Paying Business Debts to the CRA

Sometimes business owners have to decide which debt to pay off first.

Sometimes business owners have to decide which debt to pay off first.

Sometimes business owners have to decide which debt to pay off first. Business owners are often left in a position of trying to decide whether to take out a loan to pay their tax, or be assessed interest on any amounts that are outstanding.

There are two things to be considered in determining what is most cost effective.

One would need to compare the interest rate payable to the CRA versus the interest rate payable on a line of credit or other type of loan.

Currently, the CRA charges 5% interest on outstanding amounts and this rate is reviewed quarterly.

In addition, one would need to consider that any interest expense that is incurred on income taxes owing would not be deductible for business purposes, whereas the interest on a loan used to pay the tax would be deductible.

The current rate of tax for small business corporations in British Columbia is 13.5%. Not being able to deduct this interest would effectively add another .675 to the interest rate that you are paying.

As a result, if a business owner can obtain a loan for less than 5.675%, it makes sense to use outside financing.

Foreign Income Easier to Monitor

Information will now be shared between the Canada Revenue Agency and the Internal Revenue Service.

Information will now be shared between the Canada Revenue Agency and the Internal Revenue Service.

In February of this year, an agreement was signed between the Canadian and American government which makes it easier for the respective entities to monitor income earned outside their borders.

Under the terms of this agreement, financial institutions in Canada will share information with the Canada Revenue Agency (CRA), who will pass this information onto the Internal Revenue Service (IRS).

This will allow the IRS to more easily determine whether income earned at a bank in Canada is being accurately reported on an individual’s tax return.

The same information will be shared in return, so that the CRA will now have greater access to financial information regarding Canadians who hold bank or investment accounts in the United States.

This information sharing regime does not apply to registered investments, such as Registered Retirement Savings Plans, Tax Free Savings Accounts, and Registered Retirement Income Funds.

The new reporting regime will come into effect in July 2014 with information exchanges beginning in 2015.

The CRA has indicated that they will not assist the IRS in collecting taxes and penalties that are owed to the IRS.

As well, the agreement will not impose any taxes on US citizens holding accounts in Canada. The agreement will work in conjunction with tax treaties that are already in place with the United States, which govern the withholdings and the taxability of income between the two countries.

If you have investments in the United States, you should advise your investment advisor that you are a Canadian resident, to ensure that the correct amount of tax is being withheld on your income.

For instance, if you are receiving dividends on US stocks, and more than 15% tax is withheld on these dividends, you are overpaying US tax on your investment. You will need to contact your advisor to adjust your account.

Partial Exemption for Farms

If you or your family members are planning on selling the family farm in the near future, there may be some extra room for a gain on the rural property.

Currently, you may claim a tax exemption on the first $750,000 of capital gains related to the sale of qualified farm property or small business corporation shares.

In 2014, the Canada Revenue Agency will see this exemption increased to $800,000. Additionally, this amount will be indexed annually in future years.

Did You Know… About Refund Dates?

6If you have a tax refund owing to you, there are certain timelines used to calculate the refund interest you may receive.

The Canada Revenue Agency pays refund interest to taxpayers on the latest of the following dates: a) the date of the actual overpayment; b) the 120th day after the end of the tax year, if the return for the year was filed on time; or, c) the 30th day after the date the return was filed, if it was filed late.

Rates Increased

Effective October 1, 2013, the Canada Revenue Agency (CRA) increased the interest rate they charge on late payments. Since April 1, 2009, the CRA has charged an annual interest rate of 5% on outstanding balances, compounded daily. As of October 1, this rate was increased to 6%. The interest rate on refunds has also increased. For corporate taxpayers, the rate has increased to 2%, and for non-corporate taxpayers, the rate has increased to 4%.