How to prepare for potential CRA audit
A while back I had an informal conversation with a Canada Revenue Agency auditor. During that conversation the auditor told me that in the last 10 years the number of chiropractors in arrears on their taxes has risen dramatically.
I thought it would be appropriate to produce a piece in this issue to help chiropractors stay prepared for any assessments, exams or audits the CRA may have in store for them in the future.
I have outlined some of the areas that chiropractors may need the most help with as business practice owners.
The definition of an employee and type of employee is critical especially when CRA examines your payroll. For our purposes there are two types of employees: those essential to our business, and those non-essential to our business.
Non-essential workers refer to casual labourers who work jobs that are not essential to generating revenue. For example, someone who cleans the office is considered non-essential. A receptionist, however, would be considered essential. This is because the receptionist answers phone calls, arranges appointments and collects payment – which are all essential elements in running and maintaining a business.
For CRA purposes, this means that all essential employees – no matter how little they work – must be on payroll. In addition, they all need a T4 generated for them at the end of the year. For instance, even if these employees make only $20 that year, they still would need to pay 38 cents of employment insurance (EI).
First and foremost, all independent contractors (IC) need a signed contract/agreement between you (as the practice owner) and them. The contract must outline the role of the IC so that it does not coincide with the role of an employee.
For instance the CRA does a four-point test that covers the topics of control, use of tools, ability to make profit or incur loss, and ability to work elsewhere.
Control: Basically an IC must set their own hours, their own time off, direct how they assess, manage and plan future patient treatments. They must do their work unsupervised and must be allowed to subcontract the work out if they cannot do it.
Tools: An IC must use their own tools. For manual therapists, this includes their hands – which is the main tool. All RMTs at my clinic use their own linens, oils and other soft tissue tools. The physiotherapists and chiropractors use their own modality units and scraping tools.
Profit/Loss: Basically, an employee has a set rate they make (usually per hour). An IC can make more or less, depending on how many patients they see. Also, regardless of how many patients they see, their expenses are constant (insurance, car, association fees, etc.). Theoretically, they can lose money if they don’t see enough patients. In addition, the minimum fee the independent contractor must pay to the clinic, and the penalty for breaking the contract early are key factors demonstrating this category.
Able to work elsewhere: ICs are free to work elsewhere while under contract with you. The physiotherapists and chiropractors at my office, for example, work at one or two other places, and most RMTs work at home or in other clinics as well.
Invoicing: Remember that in the IC arrangement, the patient pays you (the clinic) for the service, and the IC bills you to provide the service at the rate you agreed to.
The IC must provide you with an invoice each time you give them payment. Do not give payment without the invoice. Their invoice must outline the amount you owe them, their name, registration number, address, the dates over which services were provided, and HST number, where applicable.
Many health professionals are having their professional corporation (PC) own/lease and maintain their vehicle. This is beneficial because the PC buys or leases, maintains, fuels and insures the vehicle – but this luxury is a taxable benefit for the person that drives it.
Taxable benefit means the government taxes you personally for this perk.
One easy way the government determines the taxable benefit amount is by using the stand-by charge formula. This is calculated as a two per cent per month charge of the original cost of the company vehicle.
Here is an example: the purchase price, inclusive of taxes, of a BMW X3 in 2015 was $59,000. So, two per cent of $59,000 is $1,180 per month or $14,160 per year. This means if the car you drive is owned by the professional corporation and you do not use it at least 50 per cent of the time for business, then $14,160 will be added as taxable income to your tax return. So if, you earned $50,000, the government will tax you as if you earned $64,160 that year.
This is why it is vital for you to keep a car diary and a kilometres log along with purchase receipts, in order to justify that you use your vehicle for business at least 50 per cent of the time.
Using the above example, if I demonstrated using my corporate car for business 60 per cent of the time then my personal taxable benefit would only be 40 per cent of $14,160 or $5,664.
One caveat though – on a company vehicle, personal use cannot exceed 1,666 kilometres per month or 20,004 kilometres per year.
Remember, accountants and lawyers do not know everything when it comes to your business. I make sure I read as much as I can about tax laws (I read the Excise Tax Act which is 392 pages) so that I am armed with knowledge when I meet with my accountants. I find when I do this they make less mistakes because they realize I will hold them responsible.
Be prepared. Professional associations and even governing bodies likely won’t know the answers to all your income tax questions. This is because they typically do not want to give you the wrong advice, or they simply don’t know the answers to your questions.
In fact, the growing trend for governing bodies is to distance themselves from business-related queries. For example, last year the Canadian Physiotherapy Association (CPA) issued a statement to their members asking them not to question the CPA on the topic of independent contractors. Instead, they suggested their members contact their lawyers.
Dr. Anthony Lombardi is consultant to athletes in the NFL, CFL and NHL, and founder of the Hamilton Back Clinic in Hamilton, Ont. He teaches his fundamental EXSTORE Assessment System and conducts practice-building workshops to health professionals. Visit exstore.ca for information.
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