What’s a Tax Audit?

tax audit concept

While the auditing process is meant to help maintain public confidence in the fairness of Canada’s tax system, it can be a stressful and onerous experience on a taxpayer. There are two main types of tax audits: business audits and personal audits. Read on to learn a bit more about each type, what you can expect if you’re selected for an audit of your own and how Liu & Associates can help.

Business Audits

A business tax audit is a process in which the CRA closely examines small and medium-sized businesses’ books and records to ensure they are complying with their tax obligations. Audits are also used as a way to ensure the business is receiving any monetary amounts they are entitled to.

How Are Businesses Chosen?

The business audit selection process is based on a risk assessment system. When choosing businesses to audit, the CRA will also look at any information it has on file and may compare it to similar files.

What Does an Auditor Look at?

A tax auditor will look at the company’s books, records and documents. Examples include but are not limited to:

  • Previous tax returns
  • Business records
  • Personal records

Personal Audits

Personal audits are very similar to business audits. The selection process and the documents that are reviewed are all of similar nature – the difference is that the focus is on personal taxes rather than company taxes. Again, the purpose of an audit is to ensure that your assessment is accurate. If you’re selected for a personal tax audit, the CRA will ask for you to submit certain receipts and records. Sometimes the submission of these documents will be enough, and other times an auditor will be sent out to complete a more thorough check. The audit may take place at a CRA office, or at your home.

Results of an Audit

Throughout the audit process, the auditor will openly identify any issues and discuss them with you. You are also welcome to raise any concerns you may have as well. At the end of an audit, one of three things will occur:

  • No adjustments will be made to your assessment
  • A reassessment will result in you owing more tax
  • A reassessment will result in you receiving a refund

Don’t Sweat It

Audits may seem like a scary process, but if your documentation is accurate and in order there shouldn’t be any major issues that come up. Most errors that arise are honest mistakes that are easily amended. The best thing you can do to prepare for an audit is to keep track of your records for a minimum of six years.

If you or your company is selected to undergo an audit, contact the experts at Liu & Associates. Our team will ensure that your rights are observed and work to minimize any consequences. We act as a buffer between you and the CRA to minimize the time and stress that is so commonly associated with an audit. Give us a call today!

What to Do If the CRA Orders You To Pay Back Taxes

Woman Receiving a CRA Letter About Back TaxesFor some, getting a letter from the Canada Revenue Agency that your taxes have been reassessed – and that you owe back taxes – isn’t just a bad dream. The reality is that in most cases, the CRA has three years from your original date of assessment to reevaluate your income tax return. If they can prove willful or careless misrepresentation – or fraud – then the three-year window can be waived.

What Can You Do?

  1. Pay up. CRA charges 5% interest calculated on a daily basis back from the original tax year – meaning that if you get a letter from the CRA requesting back taxes, you already owe a significant amount of interest on those back taxes. The only way to stop the accumulation of interest is to pay the fine up front.

2. File an objection. You have 90 days to file an objection with the CRA outlining your position regarding your reassessment, which they are obliged to consider. You will be contacted to confirm receipt of your objection, however, it could take months or years for your objection to work it’s way through the process.

3. File an appeal. If you haven’t heard back about your objection within 90 days again, your next option is to file an appeal at Tax Court. Like any court case, you’ll require legal representation and it could take years to resolve. Furthermore, the odds are against you – in these matter, the CRA’s assessment is considered to be correct and the burden of proof is on you.

This is a simplified overview. If you’ve been reassessed and owe back taxes your best bet is to contact a professional, like the accountants at Liu & Associates, who have years of experience working with the CRA that can walk you through the process to get you the best outcome.

Top 10 Canadian Tax Myths

Detail-of-calculator-focusing-the-TAX-key-next-to-a-sheet-of paper-with-numbers-and-a-metal-pen

It’s tax season again and everyone’s uncle, neighbor and postman have advice on how to maximize your return. Don’t listen to the chatter– consult the professionals here at Liu & Associates today! Meanwhile, refer to our myth-busting list below for the hard facts about filing your Canadian taxes in 2016.

1: I earned less than the basic personal amount, so I can skip filing this year.

While yearly income under $11,474 is not taxable, you should still file a return.

2: Once I get my Notice of Assessment, I’m in the clear.

People usually breathe a sigh of relief when they receive a Notice of Assessment, but it is only a brief review of your document’s basic math. CRA has a window of years to follow up on any inconsistent files.

3: Interest on my mortgage is tax deductible.

You do receive a tax credit when you sell your home, but not for any interest paid against an existing mortgage. On exemption is a small percentage for people that operate a business out of their homes.

4: Filing online is risky and flags your account for audits.

Some feel that an online return could put them in a bad position, but it is simply not true. Filing method has no effect on the reasoning behind tax audits. You may be asked to send in supporting documents, but this is a routine verification.

5: There’s no incentive to report tax evaders.

Recently this would have been true, but new legislation in 2014 established a hotline for good Samaritans to report false tax claims. If true, the whistleblower stands to earn 5-15% of the tax collected as a cash reward.

6: Only a child’s mother can claim the corresponding tax credit.

It is the responsibility of the spouse who earns less to claim any children on their return, regardless of gender.

7: I have no taxable income, but I can still cash in my tuition credits.

A student must have taxable income to be able to use tuition credits for a refund. Credits can be held over or transferred to relatives or spouses.

8: My tips and gratuities are not taxable forms of income.

Don’t fall for this common line, especially if you work in the service industry! Tips and gratuities are considered income– they are therefore taxable. You risk fines and other consequences if you fail to report taxable income.

9: Skipping the tax deduction means I don’t have to report RRSP contributions.

Whether or not you intend to use your RRSP contributions as tax deductions, they need to be reported in your annual filing. Failing to do so will be viewed as an inconsistency, raising your risk of audit.

10: The employment insurance I received during maternity leave is not taxable

All employment insurance benefits– regardless of maternity status– are eligible for taxation.

5 Myths About Tax Audits

When it comes to tax audits, this standard governmental process tends to get a bad rap. In general, tax audits are dreaded because they are not well understood by those who file. By debunking common myths about tax audits, Canadians can ease their worries over this regularly occurring event. Whether you are being audited or would just like to know more about the process, consider the following five myths about tax audits:

Filing for tax deductions makes you more likely to be audited.

Every year, many people avoid filing for the deductions they deserve because they are nervous it will put them at an increased risk of being selected for an audit. However, the number of deductions you claim on your taxes has little to do with whether or not your filing is audited. When it comes to your submission, the Canada Revenue Agency (CRA) looks at the filing as a whole, rather than just your deductions, to ensure it makes financial sense. It is better to claim the proper deductions each year, and receive an appropriate tax return.

I can avoid being audited by waiting to file my taxes.

It is wishful thinking to hope that you will not be audited by avoiding the CRA altogether. Failing to file your taxes can not only result in serious fines, it is also illegal. Penalties for missing the submission deadline can be much stricter and less desirable than a routine audit. It’s best to file your taxes on time with the appropriate financial details.

It is not worth correcting previous filings.

Audits do not take place immediately. In fact, they can take place several years after you file. If you notice an inaccuracy on a previous year’s submissions, you can typically volunteer the correct information to the authorities without risk of criminal charges. Keep in mind, the CRA can access any year’s tax filing at any time; if you’re concerned about an error or omission, it’s best to speak up proactively.

If you file online, you will be audited.

Many individuals who have a history of filing their own taxes or working with a professional to submit their filing are skeptical of online tax submission services. Yet those who utilize this software have been shown to be at no increased risk of being audited. In fact, those people who submit taxes online or work with a professional may be at a decreased risk of being audited, because it is less likely that a mathematical error will occur.

Audits are scary.

While many taxpayers fear being audited, the truth is that the auditing process can be a very straightforward procedure. Typically, the audit process involves you being asked several questions about your filing, and being given an opportunity to explain any drastic, year-over-year financial changes.

This tax season, if you would like more information on avoiding an audit or properly filing your taxes, consult Liu & Associates for assistance.

 

Income Tax Guide For Landlords

If you’re a landlord, then you know that tax season typically looks a little different for you than it does for those without income properties. While filing your taxes as a landlord may at first seem overwhelming, rest assured that there are straightforward ways to reduce confusion when completing your paperwork.

The most important method of managing your taxes is to learn more about landlords’ tax responsibilities and the overall filing process. Through this knowledge, you will feel more empowered to ask questions, get support and confidently complete your tax forms.

Understanding your income

Before you file your taxes for rent payments you’ve received, it is essential that you know the ins and outs of what qualifies as rental or business income. Canadian law differentiates between housing that provides simple living quarters and businesses that provide a wide range of services.

If your responsibilities as a landlord start and end with providing tenants with a safe and lawful place to reside, then resident payments will most likely be considered as rental income. Conversely, if you are providing tenants with other offerings such as cleaning, landscaping, security or administrative support, then your income will typically be considered as stemming from a business. Knowing the proper classification of your income type is critical, because it sets the foundation for the rest of the tax paperwork you must complete.

Keeping track of your expenses

There are countless types of expenses that landlords must face each year in order to maintain their property and provide a safe and comfortable dwelling for tenants. Because these expenses can add up so quickly—and just as easily be forgotten—it is in your best interest to keep a detailed record of all expenses pertaining to your property.

Expenses can include costs of onsite repairs, gas used to go to and from your building for maintenance or business-related purposes and even legal fees used to draft contracts and lease agreements. Keeping tabs on all property-related costs will increase the ease and speed in which you file your taxes each year.

Utilizing appropriate deductions

There are many tax deductions available for landlords who receive income from a rental property. While some deductions are common and easily recognizable, such as building repairs or home office expenses, others are not so straightforward. If you are a landlord, you may also be eligible for deductions related to interest on mortgage payments and loans, business-related travel, contractor payments and insurance payments made for your rental property. Additionally, you may be eligible for a deduction if your property recently decreased in value, or if you suffered property damage from a fire or break-in. Becoming familiar with the range of deductions available to you will help you secure an appropriate tax refund.

Through these simple steps, you will be on your way to filing accurate taxes that properly reflect your income. For additional guidance on how to file taxes as a landlord, consult with Liu & Associates today.

Guide to Saving Documents for your Tax Return

an-accountant-using-a-calculator-and-checklist

Around tax time, the exaggerations are everywhere– from TV to comic strips, there are many depictions of a hapless taxpayer poring over a mess of documents. It’s fun to have a laugh, but the true nature of a tax return should not require a mountain of receipts and invoices. Read on for Liu & Associates summarized list of which documents you should be saving for your yearly income tax return.

 

The basics: With any return, it is essential you have easy access to the SIN numbers and income amounts (T4 slips) of you and your family. Educational expenses and tax receipts should also be handy, as well as any business income records.

 

Investments: Keep all documents pertaining to rental property income, retirement fund contributions and any capital earned due to savings or investments. All of these can affect both your income tax owed and the deductible.

 

Receipts: The most commonly cited item to save, but what receipts are actually eligible for tax deductions? Medical and childcare expenses often qualify as deductibles. If you have expenses through work and you are either unreimbursed by your employer or self-employed: you may be sitting on a goldmine of tax credits.

 

Past returns: It is always smart to keep your personal tax records for up to three years. At tax time, you or a Liu & Associates tax expert can review your past returns for accuracy and any overlooked or carried-over deductibles.

 

Charitable donations: Any tax receipts for any eligible charitable donations are an easy way to claim a tax credit. Be aware of the minimum and maximum amounts.

 

The above list is just a brief overview of the necessary documents for filing a tax return. Work, household and lifestyle variations can all impact the details of your yearly return. Consult CRA guidelines or Liu & Associates to ensure you meet all of your requirements. Our experts can ensure your complex financial realities are taken care of completely at tax time.

Income Tax Guide To Tips & Gratuities

a-waitress-giving-back-change

It is widely believed the tips and gratuities are “tax-free,” but this is not the case. Directly from Canada Revenue Agency’s (CRA) website:

“Tips and gratuities… represent taxable income and must be reported on annual income tax and benefit returns. Restaurant servers, hairdressers, valets, taxi drivers, and others who earn tips may not have all of their income recorded by their employers, which means that their T4 slips may not include all of their income.”

If you earn any tips or gratuities through your job, read on for a guide to reporting them and their eligibility for pensionable or insurable earnings.

NOTE: Pensionable means the earnings will require a Canadian Pension Plan (CPP) contribution; insurable means the earnings will require an Employment Insurance contribution.

 

REPORTING TIPS & GRATUITIES

First, determine if your employer reports all or any of your tips on your T4 slip. If not, it falls to you to track and log any and all gratuities earned through your job. These must be then reported on your tax return. All earned tips and gratuities are taxable and failure to report them is considered illegal in Canada.

TIP: CRA provides a Voluntary Disclosure Program (VDP) for anyone who is aware that they failed to report tips or gratuities in the past. Disclosing this way can help avoid fines, penalties or even jail time.

 

DIRECT VS. CONTROLLED

As the CRA outlines, there are two types of gratuities: direct and controlled. Direct tips are paid directly to the employee and are not controlled or altered by the employer. Controlled tips are instigated, paid out or redistributed by the employer, no matter how they are received from the client. So what is the essential difference?

  • Direct tips are not subject to CPP or EI contributions;
  • Controlled tips are subject to CPP and EI deductions.

 

So, no matter how you are tipped– remember: all earnings must be reported! Don’t risk serious financial or criminal consequences by overlooking your tips and gratuities at tax time. If you have any questions or concerns, visit or contact Liu & Associates today for a professional income tax assessment.

Income Tax Guide To Commission-Based Incomes

edmonton-accountants-working-together

Canada Revenue Agency (CRA) has many provisions in place for contractors, small business and the self-employed– but if you are considered an employee, it may be more difficult to qualify. Luckily for commission-based employees, there are conditions that ensure they can claim similar deductions against their income tax. Read the guide below for a summary of the requirements and benefits for commission-based employees.

 

AM I ELIGIBLE?

The following is directly quoted from the CRA website:

“To deduct employment expenses you paid to earn commission income, you have to meet all of the following conditions:

  • Under your contract of employment, you had to pay for your own expenses.
  • You were normally required to work away from your employer’s place of business.
  • You were paid in whole or in part by commissions or similar amounts. These payments were based on the volume of sales made or the contracts negotiated.
  • You did not receive a non-taxable allowance for travelling expenses. Generally, an allowance is non-taxable as long as it is a reasonable amount. For example, an allowance for the use of a motor vehicle is usually non-taxable when it is based solely on a reasonable per-kilometre rate.
  • You keep a copy of Form T2200, Declaration of Conditions of Employment, which has been completed and signed by your employer.”

If you do not fit the criteria above, you do not qualify for any additional tax benefit.

 

WHAT CAN I CLAIM?

Income tax credits for eligible commission-based employees are very wide-ranging. Here are just a few of the deductible expenses that may be available to those types of employees:

  • Legal & accounting fees
  • Promo & advertisements
  • Vehicle expenses
  • Meals & entertainment
  • Travel costs
  • Supplies, gear & equipment
  • Staff, office space & training
  • Licenses & permits

 

Depending on your line of work, some or all of these items may be entitled to a full or partial tax credit. Examine your expenses closely and you will enjoy the best possible tax return.

The above guidelines only address a portion of the requirements and credits for those whose income is commission-based. For more details, consult the CRA website or your Liu & Associates financial expert. We can help ensure that even though you qualify as an employee, you will still have a maximized tax return every year.

Working Income Tax Benefit Explained

a-lady-holding-money

 

First of all, just what is the Working Income Tax Benefit (WITB) and who does it affect? Canada Revenue Agency (CRA) defines the WITB as “a refundable tax credit intended to provide tax relief for eligible working low-income individuals and families who are already in the workforce and to encourage other Canadians to enter the workforce.”

AM I ELIGIBLE FOR THE WORKING INCOME TAX BENEFIT (WITB)?

From CRA’s Frequently Asked Questions–

“You are eligible for the WITB if:

  • You are 19 years of age or older on December 31st; and
  • You are a resident of Canada for income tax purposes throughout the year.

You are not eligible for the WITB if:

  • You do not have an eligible dependant and are enrolled as a full-time student at a designated educational institution for more than 13 weeks in the year;
  • You are confined to a prison or similar institution for a period of 90 days or more in the year; or
  • You do not have to pay tax in Canada because you are an officer or servant of another country, such as a diplomat, or a family member or employee of such person.”

*There are exceptions to these conditions– for more information, refer to the CRA’s regulations of contact your Liu & Associates professional.

WHAT IS AN ELIGIBLE DEPENDANT IN REGARDS TO THE WITB?

From CRA’s Frequently Asked Questions–

“For WITB purposes, you have an eligible dependant if you have a child who, at the end of the year:

  • Lives with you;
  • Is under 19 years of age; and
  • Is not eligible for the WITB.”

*There are exceptions to these conditions– for more information, refer to the CRA’s regulations of contact your Liu & Associates professional.

HOW IS THE WITB CALCULATED?

From CRA’s Frequently Asked Questions–

“The WITB is calculated using the following information:

  • Marital status;
  • Province or territory of residence;
  • Working income;
  • Net income;
  • Eligible dependant; and
  • Eligibility for the WITB disability supplement.”

*There are exceptions to these conditions– for more information, refer to the CRA’s regulations of contact your Liu & Associates professional.

As the WITB is based on family structure and net income, it is vital you provide the CRA with yearly tax returns and report your eligibility to ensure you receive any benefit. Incomplete or unfiled returns can delay your approval, so follow CRA regulations to the letter to receive your credited amount in a timely fashion– or take the pressure off and have an accounting professional at Liu & Associates handle your finances and complicated family accounting.

GST/HST Credit Explained

a-man-holding-money

 

We all pay Goods and Services Taxes (GST) and, depending on your province, you may pay for it as part of a Harmonized Sales Tax (HST). These taxes are federal “consumption” taxes– meaning they represent a percentage collected by merchants on all sales of consumer goods and services payable to the Government of Canada. Many Canadian citizens are entitled to credits or rebates for GST and HST, but don’t know what they are or why they receive them.

CRA defines GST/HST credit as “a tax-free quarterly payment that helps individuals and families with low or modest incomes offset all or part of the GST or HST that they pay.” Read on for Liu & Associates’ brief summary of how GST and HST credits work and discover if you are eligible!

 

AM I ELIGIBLE FOR THE GST/HST CREDIT?

From CRA’s Frequently Asked Questions–

“You are eligible for this credit if, you are a resident of Canada for income tax purposes in the month prior to and at the beginning of the month in which the GST/HST credit is issued and at least one of the following applies:

  • You are 19 years of age or older before the month in which the CRA issues a quarterly payment;
  • You have (or previously had) a spouse or common-law partner; or
  • You are (or previously were) a parent and live (or previously lived) with your child.”

*There are exceptions to these conditions– for more information, refer to the CRA’s regulations of contact your Liu & Associates professional.

 

HOW DO I APPLY FOR THE GST/HST CREDIT?

From CRA’s Frequently Asked Questions–

“Starting with the filing of your 2014 income tax and benefit return, you no longer have to apply for the GST/HST credit. The CRA will determine your eligibility and will issue the GST/HST credit to all entitled individuals. An application is still required to receive the GST/HST credit based on your 2013 and prior returns. To apply, you have to file the applicable income tax and benefit return, even if you have not received income in the year.”

*There are exceptions to these conditions– for more information, refer to the CRA’s regulations of contact your Liu & Associates professional.

As the GST/HST credit is based on family structure and net income, it is vital you provide the CRA with yearly tax returns to ensure you receive any credit for which you are eligible. Incomplete or unfiled returns can delay your approval, so follow CRA regulations to the letter to receive your credited amount in a timely fashion– or take the pressure off and have an accounting professional at Liu & Associates handle your finances and complicated family accounting.