Canadian Taxes A to Z (2018): "E" is for Employment Income

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Today, E for for Employment Income. Five letters down, 21 to go!

WHY THE DIFFERENCE BETWEEN EMPLOYMENT & SELF-EMPLOYMENT IS SO FUNDAMENTAL

The concept of what is, and is not, "employment" income may be the most fundamental tax concept of all for most Canadians. When I was an employed lawyer I couldn't deduct much against my employment income, because my employer was supposed to be paying for all my expenses. Once I became self-employed, I could claim all sorts of deductions like home office use or computer purchase.

Confusing the employment income and self-employment income concepts can lead to great mischief at tax time. In a world of increasing "independent" contractors, you need to avoid the CRA coming after you claiming that you are in fact an employee not entitled to deductions, or that you're an employer with employees who isn't taking source deductions like you are supposed to be doing. 

The four principal factors examined by the CRA in determining employee versus self-employed status are:

  1. control;
  2. chance of profit/risk of loss;
  3. integration (with larger business unit);
  4. tool & equipment ownership and repair.

Many perceive this difference between employed and self-employed deductions to be unfair, but like a lot of things under the Income Tax Act the best that can be said is that's just the way it is.

Regardless of whether you are an employee or self-employed, you need to be working from a position of knowledge to take advantage of all the deductions that are available to you. 

SELF-EMPLOYMENT LOSSES CAN OFFSET EMPLOYMENT INCOME

An example of what you need to know is that sometimes being both employed and self-employed can work in your favour. Even if you only earn a small amount of self-employment income, you can usually apply any losses you incur in self-employment against employment earnings to reduce you overall net income.

There are technical rules around how great those losses can be, but what this practically means is that you may be better off reporting a few thousand dollars in side income, rather than just "forgetting" about it and hoping no one notices because it is so small.

DO I NEED AN ACCOUNTANT & WHAT IS AN ACCOUNTANT

Some employees may not need a designated accountant to do their taxes for them (though it's never a bad idea), whereas most of the self-employed definitely need a designated accountant.

Everyone should be very clear on the reality that the simple term "accountant" (without any initials attached at the end) does not imply any designation (unlike lawyer, where we prosecute you if you use the term without being properly qualified). You should look for an accounting firm with a designation, as those without designations may not carry any insurance and definitely aren't subject to professional regulation. Accountants in Canada are increasingly switching to a common CPA designation (from CA/CMA/CGA). 

AT LEAST USE GOOD TAX PREPARATION SOFTWARE

Everyone, employee or self-employed, can benefit from good tax preparation software. For years now I've been using http://www.taxfreeway.ca/, which I love. It's cheap, they offer great support (I've emailed them esoteric questions 24 hours before tax deadline and received an answer within the hour), and Mac and iPad versions are available (in addition to Windows). No, they aren't paying me to say that, they just deserve some appreciation. 

 

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

Canadian Taxes A to Z (2018): A is for Amortization

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Thanks to Kelly Phillips Erb, aka @taxgirl and writer for Forbes, for originating the taxes A to Z idea, and giving me permission to adapt it to Canada. Her snappy, clear and cogent writing is capable of making anyone understand (and dare I say it, "like") tax. Like her, I took a tax course in law school, and loved it (much to my surprise). Now I help folks with Canada Revenue Agency (CRA) disputes, occasionally taking them as high as the Supreme Court of Canada.

I see Kelly's already up to the letter "R" (for Relief Funds) for the 2018 tax filing deadline in the U.S., whereas I'm stuck with the letter "A" for an April 30th deadline in Canada. I've clearly got some catching up to do! 

HOW AMORTIZATION IS A TAX CONCEPT

Today, A is for Amortization. You've probably heard about amortization when it comes to paying down your mortgage, but you might not have thought about it as a tax concept. 

You generally "depreciate" significant tangible property you purchase to earn income, like a vehicle or a building. The Income Tax Act refers to this as Capital Cost Allowance (CCA), and specifies a variety of rates depending on the type of property. 

For intangible property you acquire to earn income, like goodwill or intellectual property, you "amortize" it. The Income Tax Act calls this Eligible Capital Property, and again you can write it off at a certain percentage a year. 

You "amortize" intangibles rather than "depreciate" them, because they in theory can have an indefinite life that never wears out (unlike that orange Volkswagen camper van painted with flowers that you used to use in your outfitter business). 

HOW WHAT IS AMORTIZED IS A MOVING TARGET

Generally Accepted Accounting Principles (GAAP) rules have recently changed so that goodwill is now treated somewhat differently than other intangibles for write down purposes, so that it's tested each year for impairment, rather than simply (yes, perhaps I'm overly stretching the meaning of the word "simply" here) "amortized." But you still amortize other intangibles like patents, as they'll eventually expire.

The concept to get here is that if you've purchased something for the purpose of earning income, then you're allowed to gradually deduct its cost as it wears out - even if its not a tangible thing. But since goodwill (and supposedly diamonds) is forever, you might not be able to deduct it unless you can show some proof of its diminishing in value. 

HOW AMORTIZATION WINDS UP IN THE TAX COURT OF CANADA

You can get in all sorts of trouble with the CRA by trying to deduct something as a current expense at a 100% rate that should actually be amortized. But I also help clients where the CRA sometimes unfairly denies current expense deductions of something that the CRA claims requires amortization, but which in my opinion does not. Ultimately the Tax Court of Canada gets to decide. 

A Frankfurt team of accountants has come up with with this cool (at least for those of us fond of tax concepts) comparison of tax amortization rates by country and type of intangible: http://www.taxamortisation.com.

 

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