Don’t Forget to Collect HST on the Sale of Illegal Drugs

Here’s something different!

One of the issues, in a judgment issued by the the Tax Court of Canada [Bailey v. The Queen, 2011 TCC 233, (April 28, 2011), http://decision.tcc-cci.gc.ca/en/2011/2011tcc233/2011tcc233.html],  had to do with whether or not the illegal sale of  cannabis and cocaine are taxable supplies or zero-rated supplies for the purpose of collecting the GST.

Turns out that not only are illegal drug sales taxable transactions for income tax purposes, they are also  taxable supplies subject to GST.   

… I wonder if they could claim an exemption as a small supplier in the first year of operation or apply to use the Quick Method of Accounting for the GST/HST?

On the value of the US$…

Jim Rogers was recently quoted as follows:

“Paper money is made of cotton, and I’m long cotton, by the way.  One reason I’m long cotton is because Dr. Bernanke is out there running the printing presses as fast as he can.”

David Rosenberg  in Breakfast with Dave  – January 17th 2011

It’s Harsh and Unfair but it’s the Law

Validating Supplier HST Registration Numbers

The outcome of a recent court case involving Computronic Computer Inc. [Comtronic Computer Inc. v. The Queen (2010 TCC 55)] serves as an important reminder that businesses should always validate the GST/ HST registration numbers of their suppliers in order  to prevent the disallowance of ITCs or input tax refunds based on invalid registration numbers.

 Computronic operated a wholesale computer parts and computer assembly business.  The invoices from the suppliers had valid GST numbers, but the numbers belonged to third parties that did not appear on the invoice.  The Tax Court of Canada was compelled to follow the strict position taken by the Federal Court of Appeal in another case [Systematix Technology Consultants Inc. v. Canada (2007 FCA 226)] with the result that it disallowed the input tax credit even though the purchaser paid the GST in good faith.

Section 164 of the Excise Tax Act requires a purchaser to substantiate its input tax credit (ITC) claim by obtaining from the suppler the information prescribed in the Input Tax Credit Information (HST/GST) Regulations, including the name of the supplier and the GST registration number assigned to it.

 Clearly this is a harsh and unfair application of the law.  Nevertheless, it is the law.

 The upshot of all this is that businesses need to establish procedures to manage the risk related to GST/HST.  The registration numbers of  suppliers need to be verified when set up and on an ongoing basis.  Supplier invoices with GST/HST over a certain dollar figure should be verified on an individual basis.

CRA has set up an on-line GST/HST Registry  where business can validate the GST/HST number of a suppliers: http://www.cra-arc.gc.ca/esrvc-srvce/tx/bsnss/gsthstrgstry/menu-eng.html

 [This information is from the September 2010 edition of  "Tax Matters @EY'   http://www.ey.com/CA/en/Services/Tax/TaxMatters-Sept-2010  and from the July 2010 edition of  "Tax for the Owner -Manager"  Volume 10, Number 3 published by the Canadian Tax Foundation.]

Attention Shoppers – For a Limited Time … Computers – 100% Write off

The CCA rate for computer equipment (including systems software) acquired after January 27, 2009, and before February 2011 was increased from 55% to 100% with no half-year rule. As a result, a full write-off can be claimed in the first tax year that CCA deductions are available.

To be eligible, the computer equipment purchased must be new and situated in Canada, and it must be used in a business carried on in Canada or used to earn income from property situated in Canada.

For more information on this and other tax relief measures go to cra.gc.ca/taxcuts.

 

The Snowball: Warren Buffet

Buffet

I recently read  “The Snowball: Warren Buffet and the business of life.”  It is an 838 page biography, along with another 91 pages of endnotes, of Warren Buffet – “the Oracle of Omaha.” 

In the event you have never heard of Warren Buffet his significance is that he started with nothing and went on to become the world’s wealthiest individual [worth over $60 billion] by investing in the stock market. 

The book is not only a biography on his life, but it is also, as would be expected, filled with the pearls of investing wisdom – foundational and inviolable principles that guided Buffett throughout his life. 

And there is one piece of advice that struck me as particularly profound that I would like to leave with you.  Its weight and significance comes from the fact that it is found on page 761 of an 838 page book – in the the 73rd year of his life.  Warren Buffett is addressing a group of students at Georgia Tech.   He was asked what had been his greatest success and greatest failure.  Here is his response:

“Basically, when you get to my age, you’ll really measure your success in life by how many of the people you want to have love you actually love you.

“I know people who have a lot of money, and they get testimonial dinners and they get hospital wings named after them.  But the truth is that nobody in the world loves them.  If you get to my age in life and nobody thinks well of you, I don’t care how big your bank account is, your life is a disaster. 

“That’s the ultimate test of how you have lived your life.  The trouble with love is that you can’t buy it.  You can buy sex.  You can buy testimonial dinners.  You can buy pamphlets that say how wonderful you are.  But the only way to get love is to be lovable.  It’s very irritating if you have a lot of money.  You’d like to think you could write a check: I’ll buy a million dollars’ worth of love.  But it doesn’t work that way.  The more you give love away, the more you get.” 

 

The Decision to Incorporate [Part 1]

Combined Federal & Ontario Tax Rates

Advantages of Incorporation

Income Tax Deferral

When a person chooses to begin a new business venture one of the first decisions that will have to made is how to structure the business.  Will it be operated as a sole proprietorship or as a corporation?  There are many significant advantages to be gained from operating a business in a corporation (which will be addressed at a later date).    Perhaps the most significant benefit is the ability to defer the payment of income tax.

A Canadian Controlled Private Corporation [CCPC] is entitled to a  small business deduction [SBD] on the first $500,000 of income.  In 2009, a CCPC operating in Ontario would be subject to a corporate income tax rate of 16.5%.  As of July 1, 2010 the rate is further reduced to 15.5%.  Consider that for a moment.  The first $500,000 of income is taxed at only 16.5%.  

 See the graph below:

What would be the tax rate if that income was earned through an unincorporated business?  To answer that, we need to consider two important tax rates that come into play in calculating the amount of taxes owed when you file your tax return. 

The Average or Effective Tax Rate

The first rate to consider is the “average tax rate”.  Canada Revenue Agency [CRA] uses different rates of income tax depending on how much income you have.  Basically, the more you make, the more they [CRA]take.   For example, in 2009, CRA taxed you at 15% if you made $40,726 or less.  If you made more than that you end up in another tax bracket. The rate increases to 22% on any amount over $40,726 until you get to $81,452.  After that you enter another tax bracket where the tax rate goes up to 26%, and so on, all the way up to 29%.  The Ontario government does something similar.  The result of  this is that when you calculate the amount of taxes owed on your tax return, the tax rate is really a combination of several rates of tax — taken together they represent your “average tax rate”.  

The Marginal Tax Rate

The second rate to consider is the “marginal tax rate”.   Remember what I said above about how CRA calculates your taxes: “The more you make the more they [CRA] take.”  This is referred to as a progressive tax system [It gets progressively worse].  What this means is that your marginal tax rate is higher than your average tax rate.  Let me give you an illustration, as this will be easier to grasp.  If you earn $50,000 in salary you will have to pay $7,980 in taxes.  Thus your average tax rate is 15.96% [$7,980/$50,000].  But let’s say you decide to get a part-time job to earn a little extra money.  Say you earn $1,000 from this part-time job.  How much tax will you have to pay on that extra $1,000?  If you said $159.60, which is $1,000 multiplied by your average tax rate — not only are you wrong, you are also in for a big surprise.  The correct answer is $312 – nearly double your average tax rate.  That is because that $1,000 of part time income is added to your $50,000 salary.  That extra $1,000 of income is taxed according to your highest tax bracket, with the result that it is taxed at a higher rate of tax.

And it only gets worse.  If you have a salary of $100,000, you will  have to pay $26,356 in taxes.  Thus, your average tax rate is 26.36% [$26,356/$100,000].  How much tax will you have to pay if you earn $1,000 from a part-time job.  You had better sit down — 43.4% – yes $434.00.   [I always wondered why my dad declined to work on Saturdays when he was given the opportunity to work over-time.  His answer was always that it wasn't worth it.  Now I understand what he means.]

Back to our topic – Income Tax Deferral

What would be the tax rate if that income was earned through an unincorporated business?  Once you start making around $150,000, your marginal tax rate would be more than 46%!  Now compare that to the rate of corporate income tax of 16.5% — that is a difference of 30%.  The graph below shows the amount of taxes payable at various levels of income, depending on whether it is earned personally through an unincorporated business or through a corporation.

The next graph compares the percentage of income tax paid on income earned personally through an unincorporated business with income earned through a corporation.  The personal tax rate is the marginal tax rate.

I’ll continue with this topic in Part 2.

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