Business Matters July 2018
Good record keeping today can prevent CRA penalties tomorrow.
We live in a digital world where everything is captured electronically in real time. Paper financial statements have become relics from the past; unfortunately, the requirement to produce evidence for the Canada Revenue Agency (CRA) for HST or income tax has not.
The CRA accepts records in:
- paper format
- paper format later converted to and stored in an accessible and readable electronic format
- an accessible and readable electronic format.
As explained on the CRA website, Keeping Records: “We consider you to have electronic records if you create, process, maintain, and store your information in an electronic format. You are required to retain these records in an electronically readable format, even if you have paper printouts of these records. If any of your source documents are initially created, transmitted, or received electronically, they must be retained in an electronic format. Scanned images of paper documents, records, or books of account that are maintained in electronic format are acceptable if proper imaging practices are followed and documented.” (Canada Revenue Agency, Keeping Records)
For complete details of what is required, see Information Circular IC78-10R5, Books and Records Retention/Destruction, and GST/HST Memorandum 15.1 General Requirements for Books and Records and Canadian General Standards Board (CGSB) publication, CAN/CGSB 72.11 Microfilm and Electronic Images as Documentary Evidence, and its latest amendment.
Both corporate and individual tax payers should be aware of the following:
- Records must be kept at your place of business or residence. They may not be kept outside Canada unless you receive CRA permission. This suggests that Cloud accounting to servers outside Canada does not meet the CRA’s criteria and that businesses need to keep the general ledger in CSV (comma-separated values) or PDF format on their own computers.
- Bank statements and credit card statement amounts, with the exception of bank charges and overdraft interest, will not satisfy the CRA. Original source documents that support e-transfer, cheque or deposit information are required.
- Payments of credit card balances are often lumped together with other expenditures when payments are made to the credit card company. In the event of a review, not only will you be required to produce the statements, you will have to produce the backup (i.e., invoices) for amounts shown on the credit card. Thus, original purchase invoices will be required.
- Receipts for debit card purchases for small items are often discarded. Without an original source document, these expenditures may be disallowed by the CRA.
- Accounting programs are available that attach the original electronic invoice to the specific purchase or sale. This is helpful when backtracking to the original electronic invoice. But what about purchases made off the business premises? Documents for these purchases should be scanned or photographed and placed into an appropriate folder that establishes the date of the transaction, the amount, and a description of the item(s). If using PDF software, indicate the journal entry on the PDF so that a review of the general ledger can quickly source the document.
Keep all original copies in case of a lawsuit.
Retention of Legal Documents
Documents such as purchase contracts, financing covenants, shareholder agreements, etc., should be scanned and saved in perpetuity. Hard copies of such documents should also be kept because the original source document will be required in the event of a lawsuit.
Since source documents must be maintained for a minimum of six years, it is advisable to:
- ensure all records are electronically copied to an external hard drive stored off-site
- back up data to a local offsite facility or the Cloud as well as an external hard drive
- ensure data is stored in a format useful if you need to produce historic financial records. Because some software providers can only provide backup of financial data in CSV, charts, formulas, row styling, images, and other presentations will not be forthcoming when using a CSV data dump.
- back up on a regular basis. Software is available that will automatically back up data as frequently as you need.
- ensure that a new computer, software or operating system will allow updating of the old database. It may be advisable to hold onto the older computers to ensure access to old records if required. Ensure that all old passwords are stored with the old devices.
- ensure computers used in discontinued operations are not discarded and data stored in the Cloud is recovered and stored on an external hard drive and/or payments for the Cloud service are maintained.
Failure to record and retain records properly can be costly. Consider this: if a business spends $1,000 and does not have the supporting receipt, not only has the business lost the income tax deduction, it has also lost the ITC charged on the purchase. Self-employed individuals in Ontario could lose $430 if they are in a 30% tax bracket and entitled to an ITC of 13%. An incorporated business would suffer similar losses in tax advantage and ITC refund, depending on the business’s province or territory.
Check Your Record Keeping with Your CPA
Your CPA understands the need for record retention to satisfy not only business needs but also CRA requirements. Your chartered professional accountant should review your accounting and record-keeping system to determine whether improvements could be made to ensure your business is ready and able to provide the information required in a CRA review.
Looking Beyond Disability
When employers accommodate the disability, they benefit from the ability.
Disability is a loaded word. Is a disability a real mental or physical impairment, or is the “disability” a blockage to useful employment created by the failure of society to accommodate? For example, is a person in a wheelchair disabled, or has society failed to enable them by building ramps and wider interior doorways that allow persons with disabilities to be usefully employed in the first place? Seeing failure to accommodate disability as a social problem recognizes that society loses the value of the other abilities possessed by persons with impairments.
Statistics Canada reports that in 2012, about 10.1% of the 2.3 million working-age (15-64) Canadians reported some form of disability. This figure jumps to 33.2% for those over 65. A report by the Royal Bank of Canada completed in 2000 estimated that (at that time) persons with disabilities possessed about $25 billion in annual spending power.
Impairment Is Not Always Obvious
Perhaps statistics gathered by the Vision Council of America can bring the role of accommodation closer to home. The Council estimates that 75% of the adult population use some sort of vision corrective such as glasses (64%) or contact lenses (11%). But how many of us think of ourselves as visually impaired? Without such lenses to accommodate the visual impairments of three quarters of the adult population, many of us would not be employed in our current positions, and society would not function as it does today.
One has only to look at the Paralympic Games and the recent Invictus (i.e., Latin for “unconquered”) Games to see what persons with impairments can do when they are recognized for their abilities. The kind of determination shown by these star performers should make clear to any employer that persons with impairments have what it takes to be of value in the workplace.
Nevertheless, there are still preconceived biases to be overcome to achieve inclusiveness for all.
Inclusion and Equality for Everyone
In fact, the Charter of Rights and Freedoms, the Canadian Human Rights Act (CHRA) (for federally regulated institutions) and the various provincial Acts that supplement the CHRA all support what is now recognized as the human rights of persons with impairments to be accommodated so they can live their lives as they see fit. Ontario now has the Accessibility for Ontarians with Disabilities Act, 2005, which requires all Ontario businesses to be able to accommodate persons with impairments by 2025.
Employing Disabled Persons
Employers should look past the impairment to consider the following:
- Impaired persons may have the skills necessary to perform the task.
- Building an inclusive environment starts at the top. Management must support hiring practices that evaluate individuals for what they can contribute, regardless of their impairment.
- Integrating persons with impairments into the workplace may require educating current employees to set aside all preconceived ideas about disabled persons.
- Management may need to address initial concerns about safety, perceived special treatment or productivity, to maintain a positive work environment.
Accommodation may require physical changes to the workplace.
The Employers’ Duty to Accommodate
Accommodating those with disabilities may require changes in office layout or certain work areas, modifications of access points, washroom areas and equipment. In that this will be a learning curve for both employer and employees, management must ensure the concerns of all employees are addressed to maintain a positive work environment.
Many organizations provide help, for example, Ready, Willing & Able (RWA), the national partnership of the Canadian Association for Community Living (CACL), the Canadian Autism Spectrum Disorders Alliance (CASDA) and their member organizations. Funded by the Government of Canada and active in 20 communities across the country, RWA is designed to increase the labour force participation of people with an intellectual disability or Autism Spectrum Disorder (ASD) (readywillingable.ca). The Canadian Association for Supported Employment (CASE) is a national association of community-based service providers and stakeholders working to ensure the workplace includes people with disabilities. The organization provides online information to assist employers in finding not only the necessary tools to hire employees with disabilities, but also to provide guidelines for management and all employees (supportedemployment.ca).
Employers must ensure the lines of propriety are not unintentionally crossed when hiring those with disabilities.
- Do the job analysis and determine what, if any, accommodation may be required for someone with a disability to perform effectively. Regardless of the degree of disability, it is essential to determine what accommodations must be made to support the employee in all aspects of the job.
- It may be advisable to consult an HR expert to review procedures and protocols to ensure bias-free recruitment and selection procedures.
- When scheduling an interview, ask the applicant whether there will be any special accommodation during the interview.
- Ensure access for the interview. Many older buildings have not yet been retrofitted to accommodate wheelchairs.
- Understand which questions you can and cannot ask. As with any applicant, focus on the applicant’s job skills, experience, and how they would accomplish the tasks outlined in the job description.
Engage with Life
Canadian businesses need to address the capabilities of persons with disabilities and the benefits these individuals offer not only to business but also to society. Corporal (Retired) Jackie Buttnor, a participant in the Invictus games, best described the human need for a satisfying engagement with life: “I am just going for it with the Invictus Games. It’s much more rewarding than sitting life out.”
New 2018 CRA Allowances for Company-Use Vehicles
Owner-managers should discuss Canada Revenue Agency (CRA) changes to employee vehicle allowances with their CPAs before announcing any changes to company policy.
To keep up with the rising costs of operating vehicles, Revenue Canada has increased the maximum tax-exempt car allowance deductible for employees to 55 cents per kilometre for the first 5,000 kilometres, and to 49 cents per kilometre for distances travelled in excess of 5,000 kilometres.
If you live in the Northwest Territories, Nunavut or the Yukon, the per-kilometre rate has increased to 59 cents for the first 5,000 kilometres and to 53 cents for distances exceeding 5,000 kilometres.
The rates and application are based on a calendar year. As can be expected, any employee claim for the exemption must be supported by documentation. Employees must keep a travel log for each vehicle indicating:
- starting point of business trip
- purpose of the trip
- vehicle starting kilometres
- vehicle ending kilometres
- kilometres driven.
Expense reports should be submitted monthly. Management should enforce a policy that travel costs will only be reimbursed after the expense reports are received.
Use of Personal Vehicle
Because employees and owner-managers alike also use their personal vehicles for business trips, it is important to record the January 1 odometer reading and the December 31 odometer reading of each personal vehicle that may be used for business.
The purpose of the car allowance is to cover all expenses relating to the operation of a vehicle. These expenses include:
- maintenance and repairs
- fuel, including gas, oil and propane, and charging cost
- registration and licence fees
- leasing costs
- capital cost allowances (a percentage of the cost of the vehicle allowed by the CRA to be offset against revenue as an expense)
- interest costs paid on any loan used to buy the vehicle.
- None of these expenses should be submitted to the employer if the employees are receiving a vehicle allowance. The allowance paid is not taxable in the hands of the employee only if:
- the allowance is based on the number of kilometres driven for business purposes
- the rate per kilometre is reasonable
- none of the above expenses was reimbursed by the employer.
Allowance Less Than Vehicle Expenses
Sometimes, the allowance paid may be less than the vehicle expenses incurred by the employee while working. In some circumstances, the employees do not get reimbursed for their employment-related expenses at all. If so, employees may claim their out-of-pocket expenses on their personal tax returns.
In order to claim these expenses, the employees should retain copies of the expense reports submitted for the year as well as all the vehicle expenses incurred during the year. They may wish to categorize them into specific expenses as outlined under “Calculation of allowable motor vehicle expenses” within the CRA form T777. If more than one vehicle is used, a detailed record of expenses should be maintained for each vehicle.
Additionally, the employees must obtain a T2200 Declaration of Condition of Employment form to be prepared and signed by the management. This form provides important information about the conditions of employment including:
- whether an employee was required to pay their own expenses while carrying out the duties of employment
- whether the employee was required to travel away from the employer’s place of business in the normal course of employment
- whether the employee received any fixed allowance or per-kilometre reimbursement
- the amounts of allowances/reimbursements received and whether such amounts were included in the employee’s T4 slip.
The employees are able to deduct vehicle expenses on their personal tax returns only to the extent they did not receive sufficient allowance/reimbursements from the employer. Also, they can deduct expenses, even if they received sufficient allowance from the employer, if such allowance was included in their T4 income. Because the deductibility of employment expenses is dependent on each employee’s unique terms of employment, the T2200 form must be completed for anyone hoping to claim employment expenses. The CRA then uses this information to analyze which expenses are deductible.
“Place of work” may soon include off-premises job sites.
Changing Definition of “Place of Work”
Kilometres driven from residence to workplace or office (i.e., home base for use of the vehicle for work) are considered “personal” expenses, not reimbursable costs. Recent changes to tax rules further extend the definition of “place of work” itself to include job sites (i.e., off-premises work places). For instance, if an employee is driving directly from home to a job site such as a construction project (i.e., place of work) on a daily basis for an extended period, that construction site may be considered “home base” and as such, travel to that site would not be considered a reimbursable expense.
HST / ITC
If employees do not receive a vehicle allowance but remit receipts for reimbursement, a business is allowed to reimburse the expense and offset the HST charged on the submitted receipt against the HST collected on sales. Similarly, when employees submit the car allowance expense report, a business should carve out the HST amount and claim it as an input tax credit (ITC). The ability to offset HST collected with ITCs from car allowances paid is another reason for employers to ensure employees submit expense reports on a timely basis.
No Change Since 2001
Despite the increase in the cost of vehicles over the last few years, the allowable ceiling costs for vehicle purchases, leases and interest have not risen accordingly. Unfortunately for the taxpayer, the vehicle cost ceiling has remained at $30,000, the lease cost ceiling at $800 per month, and the interest cost ceiling at $10 per month since January 1, 2001.
Guidance from Your CPA
Vehicle allowances and deductions can be a contentious point between employee, employers and taxation authorities. Owner-managers are encouraged to discuss with their CPA the specific requirements and restrictions that may apply to their workplace and their employees for the 2018 tax year.
Training for the Future
New technology makes training easier and more effective.
Training is an essential part of building and maintaining any successful business. Technological advancements have increased the amount and types of knowledge required to perform a task. There is still a need for some traditional skills, but gone are the days when a new employee learned a fixed body of knowledge and applied that knowledge for their entire career. New training methods are making the training process faster, more efficient and less expensive.
Sending employees off to training courses used to be the only means by which a business could keep workers up to date. But that too appears to be ending as faster, more efficient, less expensive means of upgrading employees flood the work world.
Technological advancements have made work less demanding but have extended the knowledge base required to complete a task. Employers need to realize that access to information on a “need-to-know” basis is an essential attribute that they must embrace if they wish to survive. Management should take advantage of new methods now available within most industries.
Online training is a starting point. This type of training is much like the old classroom approach where the employee watches and listens to experts explain problems and methods. Like classroom training, however, it assumes a “full vessel” (instructor) pouring information into an “empty vessel” (student). This method of instruction, known today as “sage on the stage”, is teacher-centred instead of student-centred. The “sage on the stage” method of instruction does not always provide practical or in-depth discussions of issues because there are often too many participants and not enough instructors. In the “guide on the side” model the instructor draws on the students’ work and life experience and guides them to finding their own solutions. The focus of this model is on the process of problem solving through critical thinking but also fully recognizes the role played by raw knowledge. Unfortunately, unless the instruction takes place in real time, online training does not allow much interaction.
Augmented reality (to be distinguished from virtual reality) was developed in the 80s and 90s for military application. Augmented reality enhances selected environments or aspects of them to enrich perception; it does not create an artificial reality. The need to train astronauts and pilots in real time became cost prohibitive, but replicating reality with computer-generated situations trained individuals to deal with potential issues via simulation. The gaming industry has demonstrated how inexpensive it is for computers to generate information perceptible by all the senses. As such, it will not be long before heads-up displays will incorporate augmented reality to guide workers step by step in real time as they learn how to diagnose and fix a specific problem.
New technology will reduce training time.
The implications of this ability to identify a problem and find a solution are that workers no longer need to retrain every time information becomes outdated or obsolete. This technology will enable employees to learn incrementally and advance at their own pace. Incorporating augmented reality hardware within the workplace will reduce training time, encourage younger workers to join your business and increase productivity. The ability to impart knowledge, experience and skill without the expense of transporting individuals to the job site is a massive cost savings and a step to providing the best possible service to clients in a fraction of the time required to send in a team to fix the problem. This is the model of the call centre in India or the Philippines: technology permits remote solutions to technical problems without the need to send someone to the site of the problem. The fact that a remote expert can solve the problem within a short time today means you can operate your business more efficiently and meet tighter deadlines.
Clients want instant fixes to their problems. Employers should consider investing in the new approach to training if they wish to stay in business. Owner-managers should consider the following sequence of a transformation process:
- Examine their existing business model to determine whether there will be a future market for their service or product.
- Phase out services and products that will become obsolete within the foreseeable future.
- Determine how to provide improved services or products for existing customers.
- List the equipment or process that must be replaced or updated and research the appropriate replacements.
- Set a timeline for financing, acquiring and integrating the upgraded equipment/process, training staff and reconfiguring the workplace (if necessary).
- Establish a hands-on training schedule to deal with real issues rather than hypothetical ones presented in a classroom environment. Employees learn faster if they can apply new processes to familiar problems. Once they are up to speed, employees can apply the new knowledge in the existing work environment and expand its application going forward.
- Engage all employees right from the start in the employer’s vision of the business and encourage them to adopt the new skills they will need to prepare them for a future in the organization.
- Promote the expectation that training will increase productivity and personal satisfaction, reduce turnover, and increase job security.
- Investigate external training facilities that provide recognized certificates of achievement through formalized training that emphasizes the need to complete or pass a training program. This approach allows your business to evaluate the results supplied by an independent source and to identify those employees who should be set on a career path and those who exhibit sufficient competence to evolve with current and future changes.
The Future Is Now
Owner-managers need to understand the inevitable changes occurring in their business. Perhaps a complete re-think of the business and a five-year plan will be worth the time. Planning and skills development today will build your future business. And, the future is now.
Disclaimer: BUSINESS MATTERS deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.
Although every reasonable effort has been made to ensure the accuracy of the information contained in this letter, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.
BUSINESS MATTERS is prepared bimonthly by the Chartered Professional Accountants of Canada for the clients of its members.
Richard Fulcher, CPA, CA – Author; Patricia Adamson, M.A., M.I.St. – CPA Canada Editor.
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