I'll let you in on a secret. The Canada Revenue Agency (CRA) is the government's tax collection agency – that's it – they collect money for the government. The CRA does not have the power to make tax law; the House of Commons does that. The CRA does not interpret tax laws; the Tax Court of Canada and the Supreme Court of Canada do that.
But the CRA is more than happy to interpret every tax law that exists and pump out an interpretation bulletin for each and every law.
These bulletins are detailed preferences the CRA wants you to follow because they generate the largest tax revenues, but they also generate myths that a lot of people follow.
Today I'll debunk two pervasive tax myths for small or startup businesses.
First myth: You can't get/shouldn't get a GST number until your gross annual revenue reaches $30k. It is true that you have to get a GST number when your gross revenue hits $30K, but this does not mean you cannot get a GST number until then.
Think of a gold mine: it takes years of searching and testing potential sites to find a proper ore body; millions of dollars for equipment, engineering and the workforce to start the mine; and time to smelt and refine the ore before the first ounce is sold.
Think of all the tax paid to get to $30k in sales. Do you think the mining industry does not claim the GST/HST paid until after their gross revenues reach $30k? Of course not.
You are in the same situation. Depending on your industry, your competition and the costs to market your product or service, it might take years before you reach $30k. Your startup expenses and accompanying GST/HST costs are valid deductions now.
It is very important to secure a GST number. You cannot claim GST/HST expenses until you have one, and GST numbers cannot be backdated.
When you call to get a GST number, the CRA will suggest or imply ineligibility or sometimes deny your application outright. I had to write a script for my customers to use when calling the CRA to ensure the tax law on this issue is properly applied and they get their GST number.
Second myth: I must calculate home-office expenses on the basis of how much area my workspace takes as a proportion of total area in my home. The CRA's website claims, "The expenses should be apportioned between business and non-business use on a reasonable basis, such as, square metres of floor space used."
What most taxpayers, advisers and certainly the CRA often miss (whether by lack of training or by intent) are the two words "such as." There is more than one acceptable method for calculating the ratio of work vs. personal expenses in a home as supported by Tax Court of Canada rulings.
The method I have found most advantageous to date is using the number of rooms rather than area.
Using the number of rooms method versus square meters typically doubles the percentage of eligible expenses.
For example, if you live in a two-bedroom plus den and living room, and you use the den as your work area, your "office" takes up 25% of your home. (You do not count the kitchen or bathroom.)
As this method is safe, valid, proven and much more beneficial to you, it is unlikely you will find this method, or others, in an interpretation bulletin.
There are specific rules of how to use this method, but any good tax adviser will know what they are. •
