Entrepreneurship & Small Business

Taxation - answering any questions here

  • Last Updated:
  • Jan 11th, 2019 10:57 am
[OP]
Newbie
User avatar
Oct 30, 2017
66 posts
17 upvotes
Ottawa, Ontario
ROYinTO wrote:
Nov 21st, 2018 12:55 am
I'm trying to understand how to handle meal expenses with respect to a government contract that pays a per diem meal allowance according to the national joint council schedule http://www.njc-cnm.gc.ca/directive/d10/ ... 2s98-tc-tm

To keep it simple, I want to look at a single meal. For example breakfast, I buy a coffee and bagel for $6.00 + $0.78 HST = $6.78
On my invoice I would include a breakfast meal allowance of $17.15 = $15.18 + $1.97 HST
In essence the difference between the 2 is profit.

Am I correct in thinking that when it comes time to file an HST return, the $0.78 is an ITC with the net HST payable as $(1.97 - 0.78) = $1.19?
In my bookkeeping, I would enter the $6.00 as an expense and the $15.18 as revenue earned.

What happens to the $6.00 expense @ Y/E. Does it get included in other meal expenses and subject to the 50% meals & entertainment reduction. Or because it is directly earning revenue do I allocate it to a separate expense account and claim the full $6.00 as an expense?
Meals allows allow you to claim meals expenses without keeping receipts, and the allowance the corporation paid you is not a taxable benefit.
if for example you claim $10 meals allows from personal to the corporation, then the $10 becomes the expenses for the corporation and it is not a taxable benefit on personal. Corporation expense the $10 for meals expense, and this amount is tax included, meaning, net: $8.85 net, and $1.15 HST. and you follow the rule of 50% deductible for meals when prepare tax return.

if you claim receipts, then simiply whatever amount from the receipt and the corporation claim the expense based on the receipt.
thank you very much
Philip Kwok, CPA, CGA
Deal Addict
User avatar
Feb 14, 2009
1188 posts
441 upvotes
ROYinTO wrote:
Nov 21st, 2018 12:55 am
I'm trying to understand how to handle meal expenses with respect to a government contract that pays a per diem meal allowance according to the national joint council schedule http://www.njc-cnm.gc.ca/directive/d10/ ... 2s98-tc-tm

To keep it simple, I want to look at a single meal. For example breakfast, I buy a coffee and bagel for $6.00 + $0.78 HST = $6.78
On my invoice I would include a breakfast meal allowance of $17.15 = $15.18 + $1.97 HST
In essence the difference between the 2 is profit.

Am I correct in thinking that when it comes time to file an HST return, the $0.78 is an ITC with the net HST payable as $(1.97 - 0.78) = $1.19?
In my bookkeeping, I would enter the $6.00 as an expense and the $15.18 as revenue earned.

What happens to the $6.00 expense @ Y/E. Does it get included in other meal expenses and subject to the 50% meals & entertainment reduction. Or because it is directly earning revenue do I allocate it to a separate expense account and claim the full $6.00 as an expense?
Hi, RoyInTo. You did not specified, but I guess you have 3 players here:
Government agency (G), your corporation (C) , you as a person (P).

Before going forward, I suggest you forget about 6.00 receipt and just use 51$ per day no-receipt allowance.
Only if you have expenses more than 51$ per day with valid reason (not easy to come by) --
only then you better go with actual receipt-proven spending.
So, the flow is as follows -- please, correct me if necessary:

(P) spends 51$ per day, no receipts.
(C) submits meal (trip) expenses to (G) as invoice. Need add taxes?
(G) pays (C) 51 * days = X$
(G) has X$ as income
(C) pays X$ to (P) as non-tax benefit
(C) has X$ as expenses in non-tax benefit to employee
(P) reports X$ as non-tax benefit in personal T1
(C) has zero balance after this flow.

For me, it is not clear if (C) has to add HST/GST/QST on top of

Alternative flow is to bypass (C) books and pass money from (G) to (P).
I called CRA and they told me that it is possible if properly documented.
Here, (G) is paying NOT an invoice, but personal trip-meal expense report.
And check from (G) is directly goes to (P) without de-jure hitting (C) books.

I am dealing not with Government directly but with intermediate agency than
deposit money to my (C) account. In QuickBooks I have special pass-thru account
for such cases. This account is not part of income-expenses calculation (not in P&L report).

Any critique and corrections for above schemas are welcome.

Cheers!
Deal Addict
Dec 12, 2009
2798 posts
928 upvotes
Toronto
Thanks @PhilipK796978
PhilipK796978 wrote:
Nov 21st, 2018 9:23 am
Meals allows allow you to claim meals expenses without keeping receipts, and the allowance the corporation paid you is not a taxable benefit.
if for example you claim $10 meals allows from personal to the corporation, then the $10 becomes the expenses for the corporation and it is not a taxable benefit on personal. Corporation expense the $10 for meals expense, and this amount is tax included, meaning, net: $8.85 net, and $1.15 HST. and you follow the rule of 50% deductible for meals when prepare tax return.
Changes are bolded (with the $ value to match Philips example). I've also numbered the steps.
tequilla wrote:
Nov 21st, 2018 12:11 pm
You did not specified, but I guess you have 3 players here:
Government agency (G), your corporation (C) , you as a person (P).

Before going forward, I suggest you forget about 6.00 receipt and just use 51$ per day no-receipt allowance.
...
So, the flow is as follows -- please, correct me if necessary:

1 (P) spends 10$ per day, no receipts.
2 (C) submits meal (trip) expenses to (G) as invoice. (taxes included)
3 (G) pays (C) 10$ * days = X$
4 (C) has X$ as income
5 (C) pays X$ to (P) as non-tax benefit
6 (C) has X$ as expenses in non-tax benefit to employee
7 (P) reports X$ as non-tax benefit in personal T1
8 (C) has zero balance after this flow.

For me, it is not clear if (C) has to add HST/GST/QST on top of

Alternative flow is to bypass (C) books and pass money from (G) to (P).
I called CRA and they told me that it is possible if properly documented.
Here, (G) is paying NOT an invoice, but personal trip-meal expense report.
And check from (G) is directly goes to (P) without de-jure hitting (C) books.

I am dealing not with Government directly but with intermediate agency than
deposit money to my (C) account. In QuickBooks I have special pass-thru account
for such cases. This account is not part of income-expenses calculation (not in P&L report).
I sort of get what both of you are saying. Forgetting the actual receipts makes sense if that would be OK with the CRA. That simplifies the calculations for the HST (by passing thru)
The problem is that (P) does not get a pay cheque to pay the allowance. G pays C by direct deposit as it includes other items (revenue earned & travel expenses at cost). So I'm not sure what to do with steps 5-8.

If I follow Phillips suggestion of creating an (?adjusting?) entry (without receipts) as a meals expense (arriving at step 8) to have the 50% adjustment done at year end, where does the other side of the entry go in my bookeeping software? e.g. draw on petty cash, owners drawings, owners equity.

Following Phillips $10 meals expense example, I would enter the following into my accounting software.
$8.85 Meals Expense
$1.15 HST paid (Input Tax Credit)
$10.00 goes where to balance the entry?
[OP]
Newbie
User avatar
Oct 30, 2017
66 posts
17 upvotes
Ottawa, Ontario
ROYinTO wrote:
Nov 22nd, 2018 11:32 am
Thanks @PhilipK796978


Changes are bolded (with the $ value to match Philips example). I've also numbered the steps.




I sort of get what both of you are saying. Forgetting the actual receipts makes sense if that would be OK with the CRA. That simplifies the calculations for the HST (by passing thru)
The problem is that (P) does not get a pay cheque to pay the allowance. G pays C by direct deposit as it includes other items (revenue earned & travel expenses at cost). So I'm not sure what to do with steps 5-8.

If I follow Phillips suggestion of creating an (?adjusting?) entry (without receipts) as a meals expense (arriving at step 8) to have the 50% adjustment done at year end, where does the other side of the entry go in my bookeeping software? e.g. draw on petty cash, owners drawings, owners equity.

Following Phillips $10 meals expense example, I would enter the following into my accounting software.
$8.85 Meals Expense
$1.15 HST paid (Input Tax Credit)
$10.00 goes where to balance the entry?
the 50% has nothing to do with the accounting record, it is only for tax deductible only. therefore, your accounting should still have 100% of the full meals amount and when filing your T2, in schedule 1, you add back 1/2 of the amount.
thank you very much
Philip Kwok, CPA, CGA
Deal Addict
User avatar
Feb 14, 2009
1188 posts
441 upvotes
ROYinTO wrote:
Nov 22nd, 2018 11:32 am
Thanks @PhilipK796978


Changes are bolded (with the $ value to match Philips example). I've also numbered the steps.


I sort of get what both of you are saying. Forgetting the actual receipts makes sense if that would be OK with the CRA. That simplifies the calculations for the HST (by passing thru)
The problem is that (P) does not get a pay cheque to pay the allowance. G pays C by direct deposit as it includes other items (revenue earned & travel expenses at cost). So I'm not sure what to do with steps 5-8.

If I follow Phillips suggestion of creating an (?adjusting?) entry (without receipts) as a meals expense (arriving at step 8) to have the 50% adjustment done at year end, where does the other side of the entry go in my bookeeping software? e.g. draw on petty cash, owners drawings, owners equity.

Following Phillips $10 meals expense example, I would enter the following into my accounting software.
$8.85 Meals Expense
$1.15 HST paid (Input Tax Credit)
$10.00 goes where to balance the entry?
My schemas above are valid for (C) been incorporated business.
There are two distinct schemas:
Schema-1: (G) pays to (C) then (C) pays (P)
Schema-2: (G) pays to (P), account of (C) is used as pass-thru channel.
In both cases nobody pays extra.

Now, if (C) is sole-proprietor non-incorporated business, possibly both schemas can be implemented.

Question-1: Can non-incorporated business pay the its own owner non-taxable benefit?
If Yes, then Schema-1 works as described.

Schema-2 also can work. Meal amount that physically goes from (G) to (C)
has to be re-classified not as income but as pass-thru amount.
For example:

Bank deposit: 7K (de-facto 5K invoice for service, 1K for tax on invoice and 1K for trip-transport-meal-hotel expense report)
(C) income account : 5K
(C) tax account: 1K
Pass-Thru account : 1K -- this amount later has to be cleared by check from (C) to (P) or by bank transfer to (P) personal account.

Note: there is no "corporate meal expenses" here at all.
These money are tax-free personal meal allowance.
If you treat these amount as "income" and "corporate meal expenses" --
then you pay income tax on at least half of this amount.

In short:
you keep money on (C) level -- you pay extra tax.
you pass money to (P) -- you pay nothing extra.

Again, I am not an accountant so any corrections or confirmation
from professionals are welcome.

Cheers!
Deal Addict
Dec 12, 2009
2798 posts
928 upvotes
Toronto
PhilipK796978 wrote:
Nov 22nd, 2018 12:15 pm
the 50% has nothing to do with the accounting record, it is only for tax deductible only. therefore, your accounting should still have 100% of the full meals amount and when filing your T2, in schedule 1, you add back 1/2 of the amount.
I understand that Phillip.

In a double entry system. If I debit 100% of the meals expense, where should I put the corresponding credit? Do I credit petty cash and put it in my pocket?
Deal Addict
Dec 12, 2009
2798 posts
928 upvotes
Toronto
tequilla wrote:
Nov 22nd, 2018 12:59 pm

Schema-1: (G) pays to (C) then (C) pays (P)
...
If you treat these amount as "income" and "corporate meal expenses" --
then you pay income tax on at least half of this amount.
I believe that is what Phillip is suggesting. I'm OK with paying income tax on 1/2 the amount. I am a fairly frugal eater, with all meals included, I'd be money in pocket - post income tax.
I just want to know the right way to enter the transaction [(C) pays (P)] into my books.
<as a sole proprietor "Petty Cash" is essentially my wallet with a corresponding line in my financial records> ;-)
Deal Addict
User avatar
Feb 14, 2009
1188 posts
441 upvotes
ROYinTO wrote:
Nov 22nd, 2018 1:24 pm
I believe that is what Phillip is suggesting. I'm OK with paying income tax on 1/2 the amount. I am a fairly frugal eater, with all meals included, I'd be money in pocket - post income tax.
I just want to know the right way to enter the transaction [(C) pays (P)] into my books.
<as a sole proprietor "Petty Cash" is essentially my wallet with a corresponding line in my financial records> ;-)
In Schema-1 (C) pays (P) means Corporation pays Person full amount of meal expense report
as "non-taxable meal allowance". In such case (C) deducts 100% of this amount and no extra tax.

If you want pay extra tax (why?) and classify this amount as "corporate meal expenses" then yes,
you add this amount to owner account. In my books I have even several sub-accounts for corporation-owner transactions:
For example:
"corporate expenses from personal account" -- here would be corporate meals paid by personal cash/personal CC
"personal expenses from corporation card" -- sometimes accidentally or by acute necessity I
use corporate card for personal needs.
"owner draw" sub-account is also here.

Cheers!
[OP]
Newbie
User avatar
Oct 30, 2017
66 posts
17 upvotes
Ottawa, Ontario
ROYinTO wrote:
Nov 22nd, 2018 1:24 pm
I believe that is what Phillip is suggesting. I'm OK with paying income tax on 1/2 the amount. I am a fairly frugal eater, with all meals included, I'd be money in pocket - post income tax.
I just want to know the right way to enter the transaction [(C) pays (P)] into my books.
<as a sole proprietor "Petty Cash" is essentially my wallet with a corresponding line in my financial records> ;-)
you credit entry should be whatever the funds is from, bank if you pay by your bank card, paid by personal funds, you credit the personal account
thank you very much
Philip Kwok, CPA, CGA
Deal Addict
Dec 12, 2009
2798 posts
928 upvotes
Toronto
Thanks guys!
tequilla wrote:
Nov 22nd, 2018 2:04 pm
If you want pay extra tax (why?) and classify this amount as "corporate meal expenses" then yes,
If you are not an expensive eater, the numbers come out pretty close. I did a quick calculation using a breakfast receipt. A coffee + snack was $5.80 pre HST. Meal allowance (breakfast) is $19.45 or $17.21 pre HST.
1/2 of $17.21 = $8.61 @ a 30% income tax rate or $2.58 totaling $11.19.
$17.21 - $5.80 = 11.41
If my math is right, I'm $0.22 in pocket for breakfast after income tax. Average it out over 3 meals and it works out to pretty much even.
Deal Addict
User avatar
Feb 14, 2009
1188 posts
441 upvotes
ROYinTO wrote:
Nov 22nd, 2018 2:37 pm
Thanks guys!


If you are not an expensive eater, the numbers come out pretty close. I did a quick calculation using a breakfast receipt. A coffee + snack was $5.80 pre HST. Meal allowance (breakfast) is $19.45 or $17.21 pre HST.
1/2 of $17.21 = $8.61 @ a 30% income tax rate or $2.58 totaling $11.19.
$17.21 - $5.80 = 11.41
If my math is right, I'm $0.22 in pocket for breakfast after income tax. Average it out over 3 meals and it works out to pretty much even.
You formulas are not clear -- what is 17.21? did you received this amount from (G)?

My math is simple: if you received X$ from (G) then
(1) pass X$ to (P) as "meal allowance" and pay no more tax at all
(2) classify X$ as "meal expenses" and pay extra X*1/2*tax_rate

For example if you spend 1000$ on meal, received 1000$ from (G)
and pass it to (P) as "meal allowance" -- you , de-facto, spend zero..

With "meal expenses" scenario you pay 150$ taxes. (1000*0.5*0.30)

Cheers!
Deal Addict
Dec 12, 2009
2798 posts
928 upvotes
Toronto
tequilla wrote:
Nov 22nd, 2018 3:01 pm
You formulas are not clear -- what is 17.21? did you received this amount from (G)?
$17.21 is the pre HST breakfast allowance
17.21 * 13% HST = $2.24
$17.21 + $2.24 = $19.45 or the total breakfast allowance which is received from (G)
$2.24 gets allocated to the HST payable account which is offset by the HST paid on the corresponding Meals Expense
Deal Addict
User avatar
Feb 14, 2009
1188 posts
441 upvotes
ROYinTO wrote:
Nov 22nd, 2018 3:37 pm
$17.21 is the pre HST breakfast allowance
17.21 * 13% HST = $2.24
$17.21 + $2.24 = $19.45 or the total breakfast allowance which is received from (G)
$2.24 gets allocated to the HST payable account which is offset by the HST paid on the corresponding Meals Expense
OK, I see your point.
In your "meal expenses" scenario you have extra 13% HST on top of 17.21 and keep it.
In the same time you have to pay extra approximate income 15% tax (X*0.5*0.3).
In my scenario there is no extra HST and no extra income tax.

Note-1: In formula, marginal income tax must be use. Marginal tax surpass 30% very quickly.

Note-2: I use "quick method". It allows to pocket some portion of 13% HST (or 15% QST/GST)
without deduction and in the same time avoid income tax with "meal allowance tax-free benefit"

Thus, with "quick method" and with high marginal tax my schema looks better,
otherwise your schema has approximately the same results.

Cheers!
Deal Addict
Dec 12, 2009
2798 posts
928 upvotes
Toronto
Thanks @tequilla
tequilla wrote:
Nov 22nd, 2018 6:07 pm
Thus, with "quick method" and with high marginal tax my schema looks better,
otherwise your schema has approximately the same results.
I got a chuckle out of that. If I was in a high marginal tax bracket, I'd be paying someone to do my books.

With the exception of this 5 day a year contract, the majority of what I do is zero rated. My supplies range from zero rated HST up to the full HST. I'm not sure I could use the quick method. I like doing things that would hold up to an audit.
Newbie
Nov 21, 2018
2 posts
I had a quick question. If I sell software online into the United States -- and under the new 2018 Supreme Court ruling I have to collect sales taxes for the various states -- can I write off that sales tax as an expense / can I lower the amount of income my software is sold for?
As in if I sell something for 100, now pay 10 in sales tax to Washington state, is my income from CRA's perspective 90 dollars or the full 100?

Top