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
1)
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.