Canadian Taxes A to Z (2018): "J" is for Journal Entry

Now under two weeks left until T-Day in Canada. Ten letters down (including today), with still 16 to go! I might need to squeeze in a couple of letters on the same day at the end. 

I'm discovering that the deeper one goes into the alphabet forest, the tricker it is to come up with good lettered tax terms. But today I do have an important one for anyone who has self-employment income. Today, J is for Journal Entry.

No, not as in travel journal, or dear diary kind of journal. But the kind of bookkeeping journal entry that will save you if you're ever challenged about your income or expenses by the CRA, because it presents a complete roadmap of your business financial transactions over the relevant taxation year(s).

WHAT IS A JOURNAL ENTRY

A journal entry is a fundamental accounting concept, but one which most of the general public won't have heard of. The reason you need to know about it if you run your own business is that through it you can prove when, why, and how much money was received or paid out from your business.

A journal based on the double entry bookkeeping system requires that the dollars of debits always equals the dollars of credits. This balancing out is the double check we all need. It'll save you from both missed transactions and transposed numbers.

Usually, each journal entry will contain the date, account name, and amount to be debited or credited. I also recommend a brief explanation of the transaction. Journals can be maintained by hand, on an electronic spreadsheet (like Excel), or in bookkeeping software like Quickbooks or Simply Accounting. If you don't have journals, you don't have bookkeeping records.

SHOEBOXES AREN'T BOOKS

Some small business people believe what accountants pejoratively call the Shoebox Method to be perfectly adequate for tax time. Into one shoebox, you toss over a 12 month period all the receipts for things you bought for the business. Into another shoebox, you toss all your sales receipts for the money you've collected from your customers. Then, at tax time, you toss both those boxes at your accountant, and hope for the best.

With the Shoebox Method, there are no journals. In fact, there aren't really any "books." Just some scraps of disorganized paper. They're a big pain to add up, and can lead to inaccurate tax filings that don't withstanding later CRA audit scrutiny.

WHY YOU NEED JOURNAL ENTRIES

With journal entries, you can figure out almost instantly how much money you netted in a given month or year, because your debits and credit are all summarized in front of you.

What this means for tax time is that you'll know how much tax you owe by plugging your journal summary numbers into tax preparation software (or turning them over to your accountant). You still need those individual receipts as back up documents, but the journals tell the real tale.

I'm not suggesting that journals are super easy to keep up to date by spending 30 minutes on a Sunday afternoon doing a little data entry while watching the game. It's definitely possible to keep your own books, but my suggestion is to turn them over to an external bookkeeper.

No need to hire someone full or part-time. Quality bookkeepers can be had in Ontario from about $35 to $90 an hour, depending on where you live (bookkeepers cost more in big cities) and whether you employ an independent bookkeeper (cheaper, but less supervision) or use one who is an employee of the accounting firm you use (more expensive, but more supervision). Regardless of how you do it, just make sure that you keep some official journals.

Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.

Les conséquences de la violence conjugale sur les droits de garde, d’accès et de visite

Le divorce ou la séparation entraîne souvent une vague d’émotions chez chacun les époux : tristesse, solitude, jalousie, frustration et parfois, la colère. Ces sentiments haineux peuvent malheureusement pousser certains parents à commettre des actes violents. En 2016, le gouvernement fédéral estimait que parmi les homicides perpétués au Canada, près de 20% étaient reliés à des crimes de violence familiale. Il n’est donc pas étonnant qu’une personne faisant l’objet de violence conjugale sera souvent détenue à moins qu’un juge de paix estime qu’elle puisse être mise en liberté sous caution.

Impact des accusations criminelles sur le droit familial

Les poursuites criminelles sont, en principe, indépendantes des procédures de droit familial. Cela dit, lorsque des accusations criminelles sont portées contre un parent en processus de divorce ou de séparation, ces accusations peuvent indirectement affecter les droits de garde, de visite et d’accès du parent en question. En effet, les conditions de mise en liberté comprennent presque toujours une interdiction de communiquer avec la victime et de rester à certaine distance de celle-ci. Il s’avère que, dans un cas de violence familiale, la victime est souvent l’autre parent. L’accusé se voit donc privé du droit de retourner à sa résidence principale si l’autre parent et les enfants s’y trouvent toujours. Si les enfants de l’accusé sont très jeunes, il peut être compliqué pour lui de communiquer directement avec eux. Il peut donc être très difficile pour le parent accusé de faire des arrangements pour continuer à voir ses enfants.

Intervention de la Société de l’aide à l’enfance

Dans les cas de violence extrême, il est possible que les droits d’accès de l’accusé soient suspendus. Si l’accusé a porté atteinte à la vie ou la sécurité de l’enfant directement, le juge de paix peut même interdire l’accusé de communiquer avec l’enfant jusqu’à la fin des procédures criminelles. Dans ces cas, un organisme public tel que la Société de l’aide à l’enfance va souvent intervenir pour offrir des mécanismes de sécurité pour la victime et pour assurer la réintégration de l’accusé dans la vie de ses enfants en temps et lieu.

Suspension des droits de garde, d’accès et de visite

Si l’accusé est mis en liberté, il revient à la victime d’entamer les étapes nécessaires en devant la cour de droit de la famille pour apporter des modifications aux droits de garde, d’accès ou de visite de l’accusé. Pour ce faire, la victime doit prouver qu’elle serait exposée à un réel danger si l’accusé pouvait continuer à exercer ses droits d’accès. La victime peut avoir recours à :

• Des photos montrant les blessures infligées par l’accusé;
• Des messages exposant le comportement abusif de l’accusé; et
• Des notes énonçant le changement de comportement des enfants depuis l’arrestation du parent accusé (nervosité, crainte, remord, etc.)

Le parent accusé doit alors réfuter ces éléments de preuve et convaincre le tribunal que ses droits d’accès devraient être maintenus. L’accusé peut soulever les arguments suivants :

• Il a été mis en liberté par un tribunal pénal compétent;
• Il n’y a aucune interdiction de communication à l’égard de ses enfants;
• Les accusations portées contre lui ne sont pas reliées aux enfants;
• Il n’a pas encore été reconnu coupable des accusations portées contre lui; et
• La suspension de l’accès aurait un effet trop néfaste sur la relation entre l’accusé et ses enfants.

Visite et échange dans un centre de supervision

En principe, l’interdiction de communiquer avec un parent n’empêche pas l’accusé d’exercer ses droits d’accès vis-à-vis ses enfants. Par mesure de précaution, il est mieux de mettre en place un accord ou d’obtenir une ordonnance imposant un lieu et une méthode d’échange permettant à l’accusé de voir ses enfants sans violer ses conditions de mise en liberté.

À cet effet, il peut être utile de communiquer avec un centre local offrant des services de supervision pour permettre à l’accusé de continuer à exercer ses droits d’accès. Très souvent, ces centres sont aussi des endroits adéquats pour effectuer l’échange des enfants entre parents.

Les meilleurs intérêts de l’enfant

Dans tous les cas, le droit du parent accusé de violence familiale de continuer à voir son enfant est assujetti au principe du meilleur intérêt de l’enfant. Même si l’incident qui a déclenché les poursuites judiciaires au tribunal pénal était de nature mineure, les juges de la cour familial maintiendront le droit d’accès à un enfant uniquement s’il est dans l’intérêt de cet enfant de continuer à voir le parent accusé. Puisqu’il s’agit d’une mesure avec des conséquences plutôt draconiennes, la suspension du droit d’accès est souvent temporaire. En effet, il est possible pour le parent accusé de violence familiale de réintégrer la vie familiale au fur et à mesure, tant que cette réintégration est dans l’intérêt de l’enfant et que le parent réussi à convaincre le tribunal que la vie et la sécurité de l’enfant ne seront pas en danger.

Dans les cas d’une arrestation d’un parent, il est préférable pour chaque conjoint d’obtenir des conseils juridiques afin de déterminer la meilleure solution relativement aux droits de garde, d’accès et de visite et pour assurer la stabilité du foyer familial.

Karen Kernisant est avocate à Aubry Campbell MacLean et pratique dans le domaine du droit de la famille, du droit pénal et du contentieux civil.

Canadian Taxes A to Z (2018): "I" is for Input Tax Credit

Today, I is for Input Tax Credit (ITC). Nine down, 17 to go!

Input tax credits are what makes GST/HST so good for business. You only need to remit to government the amount of GST/HST you collected from clients, minus the amount you paid out for inputs into your business.

Assuming you're in a business where you sell more than you purchase (always the preferred economic situation), you wind up effectively getting your supplies tax free! And who doesn't like that.

WHY ITC CALCULATION IS A PAIN & WHAT TO DO ABOUT IT

The thing that I find most confuses businesses about ITCs is how to calculate them, since the government gives you three main optional ways. Plus there are some special rules on ITCs for vehicles, aircraft, and capital property.

a. Special Rules on Planes & Automobiles, But Not Trains

For passenger vehicles, you are limited to claiming an ITC on the first $30,000 of the vehicle cost, and the vehicle needs to be used 90% or more for business purposes. Otherwise, the ITC claim is proportionate to the business use (down to a low of 10%). Aircraft aren't limited to the $30,000 cap (fortunately, unless you're in the market for a kite), but are still subject to the business/personal use ITC percentage rules.

b. Special Rules on Real Estate

For capital real property, if you're a GST/HST registrant buying property (like an office building) from a GST/HST registrant, no tax money usually needs to change hands. Instead, the purchaser will self-assess, provide a certificate to the vendor of the registration and self-assessment so that the vendor doesn't need to demand the tax at the time of closing, and then it all becomes "a wash" since the purchaser can at the end of year claim an ITC equal to the tax payable (but not actually paid) on the purchase.

The trick here is to make sure you register for the GST/HST if you're planning to buy real property subject to GST/HST. If you don't, you'll get stuck forking over the tax to the vendor, because you won't be able to claim an ITC.

WHICH OF THE THREE ITC METHODS IS BEST FOR YOUR BUSINESS

As for methods of calculation, you may have three choices: the quick method, the simple method, and the neither quick nor simple method (boringly called the regular method). 

1. The Quick Method. This is the only method which let's you actually make a profit on ITCs (though you need to report the profit as income). There are quite a few limitations as to who can use this method according to type of business and total sales, so consult your accountant.

I can't use it, for instance, because lawyers (and some other professionals) are explicitly excluded. It works best for those who collect lots of GST/HST, but don't buy many inputs (and thus don't generate many ITCs).

It's a percentage method based on your total sales rather than the actual GST/HST paid on supplies, and could lead to you having an extra $1000 in your pocket at the end of the year. The accountants at Grant Thornton have prepared a useful summary for considering whether to use the Quick Method: https://www.grantthornton.ca/resources/insights/articles/Election_to_use_Quick_Method.pdf

2. The Simple Method. This is the method that I and a lot of other businesses of moderate size use. There are yet again eligibility limitations on the size of revenues and total cost of supplies.

The advantage is that instead of separately reflecting the tax paid on every purchase in your bookkeeping records, you simply add up all ITC eligible business expenses (including GST/HST paid) and multiply the total by a particular fraction factor (depending on the rate of tax in your jurisdiction), which will give you an average of ITCs available to be claimed.

Regular limiting rules on things like being only able to claim 50% GST/HST on restaurant meals (because they are only 50% tax deductible) still apply.

3. The Regular Method. This method is the most painful of all, as it requires you to add up all the GST/HST you paid out, and deduct it from the GST/HST you collected. Subject, as usual, to various exceptions and qualifications.

This could lead to your bookkeeper trolling through thousands or tens of thousands of receipts to extract the tax paid. But it's still worth doing so, because every dollar in GST/HST you pay out, is usually one less dollar you need to remit to the CRA.

Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.

Canadian Taxes A to Z (2018): "H" is for HST

Today, H is for Harmonized Sales Tax (HST). Eight down, 18 to go!

Yeah, I know it was only yesterday that we talked about GST. And that HST is a lot like GST, except that H is worth four points in Scrabble, while G is only worth two points. But given the grief that my clients suffer over GST/HST problems, I figured it was worth another post.

A VERY SHORT HST HISTORY

For those not in the know, in 1996 Nova Scotia, New Brunswick and Newfoundland & Labrador cut a deal with the feds to blend (and reduce) the provincial sales tax with the federal GST. Provincial sales taxes in Canada were cascading or turnover taxes. Meaning that you got hit with the tax every time ownership of the same items (or their earlier components) changed in the supply chain. The taxes artificially encouraged vertical integration of business, rather than sensible organization of business according to sound economics, in order to avoid getting hit with the tax multiple times in the manufacturing process.

AN EVEN SHORTER ECONOMIC ANALYSIS OF HST

Sound economic studies, not political smoke and mirrors, show that HST encourages business investment, whereas PST slows economic growth. Most of the western industrialized world has now moved to HST-type taxes (often called VAT - Value Added Tax).

As a tax lawyer, I'm all for a lower tax burden. From both a business and consumer perspective, HST does equal a lower tax burden when combined with its effect on greater economic growth. Supposedly leading to more money in everyone's pockets at the end of the day.

Most studies show HST to be tax revenue neutral, and some suggest that everyone will pay less tax under an HST system. Certainly life is easier for business - especially small business - in collecting and remitting only one sales tax, and being able to claim input tax credits on business purchases.

THE CONTINUING HST BAD REP

In 2010 HST was implemented in both Ontario and British Columbia, but in 2011 a referendum in British Columbia voted 55% in favour of abolishing the HST and reverting back to the GST/PST system, effective in 2013. This resulted in BC having to pay back $1.6 billion in implementation funding to the federal government.

Don't mistake me for some government cheerleader. There are lots of wacky things about our tax system, and unfortunately taxpayers do sometimes need to fight for their rights (either by themselves or through hiring folks like me). But the theory of the HST is good economic and business policy. Full stop. The problems lie in its interpretation and application.

Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.

Canadian Taxes A to Z (2018): "G" is for GST

Today in the continuing Canadian Taxes A to Z saga, I present to you the letter G, representing the Goods and Services Tax. Better known to its friends and foes alike as GST. Also sometimes going by the name Harmonized Sales Tax (HST) in provinces where it has merged with provincial sales taxes.

THE GST IMAGE PROBLEM

Since its introduction in 1991, the GST has become almost as much of a target for critics as the dating way back to 1917 income tax is itself. Although GST replaced a higher (13%) hidden manufacturers sales tax with a 7% tax, and promised rebate credits to low and middle income Canadians, sticking an obvious consumption tax on top of pre-existing provincial sales taxes proved to be deeply unpopular among Canadians. I've got an undergrad background in economics, and the math remains far beyond me as to just how revenue neutral the GST really was, notwithstanding government claims at the time.

THE THINGS ONE COULD GET AWAY WITH UNDER THE GST

I can tell you that during the early years of its implementation, when I was responsible in Toronto for prosecuting offences under Part IX of the Excise Tax Act (the rather poorly named place where GST rules reside), we had folks do things like submit an input tax credit application for a rebate on the GST supposedly paid on the purchase of a 737 jetliner, notwithstanding the taxpayer was living in his mother's basement with no real business, and the government simply mailed him a gigantic cheque! Which he quickly spent.

Yes, he did go to jail. And no, you can't get away with this any more. The system and oversight of GST/HST rebates has been improved. But arguably the rules surrounding GST/HST remain more uncertain than those covering income tax.

ONGOING GST LEGAL UNCERTAINTY

Part of the uncertainly is that we have only 25 years of GST history under our belts. Another part of the problem is that the relatively well developed principles of income tax law aren't all that relevant in the GST world.

I'm a tax lawyer, and I can tell you that I get stumped by far more GST questions than income tax questions. I'll eventually figure out the answer to the GST questions - that's my job - but they usually require more research and discussions with the CRA than would be required for even esoteric income tax questions.

FIVE THINGS YOU NEED TO KNOW ABOUT THE GST (HST)

Five important things you need to know about the GST are:

1. you should always apply for personal credits, and let the CRA tell you no, rather than assuming you won't qualify;
2. even if your self-employment income is under $30,000 annually (the threshold where registration becomes mandatory), you should still consider registering for GST, as you'll be able to recover GST you pay for business supplies;
3. if you are GST registered, make sure you do your required filings (even if you have no business sales, you still need to file or deregister);
4. if you do collect GST from clients, keep careful track of all the GST you pay out (or use the simple method if permitted) to minimize the GST you need to remit to the CRA;
5. if you are obligated to remit GST, don't instead divert the funds to prop up your failing business; the CRA will find you, and GST audits are very easy from the CRA perspective compared to income tax audits, because there's very little room for grey areas.

Canadian Taxes A to Z (2018): "F" is for Fraud

Today's instalment of Taxes A to Z brings us to the letter F. F is for Fraud. Six letters down, 20 to go!

WHAT TAX FRAUD REALLY MEANS

You occasionally hear the words "tax" and "fraud" used together, but more common is "tax evasion." Fraud is a very broad term, encompassing any deception intended to result in financial or other gain. It's probably the best umbrella term covering everything and anything intentionally intended to cheat the tax system. 

The reason you don't see the F word all the time in the tax context is because it's already used in the Criminal Code (Code) for the big C criminal offence of fraud. According to s. 380 of the Code, fraud over $5000 dollars can net you 14 years in prison! That's a lot of heavy time by criminal offence standards. By comparison, tax evasion under s. 239 of the Income Tax Act (ITA) can only net you 5 years imprisonment at most. 

WHY TAX CHEATS CAN BE CRIMINALLY PROSECUTED

What most people don't know is that tax fraud can be prosecuted under s. 380 of the Code, instead of s. 239 of the Income Tax Act, exposing accused to almost three times the penal jeopardy!

I spent the first few years of my legal career as a Federal Crown with the Revenue Prosecutions Unit of the Department of Justice, and worked on hybridized cases where sometimes we'd proceed jointly under the Code and ITA if investors were also defrauded along with the government, lots of money was at stake, or we needed to make a mutual legal assistance request work in a foreign state like Switzerland who would share information with us only if the allegations were criminal fraud, but not tax evasion (which at least at the time it perceived as an administrative matter). 

WHY YOU CAN'T ACCIDENTALLY COMMIT TAX FRAUD

Fortunately for those worried about getting a little too creative in preparing their taxes, both fraud (under the Code) and tax evasion (under the ITA) are mens rea offences, meaning to convict a court needs to find the accused actually intended to defraud or evade, and wasn't just careless with his taxes. This can get a bit nuanced, since intent can be implied from all the circumstances, but mere tax avoidance isn't a crime - even if the CRA later rules that what you believed to be legitimate avoidance isn't permissible.

Tax evasion is thus distinct from all other offences under the ITA, which don't require proof of mens rea. They generally are "strict liability" offences, meaning that the burden of proof shifts to the accused to demonstrate "due diligence" once the government has established the actus reus (the basic facts underpinning that the offence took place). 

Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.