How to avoid the taxman blues

With the end of 2006 in sight, and a potentially difficult 2007 on the horizon, it is certainly a good time for many shop owners to evaluate their tax situation.

As such, the editorial team at SSGM has spent some time with two top chartered accountants at a leading Toronto firm looking into the nitty-gritty of some new tax structures and the implications of several new government programs that have recently been put in place, but which some owners may not be fully appreciating in their 2006 tax statements. What follows are a few tips that came out of those conversations.

1. Organize

While it may seem somewhat self-evident, the two accountants we spoke with both mentioned financial organization as the single most important component of a smooth and hassle free tax-season. Furthermore, both shared horror stories about days spent auditing clients with little to no internal control system. Now, accountants operate under some very strict guidelines commonly referred to as GAAP (Generally Accepted Accounting Practices). It is really not necessary to make yourself a Sarbanes-Oxley expert, but establishing some grade of professional bookkeeping, while potentially tedious, can really save you quite a lot of time and money when it comes down to tax-season. By keeping a computerized and updated ledger, as well as maintaining an organized system of invoices, structured in whichever way suits you best, (so long as that system is not stacks of boxes on your office floor) will likely be more than sufficient. In short, both accountants echoed a similar sentiment, in that the important thing is to actually have a system, as opposed to which system you decide you use.

2. Look into the Employer / Employee Apprenticeship Grant

Perhaps the biggest industry-specific point raised by both tax pros was the notion of an apprenticeship incentive. Economists have been saying for years that there is, and will continue to be, a shortage of trades people in Canada. Shop owners will almost certainly be impacted by such a shortage. As such, there is a new government program on the books this year aimed at both owners and potential apprentices, with the ultimate goal being the revitalization of both industry and labour in this vital sector. The plan calls for a $1,000 taxable grant to qualifying apprentices in years one or two and the lower of $2,000 (or 10 per cent of wages) per apprentice for employers starting immediately. While both employer and employee can expect to gain from the new formula, some caution should be heeded. The benefits are fully taxable, meaning the actual dollar amount can be anywhere from12 to 35 per cent lower than what one might assume. One accountant joked about the plan being a pretty classic ‘Give with one hand and take with the other’ situation that has typified the politics of most minority governments. But in the end, it should mean some tax savings for your shop, assuming you use it to your advantage.

3. Check on your eligibility for a Small Business Tax Break

Most independent shops across the country fall under the moniker of small business. So, when the government announces changes to the tax structure for these enterprises, it can have a large impact on how they chose to operate. The accountants we spoke with both mentioned that in the most recent federal budget the biggest targeted change, as it pertains to small businesses, came in the form of threshold changes for the lowest business tax rates. Businesses that had an income of up to $300,000 are currently (2006) taxed at a rate of 12 per cent. In the new budget, that ceiling will be raised to $400,000, as of January 2007. Furthermore, the 12 per cent figure is slated to be reduced incrementally to 11 per cent, by 2009.

Depending on your financial year end, shop owners should be wary of the changes, and calculate the tax after January appropriately. For example, if you run your shop on an April-to-April financial year, then four months of 2007 will be taxed under a different set of regulations, and you’ll need to make the appropriate adjustments.

4. Tell your techs about a Tool-tax Break for Employees:

A comprehensive tool tax is obviously something for which many from cost-to-cost have been clamoring for over the past few years. Luckily for many in the trade, the most recent budget took a few tentative steps in the direction of some kind of relief. The 2006 budget calls for an immediate tax write-off, for any tools purchased after May 2 2006. Bad luck if you bought that new top-end ratchet set on Monday the 1st.

However, if you were able to hold-off until the Tuesday, then your purchase, if it was over $1,000 and you are a tradesman who has to bring your own tools as a condition of employment, you could be eligible for a $500 tax break. A representative from the office of the Minister of Finance was able to clarify the target of this piece of legislation, as applying to individuals as opposed to corporations. As such, it is mechanics themselves, and not the garage as a corporate entity that qualify. Also, the tax credit cannot be used towards the purchase of electronic communication or data processing equipment. So, while the Harper government has obviously heeded industry advice on the general concept of tool tax assistance, issues like electronic vehicle diagnostics and the computerization of the industry has not yet percolated through the various layers of the bureaucracy.

5. Get help

In today’s shop atmosphere, a lot of managers simply find that they don’t have the time required to do a thorough job on their taxes, and while the final product may be perfectly legal, there is often a myriad of missed tax-shelter opportunities. RRSP payment thresholds, personal salary and several other government programs can all be tricky, but highly lucrative aspects of a well-established tax plan. Just as it is your job to run a successful and professional shop, there are those for whom organizing a successful and professional tax plan is their charge. A professional audit can be intimidating and even seem like an unnecessary expense. But if done well, a chartered accountant can establish a tax and business structure for you, which will reap greater long-term rewards year in and year out. So, if you are one of the many shop owners who is still taking weeks out of the year shuffling through piles of paper and chewing a pencil down to a nub, this could be the solution for you.

Final Thoughts

Due to changing industry norms, a few new trends, and perhaps more importantly, a new government in Ottawa, the 2006 tax season will be rife with changes from last year’s systems. With that said, there are likely more than a few owners out there who still aren’t getting the most out of their own tax set-ups. If you’re still not sure where your personal retirement investment portfolio should or is going, or you’re not sure how best to take advantage of some of the new government programs, then obviously some professional help is the way to go. All told, the kind of professional financial help available can mean more cash in your pocket at the end of the year, and less chance of you needing another kind of professional help after wading through your invoice statements, in a desperate search for a missing receipt. It’s dirty work, and if the two accountants we spoke with are any indication, there is someone who would love to do it.