This seminar is for every CGA member or student who has friends, relatives or neighbors, and of course, everyone is self-employed and looking for help with their record keeping and taxes. Who hasn’t been asked to help with record keeping to prepare personal tax schedule T2125 for individuals or partnerships with self-employed or professional earnings?
We will examine the case of Mary Smith, CGA, formerly chief budget officer for her municipality. Mary has been approached by several neighbors who are self-employed. They have asked her if she will do their bookkeeping and ‘simple’ tax returns.
Mary is excited. This is a perfect way to supplement to her pension income. Mary was worried she wouldn’t be able to afford to keep her house now that she’s on a fixed income, even though she did receive a generous early retirement package.
What could possibly go wrong?
Mary decides to start with three files in her first month, just to get her feet wet. How hard can this be?
Neighbour #1 - Sally is a "Business Coach". She has a home office set up in a corner of her basement by the back door. That's where she meets clients, when she's not meeting them at the local coffee shop. Her business seems to be part time, weekends, nights, when she finds the odd client. She's always looking for exchanges, to barter for services in return for her coaching. Her house is looking really smart, a new paint job, new roof and gutters, new doors and windows, driveway, gardening design. She seems to be good at getting what she wants from her clients. Last year she did her own tax return, estimating her sales at $10,000 and filling in the expenses blanks on the T2125, but she can't find any of her documentation for how she arrived at those numbers. She wants to do a better job and is a little worried about the letter she just received from CRA informing her she's going to be audited soon.
Mary discovers that Sally has investment accounts, with several brokers, and she's given them carte blanche to trade on her behalf. From what she can see, one of the accounts has been completely drained by excessive trading. The other, she's not sure is still active. Sally says it's none of Mary's business, and that she is only asking her to help with the business, not with her personal finances.
Mary also discovers that Sally's mother, who lives with her, has a notice of re-assessment for not claiming all of her RIF income on the last three years' tax returns. There's this 20% of income not reported penalty that Sally wants Mary to get rid of.
How do her records look?
Sally's records aren't very complete. When Mary attempts to sort out sales, purchases, deposits, payments, banking records, nothing adds up and there are gaps. Invoices appear to be statements of account; deposits don't equal paperwork. Deposit slips don't agree with what was deposited to the bank on those dates, and Sally only has some of her banking records. She can't find all her monthly statements for her accounts.
Neighbour #2 - Bob & Sue have a gardening design business. They create beautiful gardens, pathways, waterfalls. Their home office is beautiful. They seem to work full time, every day, and even on weekends their rig and trailer are out on jobs. Mary sees Bob out working when she's walking on Sunday's with her walk group.
It seems their clients are mostly homeowners. Mary discovers it's largely a cash business as everyone wants a cash deal because they don't want to pay HST. Bob tells Sue to pay the HST out of the total sale. Sue wants to keep the records using QuickBooks. She gets Mary to help her set up a data file and enters purchases, sales and deposits to clear receivables, and payments to clear purchases, but Sue is resisting recording all of their banking information in the books, so the bank is just a clearing account for what are supposed to be business transactions. There's no way to reconcile to the money.
How do their records look?
Records were being kept manually, but have now been put into QuickBooks. Only sales and expenses, no reconciliation to the bank. Mary discovers no matches are made between customer sales and cost of sales. She can't understand why Sue isn't willing to put jobs on to the purchase documents, even though the supply companies have the delivery address on the purchase documents. She's sure it would help them to determine which jobs are profitable and which aren't so they could manage their business to make more.
Then Mary discovers why. Bob & Sue are not recording all revenue. She looks for the address of the job that Bob did on a Sunday. The cost is there, but there's no invoice to that customer on the records. Mary confronts Bob and Sue and Bob blurts out that they don't record Sunday jobs. In fact, they don't record Friday, Saturday or Sunday jobs, at least the revenue, because then they'd have to pay too much tax.
Neighbour #3 Fred & Jane own shares in their construction repair corporation. The corporation does house repairs, they have been in the community for 35 years, and know everyone. Mary quickly figures out the Corporation hasn't filed tax returns since incorporation, six years ago. What's troubling Mary is that the vehicles they own, all five of them, are all owned by the corporation, even the ones that the kids and Jane drive. Mary's sure that those vehicles are never used for work.
Fred handles preparing the family T1's including a Schedule T2125 for self-employed income, one number for income only, no expenses, based on how much he thinks he was paid last year and how much he paid Jane by way of a cheque each month for $2,000 to cover house expenses. He pays tax based on that amount. The reason they are coming to see Mary is that Jane opened Fred's mail and found a demand to pay a 1% per month penalty on RSP overcontributions because Fred, over a year ago, put $30,000 of extra cash into an RSP when he didn't have that much limit.
They have an office in a local strip mall. Fred works the business full time, Jane is a nurse, and really doesn't get involved but Fred says she works for him, and Jane says she doesn't. Fred puts $30,000 on each of their T2125's and Jane rolls her eyes when he says he does that. Jane insists she has nothing to do with it.
It's mostly a cash business, sometimes deposits are cash, directly into personal accounts, or they use cash to pay the Visa. Everyone in the family, Jane, their three kids all seem to pay for everything with cash. Lots of toys, sporting events, major shopping at Costco every week. House is nicely renovated, thinking about selling and renovating again.
Fred hires other local repair people. He pays everyone cash and they could be immigrants, but Fred makes no attempt to document working visa/SIN # or business licence, some time sheets, no invoices for cash payments. He says that's not his business to ask, he's just helping them feed their families. Fred's company isn't registered for Payroll, WCB either.
How do the records look?
Fred says Jane does the books (not really) all she does is sort out the paper he brings home into piles and has started a Simply Accounting file, but after the first month, when the bank didn't balance, she quit using it. She does produce invoices for Fred, on occasion, and they look really nice, as she's using Word. She sometimes prints a copy for Fred, but says it's too expensive to print an extra copy, and laughs saying they are a paperless office. Jane's ability to grasp how Windows Folders work, and where to save her work is not happening. Fred keeps business purchases and vehicle expenses in a binder by the day in plastic sleeves, stapled together in the middle of the pile. Deposits are handwritten in tiny print, often don't add to what the bank says was deposited, and none of the deposits agree with the copies of invoices that Mary does find, names, amounts, dates, nothing is matching.
Today, Jane says she's leaving Fred and wants Mary to get the books fixed up so she can sue him for child support and spousal support. She wants to keep the house and kick Fred out. She's tired of the way things are, and worried about the questions Mary is asking. She wants to know if she could be implicated in what Fred's doing and how to protect herself. She says that Fred's friend who is an accountant that he golfs with prepared their tax returns, and Fred just puts the last page in front of her and says sign here, and I'll pay what you owe. Except that this year, Fred didn't pay it, and he keeps saying he will and he hasn't. She says she owes CRA about $10,000 for last year and she's not doing much nursing any more, as she'd like to retire.
Over the next week, click here to learn what Mary learns as she struggles to support her neighbours.
Will Mary be able to help? Where can Mary turn for help?
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