VISUAL NEWSLETTER – JUN 2003           


 

AVOIDING TAX AUDIT PROBLEMS

 

There are a number of areas where accounting users can make mistakes resulting in Tax Audit Assessments against your company. We will describe these briefly and discuss ways to avoid tax assessments.

 

The main Canadian taxes that can cause tax assessments in Canada are the following:

 

1) Canada / Quebec Pension Plan

 

2) Employment Insurance Deductions

 

3) Federal G.S.T. Collections

 

4) Provincial P.S.T. / Q.S.T. Collections

 

If these mistakes are not caught early, they can result in the company paying far more than necessary for the mistake later on.

 

The first two items occur in Payroll and whether you do it yourself or have an outside service calculate and submit payments, the company is ultimately responsible for any shortcomings. To avoid this, it is important for Payroll users to understand the nature of each deduction.

 

Canada & Quebec Pension plan deductions are calculated by taking this weeks pay, multiplying it times the number of pays per year and subtracting the annual exemption amount ($3500.00). The remaining amount is taxed at the current rate (4.95%) and divided by the number of pays per year to compute the amount deducted for this pay.

 

One common area where this goes off the track is vacation pay and or bonuses. These are usually additional pays over and above the basic 52 weekly pays and as such the annual exemption should not be applied unless the individual is actually taking the vacation time off otherwise problems arise.

 

This happens because the $3500.00 is subdivided too many times and is inflated to $3600 or more resulting in a tax assessment to the company. You can partially avoid this by selecting “Full C.P.P. on Vacation = Y” on the calculation screen.

 

The other area where C.P.P. and E.I can go out of balance is the issuing of manual cheques. In this case the computer makes no calculations and takes the amounts entered by the user to be correct. Again a tax assessment is a possibility. Since C.P.P. also kicks in only when an individual reaches 18 years of age, mistakes in the birth date can also cause problems.

 

Both of these taxes should be reconciled frequently by running the Tax Reconciliation Report. Keep in mind that C.P.P. figures use the Weeks Worked figure from Employee Maintenance screen 1 to calculate the annual exemption. If this number is incorrect the report will be incorrect as well.

 

G.S.T./H.S.T. & P.S.T./Q.S.T usually go out of sync because of three main problems:

 

1)    The customer tax code is wrong

2)    The product tax code is wrong

3)    The order entry tax code was changed to non-taxable

 

Either of these problems will cause the taxes on an invoice to compute incorrectly possibly resulting in a tax assessment. If this is not caught in a timely manner, the company can end up paying taxes for customers who have gone out of business. It is difficult to collect back taxes on old invoices in either case so monthly reconciliation is recommended.

 

Running the A/R & A/P Tax Reconciliation Reports from Visual Accounting Features can help avoid costly assessments.