Thank you for the overwhelming feedback for my last week’s blog post about my dad.
I am extremely grateful to be able to share such an inspiring life story. I consider myself as a gritty person because I have the best examples in my life to learn from.
I wouldn’t have been in Canada writing about tax without my dad’s vision and financial support.
Having said that, it’s often difficult for me to write and talk about my dad. For the most part, he’s a missing figure in my life.
Angela Duckworth’s book “Grit” talks about how being gritty can sometimes isolate us from the rest of the world.
Achieving great success takes time. Sometimes, it means taking away time from your family.
When I went to the equivalent of Grade 7 class in Hong Kong, I started taking the bus on my mom. I was required to buy my own lunch.
My dad would give me a weekly allowance and a monthly allowance. He’s always very generous with the amount he’s given me.
There was always “red pocket” money from dad on various occasions. He didn’t have time for presents or presence.
I don’t remember how I spent the extra money, but I certainly wish that there was more fun time spent with him.
Erwin and I rarely fight. When we fight, it is often over how little time we allocate to spend with our kids. We are fortunate, for the most part, that we can spend time whenever we want, creating memories.
Presence is more important than money and presents. ?
So, I am going to dedicate my next few blog posts to share some business tips with all contractor clients, successful contractors , contractor wanna-be, and anyone that wants to start a business. I hope I can answer the questions you have, free up some of your time, so you and I can both spend some quality time with our families creating memories.
My dad is a contractor. He works with government and large charitable organizations. Their procedures are tight and specific. Progress billings are only allowed when pre-set milestones are achieved.
It’s also common in Canada that contractors ask for money up front, some amount of progress billing, final payment and a holdback. Holdback on my dad’s projects sometimes may not be released until a year or two years after completion of the project.
What is the tax implication of these money transfer from a contractor’s perspective?
Deposits before work starts
Upfront deposits are often required from the customers to purchase materials and secure subcontractors to work on the project.
For the most part, the upfront deposits are required to be reported as income.
If you collect upfront deposit just before year-end and no materials are purchased before year-end, CRA does allow you to take a reserve (meaning a deduction) against the deposit upfront. In effect, you are not required to report the deposit you collect as income.
The only proof you need to provide, in case if you ever get asked, is that the materials are purchased subsequent to year-end, and there’s a direct trace between this deposit and the materials.
Usually, progress billing is considered income as it is billed.
HST charged on the progress billing is also considered payable when the invoice is issued.
Sometimes, due to a filing requirement, you may have issued an invoice before your year-end and money would not be receivable for a month or two, this can cause cash flow problems to some business. Having a correctly laid-out invoice template can make this information clear to the client(s).
Cash flow is another topic that we will get into over the next few blog post, stay tuned.
When you bill the client for the final holdback, it is required to be included in your income at the later of
- the architect or engineer issues the final certificate of job completion, and
- the day of expiration of the contractor lien period
Contractors are allowed in Canada to put a lien against a property if they are unable to collect. CRA is using that lien expiration date to decide when you need to report the holdback income.
Sometimes, you may not receive the holdback for a year or two, as in the case of my dad’s business. He would receive his final holdback in a year or so.
HST on holdback would also be payable when the amount is become receivable based on the criteria above. This may mean that you are paying the government in advance BEFORE you collect from your customers. Yep, it sucks.
What if my jobs are small enough and there’s no process billing?
Chances are, you would still charge your client a deposit to fund the upfront material purchased. The paragraph relating to deposits above is still applicable if you charge an upfront deposit.
If you are able to fund the project yourself, trust the customers, and only bill at the end of the job, income is taxable when you issue the invoice.
HST is charged together with the invoice and become payable at your HST filing deadline.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant