Part VII. Business Income and Expenses. The basic format for reporting income and expenses of any business is the same.

Transcription

1 What is a Business? Part VII Business Income and Expenses A business is an activity that is carried on for profit or with a reasonable expectation of profit (REOP). The business owner is not issued a T4 slip although he/she may be issued a T4A slip with an amount in Box (20). Profit or Loss - If the taxpayer s business has a profit, that profit must be added to any other income the taxpayer has and thus, he/she may be required to pay taxes on that profit. If, on the other hand, the taxpayer s business has a loss, that loss may be deducted from other sources of income, and the taxpayer s taxes may be reduced. A taxpayer cannot deduct losses arising from hobbies or similar activities if he/she does not ultimately expect them to be profitable. Because businesses are rarely profitable immediately, start-up losses are usually routinely allowed. However, if the business does not show a profit in a reasonable length of time, those losses may eventually be disallowed. How to Report Business Income and Expenses If the business is NOT incorporated, the taxpayer is required to complete one of the following forms, depending on the nature of the business he/she operates. This form, along with the T1, must be filed with CRA on or before June 15 of the year following the year-end of the business. If the business is incorporated, a T2 return must be filed. This course deals strictly with unincorporated businesses. T2125 Statement of Business Activities T2042 Statement of Farming Activities T2121 Statement of Fishing Activities The form most often used is the T2125 Summary of Business, Professional and Commission Income and Expenses. In this province the T2121 Statement of Fishing Activities is also used quite often. 0 The basic format for reporting income and expenses of any business is the same. Gross Income $xxxx Less: Cost of Goods Sold (if selling goods) $xxxx $xxxx Gross Profit $xxxx Less: Operating Expenses $xxxx CCA on Assets owned by the business $xxxx $xxxx Net Income before adjustments $xxxx Less: Personal Expense (Use of Personal Auto and Office in Home) Net Income (Loss) Report on Lines $xxxx $xxxx ====

2 The Tax Shelter Training 1 Completing the Top of the T2125#01 Form Fiscal start and end is usually Jan 1 to Dec 31 except for the year the business starts or ends. A taxpayer may operate more than one business in a year. To accommodate this the T2125 form can be cloned. To do so, click the right mouse button while the mouse pointer is anywhere on the T2125 screen; then click the left mouse button on Clone Form on the menu that appears. The cloned form will have the number T2125#02. The #02 indicates a second business. Each T2125 has eight pages with a tab for each page. The number following the form number indicates the page. (T2125#02-3) indicates the third page on the second business form). Identification The Business Name, Street Address, City, Province and Postal Code Enter information about the office location of the business, if there is one. If not, enter the home address of the proprietor (taxpayer for whom the return is being prepared). Business Number Most businesses have a business number issued by CRA. If the business has employees or is a GST/HST registrant the taxpayer must have a business number for the business. Main product or Service Enter the main product sold or the type of service provided by the business.

3 The Tax Shelter Training 2 North American Industry Classification System (NAICS) The preparer must enter the industry code that best describes the business activity. If more than one code applies or if there is more than one activity in the business, use the code that most closely describes the main business activity. The CRA uses the information from the Standard Industry Code entry for statistical purposes It is sometimes difficult to find the Industrial Code for a particular business. Cantax has a pull down menu but is quite confusing. The Statistics Canada site that will help you determine the code for most enterprises. Here you can type in the key word for the business or browse the database. Click here for the Stats Canada Site for NAICS. Partnership ID Number and Tax Shelter Number These fields are for larger investment partnerships. Generally, if a taxpayer is a member of such a partnership, he/she will receive a T5013 slip showing the amount of income and the appropriate ID numbers. % Ownership If the taxpayer has a business partner (including a spouse), the information about the partner(s) and the percentage ownership must be entered on page 3 (Details of other partners). Note that if the spouse is a partner, the preparer need only enter the percentage owned by the spouse on the top line of this section. The name, sin etc will post automatically. In addition the amount of income for each will be posted automatically if the returns are coupled. The portion of income allocated to the taxpayer will be posted to T Page 2 - Part 6.

4 The Tax Shelter Training 3 Two Methods of Reporting Income There are two methods of reporting income and expenses: the Accrual and Cash method. Accrual Method Most taxpayers are required to use the accrual method of reporting income and claiming expenses. This method has two features: 1) Income is reported in the year it is earned, regardless of when it was received. 2) Expenses are deducted in the year in which they were incurred, whether or not they were paid for in that period. There is an exception to the second point. The cost of goods purchased for resale can be claimed in the year they are sold. Cash Method This method has two features: 1) Income is reported in the year it is received 2) Expenses are claimed in the year in which they are paid. A self-employed commission sales agent can use the cash method to report income and claim expenses. Farmers and Fishermen may also be able to use this method. Where to Report Income - Report the Total Income not on T4A slips on the top line of the Income Section of the T2125. If there is self-employed income shown in Box (20) on a T4A slip it must be entered directly on the T2125 screen. Generally, commissions for a self-employed sales person will be shown in Box (20) of a T4A. T2125 HST is included in Sales of $125, ($111, $14,476.72) Minus GST and PST or HST (if included in sales above) If the taxpayer is a GST/HST registrant he/she must charge GST/HST on most products and services. The GST/HST is collected on behalf of the Government and must be remitted to them separately from Income Taxes. If the taxpayer has included the HST as part of income in the field for Sales, commissions, or fees not on a T4A slip, it must be deducted. Newfoundland and Labrador: To determine HST included in sales, divide the total sales (including HST) by 1.13 and multiply the result by 0.13 (For 2011). This will change if the HST rate changes. Returns, allowances and discounts If returns, allowances and discounts have not already been deducted from sales, they should be deducted on this line.

5 The Tax Shelter Training 4 Cost of Goods Sold If a taxpayer is in business that buys goods for resale or makes goods for resale, he/she must determine the "Cost of Goods Sold." In general, a taxpayer can claim the cost of the goods purchased or made for sale in the year it is sold. Cost of goods sold is deducted from gross revenues to determine the gross profit before other expenses. (If the business is an HST registrant, deduct HST charged on purchases). How to determine Cost of Goods Sold The value of inventory at the start of the year. (A) The cost of purchases for the year. (B) The value of inventory at the end of the year. (C) Cost of Goods Sold = A + B - C Inventory There are generally two methods to value the year-end inventory for income tax purposes: 1) Value the entire inventory at its fair market value. Fair market value is the price for which one would buy or sell an item in a normal business transaction. 2) Value individual items in the inventory using the lesser of: their fair market value, and their cost. This is the most commonly used system. Generally the inventory is based on the cost of the product. However, if the value of an item actually decreases below the price paid for it, that value may be used. Value of Inventory - If this is the first year of reporting business income, a taxpayer can choose either method to value inventory. In the first year of business, there will not be an opening inventory. If this is not the first year of business, the taxpayer must continue using the same method used in past years. The value of the inventory at the start of the current year must be the same as the value of the inventory at the end of last year. The taxpayer must do an actual stock count at the end of ach year. If inventory items are stolen or removed because of damaged, the loss incurred is automatically accounted for when the inventory is determined at the end of the year. There is no additional claim for such removal. However, if the business is reimbursed for those items from insurance or the distributor, that reimbursement must be included in income. Purchases Include delivery, freight or express charges in the cost of goods bought for resale. Do not include items purchased for personal use.

6 The Tax Shelter Training 5 Is the Business is an HST/GST Registrant? If a business has income in excess of $30,000 in a year it must be registered with the federal government and collect HST/GST on all sales. It is then required to file an HST/GST returns quarterly or annually depending on the amount of sales. This return is different from the T1 tax return and is not filed with the T1 tax return. On the HST/GST return, the business reports all the HST/GST collected and then subtract from that all the HST/GST paid on expenses (Input Tax Credit). The difference is the amount owing to CRA or the refund claimed. Below is the return used to file a HST/GST return. It is important to know that when completing the T2125 form for a taxpayer who is a GST/HST registrant, the GST/HST collected on sales must not be reported as part of the income. Likewise, GST/HST paid on expenses must not be included as part of the expense.

7 The Tax Shelter Training 6 Business Expenses In general, a taxpayer can deduct any reasonable expense incurred to earn business income. A Taxpayer cannot directly deduct expenses incurred to buy capital property. He/she may be able to claim CCA on that property. It is important to determine whether an expense is current (and therefore deductible against income) or capital in nature (and therefore may be able to be claimed over a period of time through CCA). The following is a list of current business expenses that can be deducted: (Remember, if the business is an HST/GST registrant, deduct HST/GST from the expenses). accounting and legal fees, advertising costs, allowable reserves, automobile expenses, bad debts, business use of home expenses, business taxes, fees, licenses, dues, capital cost allowance, convention expenses, delivery, freight (not deducted as cost of goods sold), equipment rental, insurance, interest, bank charges, light, heat and water, maintenance and repairs, management and administration fees, meals and entertainment, office expenses, property taxes, rent on business property, salaries and wages, including employer's contributions, travelling expenses, and other expenses which are reasonable and incurred to earn income from the business.

8 The Tax Shelter Training 7 A closer look at some expenses Prepaid Expenses (Special Rules) - A prepaid expense is an amount paid in advance for a benefit that will be received later. Prepaid expenses include insurance, taxes, and rent paid in one year for benefits received the following year. If the accrual method of accounting is used, only expenses for the period of time in the tax year can be claimed. For example, suppose that on July 31, 2010 a taxpayer prepaid the rent on his business store for a full year (August 1, 2010 to July 31, 2011). He can deduct only 5/12 of this rent as an expense in The balance of 7/12 can be claimed as an expense in Advertising A self-employed taxpayer can deduct expenses for advertising, including ads in Canadian newspapers and on Canadian television and radio stations. However, he/she cannot deduct expenses for advertising that is directed mainly to a market in Canada when he/she advertises with a foreign broadcaster, or in an issue of a non-canadian newspaper or periodical. Convention Expense A self-employed taxpayer can deduct the cost of attending no more than two conventions each year. A convention must: (a) relate to the business, and (b) be held by a business or professional organization within the geographical limits of where the sponsor of the convention usually does business. This second limit does not apply if an organization from another country sponsors the convention and the convention relates to the business. When food, beverages, or entertainment are shown separately on the bill at a convention, the taxpayer may claim a portion of these costs as meal and entertainment expenses. If food, beverages, or entertainment expenses are not separately identified, the taxpayer must subtract $50 for each day the organizer provides food, beverages or entertainment from the total convention fee. Claim the allowable 50% of the daily $50 amount as a meal and entertainment expense. Food, beverages, or entertainment does not include items such as coffee and doughnuts. Meals and Entertainment -The maximum portion that can be claimed for business meals and entertainment expenses is 50% of the actual expenditure. Entertainment expenses include tickets and entrance fees to an entertainment or sporting event, gratuities, cover charges, room rentals such as hospitality suites, and so on. The 50% limit does not apply in the case where a taxpayer incurred meal and entertainment expenses to provide a Christmas party or similar event and he/she invites all the employees from a particular location. The business is limited to 6 such events a year.

9 The Tax Shelter Training 8 Salaries and wages, including employer's contributions Salary and expenses paid to employees, and the employer share of CPP and EI are allowable expenses. The employee share of CPP and EI shown on the summary are not allowable expenses as they are included in the amount claimed as salary. The business must issue T4 slips to the employees and complete a T4 Summary to send to CRA. This summary is a good source of information on the salary and benefits paid to employees. The T4 Summary below will show the preparer that the claim for salary and benefits based on this form is $203, ($195, , , = $203,221.84).

10 The Tax Shelter Training 9 Business Use of Home Expenses A taxpayer can claim an office in home if one of the following conditions is met: The work place at home is his/her main place of business. The work place is used only to earn business income and is used on a regular and ongoing basis for meeting clients clients, customers or patients. The allowable expenses are shown on the "Calculation of business-use-of-home expenses" section of the T2125 (Page 3). To calculate the deductible portion, use a reasonable measure, such as the area of the work space divided by the total area of the home. Those measurement can be entered directly on the screen. If the taxpayer deducts capital cost allowance on the business-use part of the home and he/she later sells the home, he/she may be subject to capital gains and recapture on that portion of the home. It is recommended that CCA not be claimed as an expense. The amount that can be deducted for work space in the home expenses cannot exceed the net income from business. In other words, these expenses cannot be used to increase or create a business loss. Any workspace expenses not used in the current year can be carried forward and claimed in a future year when the business has a profit. T2125#01-3 Note that in the example above, the expenses are calculated to be $1, However, since the Net Income of the business is only $536.00, that is the maximum that can be claimed in the current year. The balance of $ is carried forward to the following year. T2125#01-2

11 The Tax Shelter Training 10 GST/HST What is GST/HST? - GST, or goods and services tax, is a 7% tax that is charged on most goods and services in Canada. In Nova Scotia, New Brunswick and Newfoundland and Labrador, the GST has been "harmonized" with the provincial sales tax, to become the HST. HST is charged at the rate of 13% (for 2011). Input Tax Credit - Any business which is registered to collect GST/HST will be able to recover any GST/HST paid on purchases made in the course of their commercial activities, by claiming "input tax credits" when filing their GST returns. Who must register? - All businesses which provide taxable goods and services in Canada must register to collect GST or HST unless its annual gross revenues is less than $30,000. A taxi business must register no matter what the revenue. Businesses, which sell only exempt goods and services, may not register to collect GST/HST, and thus may not claim any input tax credits for GST/HST that they have paid. Any business may voluntarily register to collect GST/HST. Zero-rated and exempt goods and services - Taxable goods and services include items which are zero-rated. That is, these items are considered taxable, but the tax rate is zero. These zerorated items include things such as basic groceries and prescription drugs. Other goods and services are exempt from taxes. These include used housing, most medical services, legal fees, bank charges and insurance. If a business is a GST/HST registrant, the GST/HST must be deducted from all expenses of the business when completing the T2125 or any other business form. The taxpayer will receive a benefit from the GST/HST taxes paid when he/she files a GST/HST return. This return is filed separately from the T1 tax return.

12 The Tax Shelter Training 11 Capital Cost Allowance To claim CCA on a property, the Capital Cost of the property must be entered on the Capital Cost Allowance Schedule, T2125#01-4. If the taxpayer is a GST/HST registrant, the capital cost is the cost without the GST/HST. T2125#01 4 The CCA from this schedule is posted to the Capital Cost Allowance Section on the bottom of T2125#01-2. T2125#01-2 Note: When the taxpayer has a partner, including his/her spouse, do not split the cost of items on which CCA is claimed as you would with rental property. Enter the full amount on the T2125#01-4. The total CCA will be calculated and reported on Line 9936 and used to calculate the Net Income of the business. After the Net Income is determined, the taxpayer s share is calculated on T2125#01-2.

13 The Tax Shelter Training 12 Capital Cost Allowance (CCA) Classes The following is a list of the more common CCA classes and their rates: Class 1 (4%) Most buildings bought after 1987 Class 3 (5%) Most buildings, including components bought before Class 6 (10%) Frame, log, stucco on frame, or galvanized or corrugated metal buildings that do not have any footings below the ground. Class 6 also includes fences and greenhouses. Class 7 (15%) Canoes, rowboats, and most other vessels and their motors, furniture, and fittings. Class 8 (20%) Furniture, machinery, photocopiers, calculators, musical instruments, refrigeration equipment, telephones and tools costing $200 or more. Class 8 also includes outdoor advertising signs. Class 9 (25%) Aircraft, including furniture or equipment attached to the aircraft and spare parts. Class 10 (30%) Automobiles, except those you use as taxis or in a daily rental business (Class 16). Class 10.1 (30%) Passenger vehicle Class 12 (100% ) Computer software (except systems software), china, cutlery, kitchen utensils that cost you less than $200, linen, uniforms, dies, jigs, moulds, cutting or shaping parts of a machine, and tools and medical/dental instruments that cost you less than $200. Class 13 -Leasehold Improvements Class 14 Patents, franchises, concessions or licenses for a limited period (where the period is unlimited, the asset qualifies as eligible capital property). Class 16 (40%) Taxis and vehicles you use in a daily car rental business, coin operated video games or pinball machines, and freight trucks acquired after December 6, 1991, with a GVWR of over 11,788 kg. Class 17 (8%) Roads, parking lots, sidewalks, airplane runways, storage areas or similar surface constructions. Class 38 (30%) Power-operated, movable equipment used for excavating, moving, placing or compacting earth, rock, concrete or asphalt. Class 52 (100%) Computer equipment and systems software acquired after January 27, 2009 and before February 2011 (the half-year rule does not apply).

14 The Tax Shelter Training 13 Leasehold Improvements - Class Improvements or alterations to a leased property that are capital in nature. If a taxpayer rents a property to carry on a business and makes improvements to the property, he/she cannot claim the full cost of the leasehold improvements in the year the expense of the improvements were incurred. He/she can claim a portion in each year spread out over the remaining term of the lease. If the balance of the lease is less than 5 years, the claim must be calculated as if the leases was for 5 years. Only half the full amount can be claimed in the first year (half-year rule). The balance of half the full amount that will remain at the end of the term can be claimed in the following year. Repairs are a current expense and can be claimed fully in the year they occur. Example: A taxpayer leases a property for a term of 8 years (from June 1, 2008 to May 31, 2016). He spends $12,567 in leasehold improvements in How much can be claimed each year? The taxpayer can claim $ in the first year, $ in the next seven years, and a final claim of $ in the ninth year. To make a claim for CCA on leasehold improvements (Class 13) expand at the Leasehold/Franchise line in the CCA section on the bottom of the T2125#01-2. Expand Here First Year 2008 Return Second Year 2009 Return If the taxpayer does further improvements in a later year, a new column must be used and the commencement date for that improvement must be the date of the new improvements. The expiry date will be the same as the original lease.

15 The Tax Shelter Training 14 Franchises Fees, Patents, Concessions or Licenses for a limited period Class 14. Patents, franchises, concessions or licenses for a limited period (where the period is unlimited, the asset qualifies as eligible capital property - see next topic). If a taxpayer purchases a franchise for a limited period, the CCA claim is calculated as an equal amount per year over the period. The half-year rule does not apply. Example: A taxpayer purchases a franchise for $42,000 for a 10 year period starting on January 1, Expand Here First Year 2008 Second Year 2009 Note that it seems the CCA should be exactly $4,200 each year. However, there may be slight difference because the calculation is done on the actual number of days in the whole period. With leap years, the claim is slightly off.

16 The Tax Shelter Training 15 Terminal Loss and Recapture If all the assets in a particular class are sold before the end of the year and the selling price is less than the UCC of the previous year plus current year additions, the taxpayer may be able to claim the difference as a Terminal Loss against other income. On the other hand if all the assets are disposed of at the end of the year and the selling price is higher than the UCC of the previous year plus current year additions, the taxpayer may have to include the difference in income as Recapture of CCA. Example: A taxpayer has a some equipment that had a UCC of $12, at the end of last year. It was the only equipment in that class. This year he disposed of that equipment for $8, and claimed a terminal loss of $3, He also sold all the assets in Class 38 for $56, The UCC at the end of the previous year was $49, The Recapture of CCA is calculated as $7, The Terminal Loss for the Class 43 is claimed as CCA on Line 9936 of the T Page 2 and the Recapture is included as income on Page 1, Part 3 of the T2125. Terminal Loss T Page 2 Recapture of CCA T Page 1

17 The Tax Shelter Training 16 Eligible Capital Property Property that a taxpayer buys that has no physical existence, but gives a lasting economic benefit is called an eligible capital property. The acquisition cost of this kind of property is an eligible capital expenditure. Some of the most common eligible capital expenditures are the goodwill of a business, one time franchise fee, customer lists, trademarks, milk quotas and other government rights or licenses. It also includes any other intangible property that has an unlimited life used in a business. A taxpayer may deduct a portion of the cost over a number of years. The amount that can deducted is the annual allowance. For years after 1987 the annual allowance is calculated as 7% of the positive balance in the cumulative eligible capital account (CEC). The CEC is a pool similar to the CCA class pools. The CEC pool consists of: The balance in the pool at the start of the year PLUS 3/4 of eligible expenditures made in the year LESS 3/4 of all amounts received or receivable from the sale of eligible capital property for the period. If there is a positive balance in the year of disposal but no eligible capital property remaining the pool balance may be claimed as a business loss. Note: The CEC account must be reduced by 3/4 of any assistance received from a government. Example: A taxpayer has a CEC of $ at the beginning of the year. During the year he acquired a customer list for $ and sold a trademark for $ What is the allowable deduction for eligible capital expenditure? Ans: $ Expand Here T2125 Page 5

18 The Tax Shelter Training 17 Vehicle Expenses Motor vehicle - this is an automotive vehicle designed or adapted for use on highways and streets and generally used to transport goods, equipment or passengers and used extensively in the business. Passenger vehicle - this is a motor vehicle designed or adapted primarily to carry people on highways and streets. It seats a driver and no more than eight passengers. Most cars, station wagons, vans, and some pick up trucks are passenger vehicles. They are subject to the limits for CCA, interest, and leasing. Motor Vehicle used for Business (Class 10) - If the taxpayer owns a motor vehicle that is strictly used for business purposes, all the expenses related to the vehicle can be claimed as an expense. To make the claim, expand at Line 9281 on the T Page 2 screen to go to the Motor Vehicle Expenses screen (T2125 Page 6). Enter the appropriate information. The total expenses (not including CCA) will be posted back to Line GST/HST: Enter the total cost including GST/HST if the taxpayer is NOT a GST/HST registrant. If the taxpayer is a GST/HST registrant, the taxes are claimed on the GST/HST return and should not be included in the cost of additions. T2125#01-5 To claim CCA on a motor vehicle used for business, enter the information about the vehicle on the T Page 4. The CCA will be posted to the Capital Cost Allowance section and to Line T Page 4 T Page 2

19 The Tax Shelter Training 18 Passenger Vehicle used for Business - If the vehicle is a passenger vehicle used 100% for business and costs more than $30,000 before taxes, the class is 10.1 and the information about Capital Cost should be entered on the bottom of the Motor Vehicle Expenses Schedule. (T2125 Page 6). The amount to be entered as Cost of Additions is $30,000 plus HST on $30,000. ($30,000 + $3,900 = $33,900) if the taxpayer is NOT a GST/HST registrant and $30, if he/she is a GST/HST registrant. A passenger vehicle is any of the following: Coup, sedan, station wagon, sports car, or luxury car Pickup truck or Van that can seat 1-3 passengers used less than 50% to transport goods or equipment Pickup with extended cab, SUV or Van that can seat 4-9 passengers and used less than 90% to transport goods, equipment or passengers Taxpayers cannot claim a terminal loss or need to report a recapture on the disposal of a Class 10.1 passenger vehicle.

20 The Tax Shelter Training 19 Personal Vehicle used partly for business - To claim expenses for a personal vehicle that is used partly for business and partly for personal or in more than one business, the AUTO schedule must be used. This schedule has two pages. AUTO Page 1 This section MUST be completed to allocate the claim. If this section is not completed the claim will not be made anywhere. Allocation of automobile expenses - In this section, the preparer MUST select the Schedule or Form where the expenses must be posted and the percentage of allowable expenses. In this case 100% will be posted to the schedule T2125 for New Fun Sales. The expenses and CCA are posted on the T2125#01-2 T2125#01-2

21 The Tax Shelter Training 20 Page 2 of the AUTO screen is used to calculate CCA. AUTO Page 2 Limits on lease Payments and Interest Charges If a personal vehicle is used partly for business there are limits to the amounts that can be claimed for lease payments and interest charges. These limits were covered in Part 5 Employment Expenses. Form T2125 is a clonable form. If the taxpayer has more than one business and requires a second Form T2125, Goto the first page of the Statement of Business Activities (T2125#01-1) and: 1. Select Edit Clone Form; or 2. Press Shift+Ctrl+F4; or 3. Right-click, select "Clone Form" from the drop-down list. Any one of these procedures will create and take the preparer to a second Statement of Business Activities (Form T2125#02-1). The cloned form will appear in the Goto Form list and the Index of Information as T2125#02. This procedure can be repeated to create any amount of business schedules required by the taxpayer.

22 The Tax Shelter Training 21 Non-Capital Losses A loss from a business is called a non-capital loss. Non-capital losses can be deducted from other income in the year the losses are incurred. However, in some instances, a loss may be so large that it completely offsets all other net income sources. In this circumstance, any excess loss that is not offset against other income in the year the loss is incurred is available for deduction in carryover years. These losses can be carried back and be claimed in any of the previous three years if the taxpayer had a taxable income in any of those years. In addition, they may be carried forward and claimed in a future year when needed. The number of years to which the loss may be carried forward depends on the year the loss was incurred. Losses incurred to March 22, 2004 can be carried back three years and forward seven years. Those losses arising in tax years ending after March 22, 2004, and before January 1, 2006, can be carried forward for ten years. Those incurred after December 31, 2005 can be carried forward for twenty years. Form T1A, Request For Loss Carry-Back To request a non-capital loss carry back, Area I of the T1A Form - Request For Loss Carry- Back must be completed. This form is also used to carry back capital losses incurred during the current year. (We will discuss Capital Losses in Part 8). For non-capital losses, only Section I needs to be completed. T1A Section 1 Enter the amount the taxpayer wishes to apply to any of the previous three years. In this case $12,635 will be carried back and claimed on the 2006 return, leaving a balance of $5, for carry-forward. $18, available for carryback or forward

23 The Tax Shelter Training 22 Completing Area I of the T1A Section 1 calculates the total non-capital loss for the year that may be carried back to a previous year or carried forward. CanTax performs this calculation automatically when all sources of income have been entered. It also accommodates the non-capital loss amount that the taxpayer wishes to carry back to the previous three years. To determine the amount that should be carried back, the returns for the previous three years should be examined to see how much of a loss carry-back and which year(s) would be most beneficial. (It is better to claim the most in the years farther back). For 2008, any unused non-capital losses not carried back are available for carry forward to any of the next twenty years. Non-Capital Losses carried forward Line 252 If a taxpayer has non-capital losses carried forward from any of the previous years that has not expired, these may be claimed on line 252 of the current year. The amount available for carry forward should be shown on the taxpayer s Notice of Assessment. It is also available from the Efile Help Desk. If the taxpayer was a client the previous year, the carry forward amounts should be shown under the Non-Capital Losses column on the Losses screen. In the example below the taxpayer has a non-capital loss of $15, carried forward from one or more of the previous years. The available balance for carry forward will be shown on the Notice of Assessment from the previous year and can be obtained from CRA.. To use any amount of the carry forward in the current year, enter the amount on the line Losses to be applied in 20xx under the Non-Capital Losses column. In the example below the taxpayer has elected to apply $3, to the current year. This leaves $11, to be carried forward to next year. The $3, is posted to Line 252 on page 3 of the T1.. T1 - Page 3

24 The Tax Shelter Training 23 Fishing Income (Line 143) What is fishing income? Fishing income includes income from fishing for or catching fish, shellfish, crustaceans and marine animals. To report income and expenses for a fishing business complete a T2121#01-1 form. This form is very similar to the T2125 with some modification specific to fishing enterprises. T2121#01-1 Identification Fiscal period - Since 1995 the fiscal year for income tax purposes for nearly all fishing business is the calendar year - January 1 to December 31. A fiscal period cannot exceed 12 months, but may be less than 12 months when a new business begins or an existing business terminates. Identification This area is similar to as the T2125 except that there are spaces for the Name of the fishing vessel, Commercial Fishing License #, and Main species. North American Industry Codes - Enter the industry code that best describes the taxpayer s fishing activity. The following is a list of codes that apply to fishing activities: Salt water fishing - Boat owners with crewshares Salt water fishing - Boat owners without crewshares Salt water fishing - Sharesman Inland fishing - Boat owners with crewshares Inland fishing - Boat owners without crewshares Inland fishing - Sharesman Animal aquaculture

25 The Tax Shelter Training 24 Fishing Income Since 2006, fishing income paid to a fisherperson must be reported on a T4 slip. Earnings from direct sales must be self-reported. Other related income may include the following that will not usually appear on an information slip. The taxpayer will have to provide the documentation. Patronage dividends Government grants and subsidies Groundfish gill net buy-back program payments (if you inventory your nets) Rebates or bonuses Payments of debts with part of a catch Compensation for loss of fishing income or property Insurance proceeds Fisher s Income reported on a T4 Slip. If a fisher receives a T4 slip with an amount in Box(14), he/she is considered to be an employee and the income is reported as normal on the T4 screen. If the T4 has no income in Box(14) but a code 17 in Box(29), he/she is considered to be a selfemployed fisher. The Other Information area will have amounts entered in Box(78) and (79) and/or (80). The amounts in Box(78) must be entered as income on the T2121 screen. The amount in Box(24) is the amount of income on which the taxpayer pays EI Premiums; this has been calculated using the amounts in Box(79) and/or(80). If any amount is shown in Box (24), it must be entered in the Box (24) field on the T4 screen (you will have to override). Code 78 - Fishers - Gross earnings Code 79 - Fishers - Net partnership amount Code 80 - Fishers - Share-person amount Caution: Our experience has been that entries on many T4 slips for fisherman are not entered correctly. The taxpayer must be questioned thoroughly to determine his/status as a boat owner, co-owner or shareman. Determine how much the taxpayer actually received from the employer. The income from Box(78) must be included on the T2121 form and expenses claimed from that. The amount that the taxpayer pays to his crew (if any) must be determined from interviewing the client. He/she should be keeping a record of the amount paid to the crew. In some cases, the T4 slip will show only the amount paid to the client and in other cases it will show the total amount paid to for the boat including amounts paid to the client and to the crew. This is always a problem when dealing with fishermen. The client interview is the only way to determine the breakdown.

26 The Tax Shelter Training 25 Income Section of T2121#01-1 Income Accrual or Cash method of Accounting A taxpayer can use either the cash method or the accrual method to report fishing income and claim expenses. Most fishermen use the cash method. Once a method is chosen, he/she must continue to use that method in future years. The method can be changed with permission. Fishing Expenses In general, a taxpayer can deduct any reasonable expense incurred to earn fishing income. As with any business, GST/HST should be included in these expenses only if the taxpayer is NOT a GST/HST registrant. Who can claim expenses? Fishing vessel owners, captains of fishing vessels, and sharesmen who receive a share of the catch are considered to be self-employed fishermen. They can deduct as expenses, amounts spent to earn fishing income. However, owners, captains and sharesmen cannot duplicate expenses. For example, expenses such as fuel, food and ice deducted by the owner in calculating the income to be shared, cannot be deducted by anyone else. Fishing Vessel Owners Fishing vessel owners can deduct all the expenses for each trip, including the costs of calculating the crew shares. He/she may also be entitled to claim motor vehicle expenses and business use of home expenses. He/she can also deduct any other expenses to earn fishing income, including capital cost allowance on property owned and used for fishing. Captains of Fishing Vessels The captain of a fishing vessel can deduct expenses that were not paid by the owner. These expenses include the cost of personalized navigational aids and rubber gear. He/she can also deduct motor vehicle expenses for transportation of crewmembers, and gathering supplies and parts for use on the vessel. He/she may also be entitled to claim business use of home expenses. Sharesmen Generally a sharesmen s income is calculated after all trip expenses are deducted from the sale proceeds of the catch. Therefore, the only expenses he/she can deduct are amounts for rubber gear, gloves, and knives for use on the fishing vessel. Sharemen cannot deduct the cost of traveling between home and the fishing vessel. This cost is considered personal.

27 The Tax Shelter Training 26 List of Most Common fishing expenses: * Salaries and wages * Business use of home expenses * Crew shares * Insurance * Interest expense * Food provisions * Gasoline and oil * Gear * Licenses * Motor vehicle expenses * Nets and traps * Small tools * Fishing vessel repairs * Engine repairs * Electrical equipment repairs * Accounting, legal fees and leasing costs * Capital cost allowance including allowance on eligible capital property Nets and Traps - Nets and traps include lines, hooks, buoys, anchors, and radar reflectors. The taxpayer cannot deduct the full cost of nets and traps purchased during the year (unless he/she has been doing so in previous years see page 15 in the Fishing Guide). If the taxpayer has just started fishing, there are two methods that can be used to deduct a portion of these costs against income. Method 1 - Capital cost allowance method Capitalize the cost of the nets and traps, and deduct an amount for capital cost allowance (CCA) each year. Net and traps are a Class 8 20%. Method 2 - Inventory method Add the cost of nets and traps to the opening inventory and then deduct the value of nets, traps and twine on hand at the end of the year. The net result is the "loss" on nets and traps that can be deducted as a fishing expense. To do the calculations expand at line 9137 Nets and Traps. The screen below appears. Fishing Vessel Used Mainly for Personal Use If a taxpayer uses a fishing vessel mainly for personal activities but sometimes catches a small amount of fish to sell, he/she can deduct expenses and capital cost allowance. However, the amount that can be you deducted cannot exceed the income reported.

28 The Tax Shelter Training 27 Motor Vehicle Expenses To claim Vehicle Expenses for a vehicle used exclusively for the fishing business, expand at the line Motor Vehicle Expenses (not including CCA) Expand here to go to AUTO schedule to claim partial use of personal vehicle for fishing. Capital Cost Allowance To claim CCA on property (other than for a Motor Vehicle) for a fishing business expand in the CCA section of the T2121#01. Total claim for CCA includes CCA for Motor Vehicle $ plus $2, from this schedule.

29 The Tax Shelter Training 28 CCA Classes and Rates for Fishing Enterprises Boats and component parts... 7 Breakwaters Cement or stone... 3 Wood... 6 Buildings and component parts Wood, galvanized or portable... 6 Other: Acquired after 1978 and before 1988*... 3 Acquired after Chain saws Docks... 3 Drills - All types... 8 Electric-generating equipment (not more than 15 kw) Acquired after May 25, Acquired before May 26, Electric motors... 8 Engines Stationary... 8 Ice machines... 8 Leasehold interest Nets 8 Office equipment... 8 Outboard motors Power block - Purse seine... 7 Pumps... 8 Radar or radio equipment Acquired before May 26, Acquired after May 25, Tools Under $ $200 and over... 8 Trailers Traps... 8 Trucks Weirs... 3 Weirs Fish... 8 Welding equipment... 8 Wharves Cement, steel, or stone... 3 Wood... 6 Windchargers... 8 CCA Rates Class 1...4% Class 2...6% Class 3...5% Class % Class % Class % Class % Class % Class %

30 The Tax Shelter Training 29 Example: A Taxpayer is a Salt Water fisherman who is a boat owner with a crew with whom he shares the catch. His fiscal year is the calendar year and he uses the Cash method of accounting. From Direct Sales From T4 Slips Amount paid to crew Motor Vehicle Expenses not including CCA on vehicle. CCA will be claimed at line 9936 below. CCA on Boat, Equipment and Motor Vehicle

31 The Tax Shelter Training 30 Vehicle Expenses CCA on Boat and Equipment T2121#01-4 Sale of Fishing License If a fisherperson sells his/her fishing license for more than what he/she paid for it, there may be a capital gain on which he/she will have to pay taxes. This will be discussed in more detail in Part 8 Capital Gains and Losses

32 The Tax Shelter Training 31 Investment Tax Credit (ITC) Line 412 Schedule 1 If a taxpayer, operating a fishing business in Newfoundland and Labrador, purchases Qualified Property, he/she may be able to claim an Investment Tax Credit (Code 12 10%) to reduce taxes payable or claim a refund of part of the cost incurred. Qualified Property includes new buildings, machinery or equipment used in farming, fishing, logging or manufacturing. The property must not have been used for any purpose before being purchased. Note: If the property was purchased pursuant to a written agreement entered into before Feb 22, 1994 and after 1989 the rate is 15%. Before 1989 the rate is 20%. A taxpayer may also be eligible for the ITC if he/she: received a T101 slip with an amount in Box (128). received a T3 slip with an amount in Box (41). received a T5013 slip with an amount in Box (38) or an amount is shown in the financial information provided to him/her by the partnership. Examples of Qualified property the for a fishing business: Electrical generating equipment Oil or Water Storage Tank Manufacturing and Processing Equipment Radio Communication Equipment Radar Equipment Pollution Prevention Equipment A vessel, including the furniture, fittings and equipment attached To make the claim complete Section I of form T2038. T2038 Section I CCA Class

33 The Tax Shelter Training 32 Same Information on CCA Schedule and T2038 The information reported on the T2038 should be the same information that was reported on the CCA Schedule. The ITC claim will be posted to 412 of the Schedule 1 Page 2. CCA Reduced by ITC Claim? In the following year the ITC that was used in the current year must be subtracted from the UCC of the property. Following Year ITC claimed in the previous year for that item

34 The Tax Shelter Training 33 Excess ITC - If a credit is more than is require to completely reduce taxes in the year, the taxpayer can (a) carry it back to any of the past 3 year, (b) carry it forward for up to 10 years or (c) claim a 40% refund of all or part of the credit and carry forward the balance of 60%. However, a refund can only be claimed in the year a qualifying purchase was made. This refund will be automatically calculated by Cantax on page 3 of the T2038 and posted to Line 454 on page 4 of the T1. Example: A taxpayer has a ITC of $3,780 in the 2008 that is not needed to reduce his federal tax to nil. In 2006 he had to pay federal taxes of $682, so he elects to carryback that amount to His Refund of ITC is $1, The amount carried forward to next year is $1, T Enter here the amount to be carried back to 2006 T2038-S1