University and college degree students get up $1,680 in grants

College diploma and certificate students get up to $770 in grants.

Please review government website for eligibility and  application details.

http://www.ontario.ca/education-and-training/30-off-ontario-tuition

Scenario 1. Employee or shareholder owns or leases a car personally.

This may be the easiest way to claim deductions. Corporation reimburses employee or shareholder for each business kilometer driven for business purpose. Compensation rate in 2012 is 53 cents per kilometer for first 5,000 kilometers and 47 cents thereafter.

Example: Employee drove for business purpose 13,000 kilometers

5,000 km * .53 cents = $2,650

8,000 km * .47 cents = $3,760

Total 13,000 km            =$6,410

In this example $6,410 is deduction that corporation will claim for car expense reimbursement to employee or shareholder. The corporation will issue a cheque for $6,410 to employee or shareholder. Money received is not taxable income on personal level.

All car related expenses (i.e. lease or loan payments, gas, insurance, repairs and maintenance and etc.) to be paid by employee or shareholder.

It does not matter whether a person owns or leases an expensive car or drives a cheap used vehicle. The same compensation rate per kilometer is used – 53 cents / 47 cents.

In case of CRA audit you have to provide mileage log supporting business kilometers claimed.

Scenario 2. Corporation owns or leases a car

In situation when a corporation leases or purchases a car, all car related expenses are claimed by corporation and a taxable benefit is allocated to employee or shareholder for personal use of the vehicle.

Taxable benefit is notional amount which is added to individuals taxable income and it is subject to income tax. Taxable benefit depends on number of kilometers driven for personal use and cost/lease of the car. Keep in mind that commute from home to your place of work is generally considered personal travel. Taxable benefit may result in a few thousands dollars added to individuals income and taxed at top marginal rate

Also, depreciation and lease expenses are restricted to certain cost threshold amounts.

Company owns a car

Cost limit for depreciation purposes is 30,000 before HST. For instance if a company purchases a car for $50,000 plus taxes only 30,000 will be eligible for depreciation and remaining $20,000 will never be deducted.

Company leases a car

Leasing expense is generally restricted to $800 + taxes per month. However, if the cost of the car exceeds $30,000 plus taxes the allowable lease expense is prorated and reduced.

Tax Advise

In many situations you will achieve approximately the same result if you buy/lease a car personally or through corporation. In a typical situation a car costing $30,000 plus tax which runs 24,000 km per year and 75% is for business use – tax results will be very comparable. When deciding to buy or lease you should also consider other factors such as years you want to use the car, interest rates, insurance cost, residual value and etc.

However in the following situations are recommendations are:

1. If you consider buying or leasing a car which costs more than $30,000 plus taxes it is usually better to do it personally rather than through a corporation. The reason is that you will not be able legally deduct all depreciation or lease payments. However your taxable benefit will be calculated on the full amount.

2. If you expect overall few kilometers driven by the car and more than 50% will be for business buy or lease it through corporation. The reason is that if you own/lease it personally the car reimbursement you receive from the company will be very low. That will be more beneficially to own/lease it through corporation and deduct all car related expenses. The taxable benefit allocated to you is expected to be low if you drive few personal kilometers.

Independent operator in construction means, an individual who,

• does not employ any workers
• reports himself as self-employed to Canada Revenue Agency
• is retained as a contractor by more than one person during an eighteen month period.

or

• an individual who is an executive officer of a corporation that,
• does not employ any workers other than the individual, and
• is retained as a contractor by more than one person during an eighteen month period.

Two exemption from WSIB coverage are available:

 1. Home renovation work

Independent operators, sole proprietors, executive officers and partners in a partnership working in construction industry are exempt from compulsory coverage if they are engaged exclusively in home renovation work.

What is exempt home renovation work?

Exempt home renovation work means construction work that is performed by an independent operator, a sole proprietor, a partner in a partnership, or an executive officer in a corporation and, on an existing private residence that is or will be occupied by the person who directly retains the contractor, or by a member of the person’s family.

Independent operators, sole proprietors, partners and executive officers are subject to compulsory coverage when their business is engaged in non-exempt work.

WSIB coverage exemption is not available if you engage in what would normally be regarded as exempt home renovation work, as well as non-exempt work. The insurable earnings reported for the independent operator, sole proprietor, partners or executive officers must include the earnings related to all construction work, including the home renovation work.

2. Exemption of a partner or executive officer

This exemption applies to partnerships, corporations with workers, and corporations without workers but with multiple executive officers. This exemption does not apply to a corporation with one executive officer and no workers.

A partnership or corporation may elect one partner or one executive officer, respectively, for an exemption from coverage if the partner or executive officer does not engage in any construction work. Periodic site visits are permitted, provided that the partner or executive officer is not performing construction work on the site.

Reporting of Insurable Earnings

Independent operators.

Independent operators must determine their own insurable earnings. The gross insurable earnings are based on the labour portion of the contract. If labour costs are not adequately recorded the following formulas should be used:

• If there is no evidence that the contractor supplied major materials and/or heavy construction equipment used in the direct performance of the construction work, the WSIB considers the entire contract value (100%) as the contractor’s gross insurable earnings.
• If there is evidence that the contractor supplied major materials, and/or heavy construction equipment, used in the direct performance of the construction work, the WSIB permits the principal to identify the labour portion using the following allowed percentages:

1. where a contractor provided labour and major materials, the principal is to use 60% of the contract value as the contractor’s gross insurable earnings.
2. where a contractor provided labour and heavy construction equipment, with or without major materials, the principal is to use 33 1/3% of the contract value as the contractor’s gross insurable earnings.

Sole proprietors with workers and partners in partnership with or without workers.

The insurable earnings for a sole proprietor in construction, and a partner in a partnership in construction, are the individual’s annual self-employment business income reported to CRA on line 135 of T1 General

Executive officers in a corporation

The gross insurable earnings of an executive officer is based on the total of:

• employment income reported on a T4 Statement of Remuneration Paid
• other insurable employment income reported on a T4A, Statement of Pension, Retirement, Annuity, and Other Income
• dividends reported on a T5 Statement of Investment Income, and
• director fees issued by the corporation to the executive officer.

Minimum amount of insurable earnings

The WSIB sets an annual minimum amount of insurable earnings for sole proprietors, partners and executive officers in construction. Each year the minimum amount is set at 1/3 the annual maximum amount of insurable earnings ($81,700 in 2012).

Who need to register?

Does it sound good? Maybe it is too good to be true! Obviously, CRA is not happy with this situation. There are special rules for Personal Service Business (“PSB”) otherwise called “incorporated employees”. As of October 31, 2011 the rules became even tougher.

What are tax consequences to be a Personal Service Business?

PSB is not allowed to have Small Business Deduction and even General tax reduction. In Ontario corporate tax of PSB would be 39.5% (compare with 15.5% of Small Business Corporation!). PSB is very limited to expenses it is allowed to deduct. Generally, only salaries paid to shareholder would be allowed.

If your corporation is reassessed as a PSB that would create a huge tax bill!

What are some characteristics of a business that would cause PSB designation?

1. One or very few clients.

2. Working mainly at client’s office

3. Using client’s equipment and tools.

4. Being listed in client’s telephone directory.

5. Having business card issued in the name of client’s corporation.

6. Degree of integration with client.

7. Contractor might be reasonably considered as an employee of the client.

CRA Guide “Employee  or Self-employed” rc4110-11e provides more details.

 What to do to minimize risk?

1. Review terms of your contract if you have one or prepare and sign a contract if you don’t have one.

2. Try to get as many clients as possible

3. Use your own tools

4. Establish in the contract right to work from your office.

5. Get your business cards. website, HST number, business name (don’t use numbered company).

6. Involve in Research & Development and claim R&D credits. Doing that might show that your company developing products.

7. Discuss your situation with accountant in advance. Don’t wait till CRA reassess your tax return

For professional help please contact us

at (416) 739 – 1899

Toronto office:

4580 Dufferin Street Suite 401 
Toronto, ON M3H 5Y2

Richmond Hill office:

67 Alpaca Drive, Richmond Hill, ON L4E 0G1

email: ca4gta@gmail.com

Generally, US corporation or a Self-Employed Person carries on business in Canada will owe Canadian tax only if it has permanent establishment in Canada.

Determining Canadian tax treatment is a two step approach.

Permanent Establishment includes:

• Place of management

• Branch or office

• Factory or workshop

• Mine, oil or gas well or other place of extraction of natural resources.

• Management or employees in with authority to conclude contracts in the name of Canadian company.

• Individual spends in the United States 183 days or more in any twelve-month period and during that period more than 50% of gross active business revenue of the enterprise consists of revenue derived from the services performed in the United States. NEW!

• Services provided in the United States for 183 days or more in any twelve-month period in respect to the same or connected projects for US resident or another foreign company with permanent establishment in the United States. NEW!

Permanent Establishment excludes:

• Facility for storage, display and delivery of goods or merchandise

• Maintenance of stock for storage, display and delivery of goods or merchandise

• Maintenance of stock of goods or merchandise for purpose of processing by another person

• Purchase of goods or merchandise for Canadian

• Advertising, supply of information, scientific research which have preparatory character for Canadian.

• Carrying business through an independent broker or an agent.

FILING REQUIREMENTS – US CORPORATION IN CANADA

If US corporation carries on business in Canada and has no permanent establishment in the Canada it has no US tax liability under treaty protection. However, US corporation has to file certain tax returns with Canada Revenue Agency in order to notify them of tax treaty position.

Failure to file these returns will result in loosing tax treaty protection and penalties up to $2,500!

Tax returns to be filed:

In the United States:

1. 1120 – US Corporate Income tax return. Report world income.

2. US state corporate income tax returns, if applicable

In Canada:

1. T2 – Canadian Corporate return including Schedule 91.

If US corporation has permanent establishment in Canada it is liable for Canadian income taxes.

Tax returns to be filed:

In the United States:

1. 1120 – US Corporate Income tax return. Report world income. Form 1118 to claim Foreign Taxes paid in Canada

2. US state corporate income tax returns, if applicable

In Canada:

1. T2 – Canadian Corporate return. Report revenue and expenses attributable to permanent establishment in Canada.

FILING REQUIREMENTS – US SELF-EMPLOYED PERSON IN THE CANADA

If US self-employed person carries on business in Canada and has no permanent establishment in Canada he has no Canadian tax liability under treaty protection.

Tax returns to be filed:

In the United States:

1. 1040– US Income Tax Return. Report world income.

In Canada:

1. R 105 – Regulation 105 Waiver application – to avoid Canadian withholding tax

2. If withholding taxes were withheld – file T1 to obtain refund.

If US self-employed person has permanent establishment in Canada he is liable for Canadian income taxes.

Tax returns to be filed:

In the United States:

1. 1040 – US Income Tax Return. Report world income. Form 1116 to claim Foreign Taxes paid in Canada

In Canada:

1. T1 – Individual Income Tax Return. Report revenue and expenses attributable to permanent establishment in Canada.

Information provided is very high level. Each case is different and should be carefully assessed.

For professional help please contact us

at (416) 739 – 1899

Toronto office:

4580 Dufferin Street Suite 401 
Toronto, ON M3H 5Y2

Richmond Hill office:

67 Alpaca Drive, Richmond Hill, ON L4E 0G1

email: ca4gta@gmail.com

Determining US tax treatment is a two step approach.

Step 1. Determine if Canadian corporation or a Self-Employed Person is engaged in US Trade and Business (“USTB”) and has Effectively Connected Income (“ECI”) with the United States.

Unfortunately, the term “trade or business” is not defined in the US Internal Revenue Code. Under court cases to be considered trade or business activities should be considerable, continuous and regular. Examination of facts in each case is necessary. Consider the following:

• Whether profit-generating activities are physically conducted in the United States.

• Level of administrative activities in the United States. Usually ministerial activities (i.e. recordkeeping, payroll function, receiving correspondence) will not give rise to USTB.

• Purchase and/or Sale of Goods. Purchase of goods in the United States does not constitute USTB. If Canadian company sells goods in the United States it might be considered to be engaged in USTB considering the extent of profit generating activities conducted in the United States.

• Activities of Agents. As a general principle engaging independent agents does not constitute USTB. However, activities of dependent agents will likely give rise to USTB.

Under US tax laws foreign corporation and non-residents with USTB is subject to US net basis income tax. If Canadian corporation or a Self-Employed Person has USTB he can seek treaty protection under Canada – US Tax Treaty and avoid US tax liability. To claim treaty protection Canadian corporation or a Self-Employed Person should not have Permanent Establishment in the United States. Permanent Establishment is covered by Article V of the Canada – US Tax Treaty.

Determination of Permanent Establishment is done in Step 2.

Permanent Establishment includes:

• Place of management

• Branch or office

• Factory or workshop

• Mine, oil or gas well or other place of extraction of natural resources.

• Management or employees in with authority to conclude contracts in the name of Canadian company.

• Individual spends in the United States 183 days or more in any twelve-month period and during that period more than 50% of gross active business revenue of the enterprise consists of revenue derived from the services performed in the United States. NEW!

• Services provided in the United States for 183 days or more in any twelve-month period in respect to the same or connected projects for US resident or another foreign company with permanent establishment in the United States. NEW!

Permanent Establishment excludes:

• Facility for storage, display and delivery of goods or merchandise

• Maintenance of stock for storage, display and delivery of goods or merchandise

• Maintenance of stock of goods or merchandise for purpose of processing by another person

• Purchase of goods or merchandise for Canadian

• Advertising, supply of information, scientific research which have preparatory character for Canadian.

• Carrying business through an independent broker or an agent.

FILING REQUIREMENTS – CANADIAN CORPORATION IN THE UNITED STATES

If Canadian corporation has USTB and has no permanent establishment in the United States it has no US tax liability under treaty protection. However, Canadian corporation has to file certain tax returns with Internal Revenue Service in order to notify them of tax treaty position.

Failure to file these returns will result in loosing tax treaty protection and penalties up to US $10,000!

Tax returns to be filed:

In the United States:

1. 1120F – US Income tax return of a Foreign Corporation. Filed as Protective Return.

2. Form 8833 filed with IRS to disclose tax treaty position.

In Canada:

1. T2 – Canadian Corporate return

If Canadian corporation has USTB and permanent establishment in the United States it is liable for US Federal and state income taxes.

Tax returns to be filed:

In the United States:

1. 1120F – US Income tax return of a Foreign Corporation. Return includes income and expenses related to US operations on “proportionate basis”.

2. Form 8833 filed with IRS to disclose tax treaty position.

3. Form 5472, Information Return for 25% Foreign Owned Corporation and Related Party Transactions – to disclose dealings with the Canadian shareholder and/or related party. (Failure to file results in penalty US $10,000 per form!)

In Canada:

1. T2 – Canadian Corporate return. Foreign taxes paid in US will be claimed.

FILING REQUIREMENTS – CANADIAN SELF-EMPLOYED PERSON IN THE UNITED STATES

If Canadian self-employed person has USTB and has no permanent establishment in the United States he has no US tax liability under treaty protection. However, that person has to file certain tax returns with Internal Revenue Service in order to notify them of tax treaty position.

Failure to file these returns will result in loosing tax treaty protection and penalties up to US $10,000!

Tax returns to be filed:

In the United States:

1. 1040NR – US Non Resident Alien Income Tax Return. Filed as Protective Return.

2. Form 8833 filed with IRS to disclose tax treaty position.

3. Form 8840 – Closer Connection Exemption. To avoid taxation of world income in the United States.

4. Form 8233 – To prevent withholdings of income tax at source based on the tax treaty

In Canada:

1. T1 – Individual Income Tax Return with world income

2. CPT56 – to prevent paying Social Security and Medicare Taxes in the United States

If Canadian self-employed person has USTB and permanent establishment in the United States he is liable for US Federal and state income taxes.

Tax returns to be filed:

In the United States:

1. 1040NR – US Non Resident Alien Income Tax Return. Return includes income and expenses related to US operations on “proportionate basis”.

In Canada:

1. T1 – Individual Income Tax Return with world income. Foreign taxes paid in US will be claimed.

2. CPT56 – to prevent paying Social Security and Medicare Taxes in the United States

Information provided is very high level. Each case is different and should be carefully assessed. We discussed Federal level of taxation in the United States. State taxation rules are different in each state. Some states like California do not follow Federal Canada – US tax treaty. You may have a situation where company is protected from US federal tax liability under the treaty and is subject to a state tax. Also, US taxation of corporations significantly differs from Canadian taxation.