No Fooling - Proprietorship Returns Due June 15

Time’s up for procrastinators... midnight on Monday June 15 is the T1 tax filing deadline for unincorporated businesses.

T1 tax specialists and wealth managers will want to call their delinquent clients now and send notices, as a public service, to Chambers of Commerce and other trade organizations to remind their members to file.

Those who owe money to CRA have been incurring interest costs on the balances due since May 1, but to avoid late filing penalties—a complete waste of precious resources—it’s important to file on time. Proprietorships are owned by a sole individual, usually a business start-up that can morph into a corporate structure in the future.

However, what’s important now is that the proprietor will add net business income — after business deductions and capital cost allowance claims—to other income earned in the year. Business losses will offset all other income in the year, which makes them valuable, and subject to audit as well.

With all the audit/expense documentation conflicts in the news these days, particularly relating to certain senators, it’s important to educate proprietors on the “basics” when it comes to tax reporting:

1. Report all income earned, unless specifically exempt in the Income Tax Act. Most unincorporated businesses normally report income based on a calendar year basis (although an election may be made to use an alternate year-end). Note that barter transactions are included in income declaration, so account for them in your records.
2. Personal or “mixed use” must be accounted for. That means no personal living expenses, or personal components of travelling expenses, home office, or use of inventory for personal consumption can be written off to reduce taxable income. 
3. Separate personal and business activities. Keep a separate bank account in the name of the business and be prepared to justify income and expense flows. Separate credit cards for personal and business use are a good idea, too. That’s a great advantage in a tax audit or Net Worth Assessment (check out our recent Net-Worth Assessment articles here and here).
4. Schedule Capital Assets used in the business at their Fair Market Value when acquired, and dispositions must be noted as well. A capital gain may result in some cases, as well as recapture of over-deducted capital cost allowances (CCA). If at disposition the asset depreciated more than the deduction taken for CCA, a terminal loss results.
5. Make Quarterly Instalment Payments. It’s easier to cope with a large total tax bill (the average bill this year has been just over $4500 according to CRA stats) if you are making quarterly tax instalments throughout the year. You may wish to get on that cycle now if you’re not already making quarterly instalments.

Advisor Alert.  Tax Services Specialists, in their capacity as educator, advocate and steward of their clients’ resources, should be sure to council for audit-proofing with every “last minute” proprietorship return. Firms with promising junior tax preparers should consider taking the T1 Professional Tax Preparation – Proprietorships course over the summer, to be better prepared for next tax season.

Client Alert.  Next year, April 30, 2016, falls on a Saturday. If you must procrastinate, do speed up your date: File and pay your taxes by Monday May 2 to avoid interest costs on taxes due.