – all other records that corporations have to keep
  • When corporations amalgamate or merge to create a new corporation, the new corporation must keep business records of each of the amalgamated or merged corporations for 6 years from the end of the taxation year to which they relate
  • If you are a legal representative of a deceased taxpayer or trust, you can destroy the records after receiving clearance certificates to distribute the property under your control

Note: A person is not relieved of an of the record keeping, readability, retention, and access responsibilities because he or she contracts out the record keeping function to a third party such as a bookkeeper, accountant, service provider, or such other arrangements.

Protect Your Business from Fraud

Small businesses are particularly susceptible to fraud for a number of reasons:

  1. The owner-manager is typically very busy, out promoting the business and working to create revenue, yet not comfortable with the reporting requirements internally and therefore not aware of how receivables and payables are being managed.
  2. The size of the organization restricts the ability to install the necessary internal controls designed to prevent and detect fraud.
  3. The owner is trusting.

Why do employees commit fraud and how to mitigate the factors:

  1. Financial pressure – a need to generate additional funds either to support a habit (shopping, gambling or drugs, for example) or support an image (breadwinner). Be aware of red flags that may indicate financial pressure. These indicators can include:
  • suddenly purchasing more material items,
  • suddenly carrying large amounts of cash,
  • frequent calls from creditors,
  • irritable or moody behaviour,
  • unnecessary overtime,
  • arriving for work early and staying late,
  • the mention of medical problems,
  • signs of drug or gambling addictions, and
  • dissatisfaction at work.
  1. Rationalization – the belief that the company or owner ‘owes’ the employee or that the company has so much, it won’t even notice, or that others do similar things so it’s ok to join in. This can be mitigated by:
  • Promoting a strong sense of ethical behaviour within the business. Doing so will reduce the ability of the employee to rationalize the misappropriation.
  • This is a simple as a consistent performance management process whereby employees’ work is reviewed and assessed regularly. It can also be a more complex system whereby employees sign a corporate code of ethics annually acknowledging the expectations.
  • Keep in mind, however, that no matter how strong the corporate governance is, an employee can still rationalize the theft by tying the act to ‘saving a loved one’ or ‘just borrowing the funds’, thereby avoiding the guilt associated with harm to the corporation.

 

  1. Opportunity – the ability (knowledge and or access) to commit the fraud is present due to the experience level of the employee, the lack of internal business experience of the owner / manager, complacent management or weak internal controls. This can be mitigated by:
  • Implementing a system of internal controls that help to both prevent fraud from occurring in the first place and detect fraud after it has taken place is a key step to undertake for all small business owners.
  • This element is the one the owner has the most control over and yet developing a system of processes, procedures and controls that deter employees from committing fraud is usually overlooked due to a lack of understanding by the owner-manager.

*Removing even one of these factors can significantly thwart or mitigate losses.*

Beware of fraudulent communications from the tax department (CRA – Canada Revenue Agency)

Occasionally, taxpayers may receive, either by telephone, mail, text message or email, a fraudulent communication that claims to be from the Canada Revenue Agency (CRA). In all these cases, the communication requests personal information, such as a social insurance, credit card, bank account, and/or passport numbers, from the taxpayer.

These fraudulent communications typically insist that this personal information is needed so that the taxpayer can receive a refund or benefit payment. Other communications urge taxpayers to visit a fake CRA website where the taxpayer is then asked to verify their identity by entering personal information. These are SCAMS and taxpayers should NEVER respond to these fraudulent communications, or click on any of the links provided.

To better equip taxpayers to identify those communications that do not come from the CRA, the following general guidelines should be followed.

If you have signed up for online mail (available through MyAccount, My Business Account and Represent a Client), the CRA will do the following:

  • The CRA will send a registration confirmation email to the address provided once an individual or business has registered for the online mail service.
  • The CRA will also send an email to the address provided to notify you when new online mail is available to view in the CRA’s secure online services portal.

The CRA will not do the following:

  • The CRA will not send emails containing any links.
  • The CRA will not request personal information of any kind from a taxpayer by email or text message.
  • The CRA will not divulge taxpayer information to another person unless formal authorization is provided by the taxpayer.
  • The CRA will not send emails in English or French only: all communications are in both official languages.
  • The CRA will not leave any personal information on an answering machine.

When in doubt, ask yourself the following:

  • Did I sign up to receive my online mail through MyAccount, My Business Account or Represent a Client?
  • Am I expecting additional money from the CRA?
  • Does this sound too good to be true?
  • Is the requester asking for information I would not include with my tax return?
  • Is the requester asking for information I know the CRA already has on file for me?
  • Am I confident I know who is asking for the information? For our existing clients, if you are unsure, our office can contact the CRA on your behalf to see if the communication is fraudulent. You can also contact them directly yourself at 1-800-959-8281.

By following these guidelines, you will be able to better protect yourself from malicious fraudsters.

Registered Charity Compared to a Non-Profit Organization

If you are wondering what the differences are or if your non-profit organization should apply for charitable status, please review the chart below for all the differences:

Topic Registered Charity Non-Profit Organization
Purposes
  • must be established and operate exclusively for charitable purposes
  • can operate for social welfare, civic improvement, pleasure, sport, recreation, or any other purpose except profit
  • cannot operate exclusively for charitable purposes
Registration
  • must apply to the Canada Revenue Agency (CRA) and be approved for registration as a charity
  • no registration process for income tax purposes
Charitable registration number
  • is issued a charitable registration number upon approval by the CRA
  • is not issued a charitable registration number
Tax receipts
  • can issue official donation receipts for income tax purposes
  • cannot issue official donation receipts for income tax purposes
Spending requirement (disbursement quota)
  • must spend a minimum amount on its own charitable activities or as gifts to qualified donees
  • not applicable
Returns
  • must file an annual information return (Form T3010) within six months of its fiscal period-end
  • may have to file a T2 return (if incorporated), and/or an information return (Form T1044) within six months of its fiscal period-end
Tax exempt status
  • is exempt from paying income tax
  • is generally exempt from paying income tax
  • may be taxable on property income or on capital gains
GST
  • most supplies are exempt
  • most calculate net tax using net tax calculation for charities
  • is eligible to claim partial rebate of tax paid on supplies
  • few supplies are exempt
  • must calculate net tax in regular manner
  • is only eligible to claim a partial rebate of tax paid on supplies if it receives significant government funding

Does your business have employees aged 60 to 70?

Beginning January 2012 the rules for CPP contributions for your employees aged 60 to 70 changed:

  • You have to deduct CPP contributions for all employees who are 60 to 65 years of age—even if the employee is receiving a CPP retirement pension and did not contribute in the past.
  • You must also deduct CPP contributions for all employees who are 65 to 70 years of age, unless they choose not to contribute to the CPP by giving you a signed and completed copy of Form CPT30, Election to Stop Contributing to the Canada Pension Plan, or Revocation of a Prior Election. They also have to send the original Form CPT30 to the Canada Revenue Agency (CRA).
  • Workers who were at least 65 years of age in 2012, receiving a CPP retirement pension, and who had chosen to stop contributing to the CPP can start contributing again if they want to, but they have to wait until the next calendar year. They will be able to do so by giving their employer another signed CPT30 and sending the original to the CRA.
  • After the month in which they turn 70 years of age, employees can no longer contribute to the CPP.

Consequences

If you, as the employer, do not deduct or remit CPP contributions to the CRA, you may have to pay your employee’s share and your share of the CPP contributions. If you do not remit the contributions to the CRA by the due date, you may also be charged penalties and interest.

More information

For more information about how the changes affect employers, go to www.cra.gc.ca/cppchanges-employers.

Disaster Recovery

In case of a disaster such as a flood (like what happened in Calgary in 2013), fire, tornado, or earthquake, does your business have a plan in place? A plan does not need to be complicated, but should as a minimum have these two parts:

1. A method to contact all employees or staff. This is important as staff need to be informed about the occurrence of the disaster at the workplace in a timely manner. They would also need to know if, when, and where to return to work.

If your company is small enough, direct phone contact of employees may be the best method so ensure a current employee phone number list is maintained and is readily available. If you have a large staff, an alternate method could be social media. For example staff could be told that in case of a disaster, they should check the company’s Facebook or Instagram account for updates.

2. Alternate arrangements to recommence business operations as quickly as possible. This is important as any lost productivity for the business will mean a potential loss in revenue and customers.

A plan should be in place that if the original business premises is unusable, there should be arrangements for an alternate location for the business to operate. Having a functioning data backup system is essential for this part of the plan as well as having an alternate location for the business to operate.

 Additional Planning Resources

For more detailed help on creating a disaster recovery plan your company could consider using an external consultant who specialize in disaster recovery planning or online resources such as  The Disaster Recovery Guide at www.disaster-recovery-guide.com