Running a business and maintaining your financial accounts on a regular basis can be a difficult task. Doing your own accounting has its own pros and cons. With too many responsibilities in your hands, mistakes are bound to happen. Such mistakes create a problem for you during an annual audit. Here is an audit preparation checklist you should keep in mind when there’s an audit for your small business accounting Edmonton.
Update Your Books Daily
You do not want to sit down to tally all your accounts before the visit of an auditor. In any business, monetary transactions happen on a daily basis. Make sure to keep a record of the same in your books of account on a regular basis. If you keep this for later, you might end up forgetting some transactions. Also, make sure your balance sheet and trial balance are tallied as that is the first thing an auditor will ask for.
Check for Compliances
Before an auditor comes and has a look at your books of account, make sure you are following proper compliances. Identify your company under which legal statutory compliance it falls and ensures that you follow them duly. This will make it easier for the auditor to check your accounts and there will be less scope of any incorrect rates applied to your business transactions.
Organize Your Receipts
When an auditor checks your books of account, they may ask for receipts of incomes and expenses to cross-check the entries. Make sure you have an organized folder in which all your receipts are arranged chronologically for the auditor to go through. If you have a software system to track your receipts, make it easily accessible to the auditor.
Be Ready to Answer All Questions
There are certain questions that an auditor will ask. When going through your books of account, the auditor may look at some significant changes that have taken place compared to previous year’s data and may ask you questions regarding the same. The other question may be if all the entries are accurate and if these entries have tangible proofs such as receipts. Next, he might ask about your tax compliance. Be ready with all the answers to such questions.
Perform Regular Reconciliations
A reconciliation of an account refers to documenting that the account balance is correct. It makes use of two sets of entries to ensure that the figure tallies. Basically, it justifies that money removed from the account matches the amount that has been spent. Do not wait for the end of the year to reconcile your accounts. Try to do it at least on a monthly basis as it gives you a better understanding of the items to be reconciled
With so many things to keep in mind, it is common for people to miss out on a thing or two. To avoid this, you could take professional help to conduct an internal financial statement audit to avoid discrepancies. Having an internal audit conducted makes your books of account ready for the final audit. Take professional help wherever necessary. To get assistance in maintaining your books of accounts, reach out to the small business accounting Edmonton professionals.
Planning and preparing for tax payment well in advance can help you save both time and money. But, if you haven’t started preparing for the tax season, don’t fret. Experts from the top Edmonton accounting firms suggest the following tax saving tips for business owners.
1) Maintain Books of Account
Hire an accountant to maintain all your transactions in the accounting format. Maintaining books of account or bookkeeping can help you in keeping a track of all the income from different sources and the expenses of your organization. It will also help you to see where you can save taxes and claim returns wherever possible.
2) Keep Personal and Business Finances Separate
A common mistake that business owners often make is mixing their personal and business finances. It’s important to have a separate bank account for your business. Separating business financial statements from personal finances help in getting things organized during filing taxes. Mixing both these finances and their accounts can only create confusion and affect the tax filing procedure.
3) Deduct Home Office Expenses
If you don’t have a proper office space and work from home, you can still save on taxes. As you consume and use parts of your home resources, you can deduct expenses like your mortgage interest, insurance, and utilities and reduce the amount of tax to be paid. Talk to a tax consultancy firm to understand how the deduction amounts can be calculated.
4) Deduct the Vehicle Expenses
Just like the resources you use at home, you can also deduct the vehicle charges to save tax. If you use your car for business purposes, you can claim it as an expense. Other expenses that include in your vehicle expenses are fuel, repairs, maintenance, and the insurance premiums.
5) Categorize Income Under Various Heads
Different interest rates are levied on incomes under different heads. The taxable rate for income under different heads may vary. Some income may be even exempted under certain heads. Therefore, categorize your incomes appropriately so that you don’t end up paying more tax.
As a business owner, there are several taxes that you may have to pay. For more tax saving tips, contact a tax consultancy firm. If you want to reduce your tax expense, then start planning for taxes right away. If you need any assistance in tax planning for your business in Edmonton, then get in touch with professional tax consultancy or top Edmonton accounting firms. The professional firm will not only guide you to plan for your taxes better but also assist you in timely filing your tax returns.
The estimation to determine whether a particular of expenditure or investment is worth funding for a significant amount is called capital budgeting. The large amount of money spent for these investments are called capital expenditures. These investments are mainly for acquiring fixed assets such as machinery, land and building, etc. For getting accurate results to determine whether the investment is worthwhile, the process of capital budgeting needs to be carried out effectively and efficiently. Here are a few objectives of capital budgeting.
The correct investment decision can yield spectacular returns. The effects of capital budgeting decision will have a long-term impact on your business. For example, a machinery may be bought initially for a huge expenditure which can affect the correct spending of the company. However, the returns from the investment will be obtained in the coming years. Thus, you need capital budgeting to help you take decisions which have a long-term implications on the firm. Hence, the future of the firm is determined by capital budgeting.
Large Amount of Funds
Making capital investment decisions require large amounts of funds. Companies cannot afford to make any wrong decisions especially, when huge sums of money are involved. Thoughtful, wise and correct investment decisions should be made, otherwise the company will incur losses.
Capital budgeting decisions cannot be reversed once they are taken. The reason for this can be that either these capital assets cannot be converted into usable assets or second hand capital goods have no value in the market. Hence, the only remedy is to dispose off such assets which will sustain heavy losses to the firm.
Most Difficult Decisions
Capital investments are the most important decisions that are to be made by the company. These decisions make or break a path for a profitable future. It is extremely difficult to estimate the costs which will be incurred in the future due to political, technological, and economical factors which affect the estimated benefits and costs.
Budgets are used by companies to determine their future growth and expansions. The capital budgeting decisions that are taken help you to plan for future business developments. Therefore, before you go ahead with executing your plans, you need to plan whether the project you undertake has a good return on your investment or not. The same is the case when you purchase an asset to enhance your output and scale your business operations. You need to determine the cost of machinery, the payback period, the net revenue you generate in subsequent years, etc. This is possible only when you use capital budgeting to plan for your company’s future activities.
Now that you know the objectives of capital budgeting for your business, you should use it for making any of your business decisions. For the growth of your company and increasing profits, you need to have capital budgeting. If you find it difficult to take any financial decisions, then get in touch with professionals who will help you out. Also, if you need help in managing your asset.
Operating a business comes at a cost. These costs include manufacturing, marketing, salary payment, administrative costs, and more. All such costs that organizations incur on a routine basis are termed as a business expense. Although every organization has its own set of expenses, there are some common business expenses that most firms pay. Efficient management of these business expenses helps in increasing profits and reducing your tax burden. Here is a list of some common business expense that must be anticipated and managed.
Every business operates from a tangible space. It may be a part of your home or space at a different location. Hence, costs related to the office space are a common business expense. You may have leased or rented the location, or it may be a mortgaged property. Hence, rent or lease and interest on the mortgage would count as some common expenses.
Utility and Administrative Expense
Apart from location costs, there are other general expenses that businesses incur in their day to day operations. These include utility costs like electricity and water, and administrative costs such as expenses for telephone and the internet, office supplies like pen, paper, and pins, and general property maintenance. If you are operating from home, these costs may vary in terms of the part of your home being used for business. However, these remain a part of common expenses irrespective of the type and size of business.
Payroll and Benefits
Employee salary and benefits make a huge portion of business expenses. Employees are paid as per the payroll system of the company. Additionally, there are certain taxes that you incur plus benefits that you pay to your employees which qualify as common business expenses.
Advertising and Marketing Expense
Advertising and marketing are vital for growth and success of your business. To increase sales and expand growth, businesses use various advertising mediums like television, newspapers, billboards, banners, and digital media. Additionally, having a website has become a necessity today. Website maintenance, advertising, and marketing costs are an important business expense.
Although taxes depend on the type and size of the business, they make a vital part of your expenses. Income tax, self-employment taxes, workers compensation tax, and other business taxes are all vital expenses to be taken note of. However, the tax burden can be reduced by identifying deductions and credits. Consulting a tax professional will help in efficient tax management.
Businesses aim to earn profits. Giving a substantial amount of consideration to managing business expense will assist you in increasing profits. Moreover, most of these expenses are eligible for deductions to reduce your tax liability. Consult an accounting and taxation expert for the best ways to handle these expenses.
How you would pay yourself as a small business owner is a question that requires contemplation. You can pay yourself a salary, or can receive dividends, or a combination of both. However, the decision on salary vs dividend is influenced by a variety of factors such as personal and corporate tax structure. Considering this, each way of paying yourself comes with pros and cons. Moreover, in almost all cases there is a discrepancy of a percentage or two that can work in your favor or against you, and this potentially influences your decision on how to compensate yourself. To provide you with clarity on the subject here is a comparison of paying yourself in salary vs dividend.
Compensating yourself in Salary
As mentioned above you can compensate yourself with a salary as well as with a dividend. If you choose to pay yourself salary, you can reap certain benefits but will also have to bear the disadvantages that come with it.
By compensating yourself in salary, you ensure a personal income. With a personal income, you will be able to contribute toward the Registered Retirement Savings Plan (RRSP) and Canada Pension Plan (CPP). As your CPP is based on how much and how long you contribute, paying yourself in salary will help you consider this important retirement plan. Regarding tax benefits, the salary or bonus you pay yourself will be a tax deduction for your small corporation. Additionally, you can implement income splitting by paying salary to related employees such as a spouse or children and avail of income tax benefits.
Having a personal income may also turn out to be a drawback. Unlike dividends, which are taxed at a lower rate, salary is a hundred percent taxable. This might increase your tax load. If your business profits vary every year, paying yourself with a salary can result in taxation issues, as you will not be able to carry forward business loss. With regards to CPP you will have to contribute toward it as an employer as well as an employee. Furthermore, it will also require you to set up a payroll account with the Canada Revenue Agency.
Compensating yourself in Dividends
Many business owners choose to compensate themselves via dividends. Paying yourself in dividend comes with the following advantages and disadvantages.
Dividends are taxed at a lower rate than salary hence you save yourself from the load of personal tax. Additionally, when paying yourself in dividend, you will not have to pay toward CPP, which will save you money. Unlike salary, paying yourself in dividend is much simpler. You write a check to yourself from the company, update your minutes books, and prepare a director’s resolution for dividends paid.
Apart from the benefits you reap, there are certain disadvantages. Compensating yourself in dividend does not allow you to contribute toward retirement benefits like RRSP and CPP. Dividends can also disallow you from enjoying the benefits of personal income tax deductions.
Whether you pay yourself in salary or dividend is completely dependent on the type of business, and your personal financial circumstances. A detailed understanding of types of corporations and related tax structure, as well as your personal financial management, will help you make the best decision. Guidance of a financial and tax consultant is recommended to help you choose the best from salary vs dividend.
Business insurance is a critical part of running a successful business as it protects your business from risks. Business insurance policies change year after year, which is why it is important to review your existing insurance policy before you renew it. Renewing a business insurance policy that does not safeguard your business from risks is pointless and is a waste of your hard-earned money. That is why we have compiled a list of tips for you to consider before you renew your business insurance.
Obtain multiple quotes
Renewing or buying a business insurance without doing research and shopping around for the best deal is a mistake you do not want to make. Reach out to multiple business insurance agencies and obtain their policy quotes and benefits brochures. This will help you to make an informed decision before renewing your existing policy. Even if you have no complaints with your current business insurance plan, it doesn’t hurt to look around in the market for a better one.
Check coverage clauses for property
Whether you run your business out of a leased property or from your own property, business insurance costs should include coverage for your property. Some business insurance plans do not have coverage listed for vacant buildings and leased property. Check the coverage provided for property under the plan you are looking at before you renew your business insurance.
Review your business’ insurance needs regularly
You need to do a thorough valuation of your business which includes calculation of the net worth of your business and equipment and also your liabilities. With the growth of your business, the business insurance needs of your company might defer. Inventory growth, the size of assets and liabilities may change and may require a different business insurance coverage. Be sure to review your insurance needs periodically and weigh them against the growth of your company.
Get your data insured
What good is your insurance plan if the business insurance costs don’t provide coverage for data? Data breaches and thefts are a huge business risk and having business insurance for electronic and cyber data is imperative. Check with your business insurance provider for adequate coverage of electronic data and security breaches before renewing that insurance plan.
Determine replacement value of equipment
This is an important business insurance tip to consider. Be sure to check the market value of office equipment and machinery to determine the insurance limits. Insurance companies roughly estimate the value of equipment as $10,000 per employee and that is the book value of the coverage that you will receive in case of an accident. Checking the market cost of all your equipment will allow you to understand the business insurance costs that you are eligible for and how much you will need to pay in case of a difference between book value versus replacement value.
These are the important business insurance tips that you need to remember before you renew your business insurance. Contact a reputed business accounting firm for accurate business valuation and asset and liabilities calculations before you choose a new business insurance plan.
Business plans serve multiple functions such as setting a benchmark for growth, attracting investors and acquiring funding from investors. Creating the ideal business plan for investors can help you with fundraising more than any other endeavors. It is essential to learn the art of creating a business plan to attract investors. Often, before you even give your passionate pitch, investors will first want to take a look at your business plan. Here are some pointers on how to create the most effective business plan for investors.
What can a business plan showcase?A business plan can help highlight key factors which are essential in your quest to acquire funding from investors. A detailed business plan helps the investor visualize the progress of the company and cements the idea that a lot of thought has been gone into the business venture. It also allows investors to hold the entrepreneur accountable for growth by taking into account a set of financial benchmarks to compare with.
How to create a business plan for investors?Now that you know what a business plan can do to help you acquire funding from investors, here’s a step-by-step guide to crafting a business plan to attract investors.
Your entire business plan should read like a marketing brochure, loaded with enthusiasm and positivity. Your investors should feel compelled to be excited for the business venture after reading your business plan. Include your vision, mission and a set of goals that you have set for the company.
Investors will back only those business ventures that have high growth potential. They are looking to double their investment in short time spans of 4-5 years. Knowing your market is imperative to assess the growth potential of your business venture.
The worst mistake that you can make while drafting a business plan is assuming that investors understand the technical jargon associated with your business product. Explain your business idea or product in the simplest terms possible, so that a reader from any background can easily understand what it is.
If your business has to succeed, your product needs to sell. Investors need to see if your product will gain traction with consumers. You need to clearly demonstrate the specific product need in the market that your product will fulfill.
Investors appreciate entrepreneurs who understand risk management and account for them in the business plan for investors. You need to have a section in your business plan which states major risks associated with your business and your plan of action for tackling them. This shows the investor that you are prepared to handle any operating risks that may arise and that their money is safe with you. Such a business plan will help you acquire funding from investors easily.
These are the steps involved in drafting a business plan to attract investors. Follow it religiously to create an effective business plan for investors and your business plan will serve you well. Speak to an adept accounting service in Canada to help you with the financial aspects of planning your business.
Every entrepreneur should know what their business is worth and business valuation is the most effective way to determine how much your business is worth. Accounting services in Edmonton will conduct a business valuation for you if you are looking to sell your business or merge your company. Here are three most commonly used methods to do a business valuation for your business.
The simplest way to calculate the value of your business is by counting the value of your hard assets. This is the resale value of your equipment, machinery, and other devices. However, this generally gives the lowest value of a company as the real value of your company is significantly higher due to other factors such as market value, liabilities such as debt etc. The difference between the market value of your company, or good will as accounting services generally refer to them as, and the liabilities will give the exact value of the company. Therefore, this method is not the most accurate method for business valuation of a company.
Discounted Cash Flow
This method takes into consideration the cash flow of your company by calculating the projected stream of profits that the company makes in the future. The steadier the cash flows of your business, the higher number of future returns they will be able to add up to. This also helps to calculate how much your business will be worth in the future. Once a buyer has an estimate of how much profit your business will make in the future, they can add a discount rate to calculate the actual worth of your company. This discount rate depends on the future worth of the company, the time value of money, the level of risk the investment is, and the cost of capital. The accuracy of this method relies on two key factors: how much profit your business is expected to make in the future and how precise those estimates are.
Accounting services in Edmonton utilize either of these business valuation methods and not both of them together. Assets are considered as a subset of profit generation if the discounted cash flow method is used and are not included separately.
Another common business valuation technique is to see the value of similar companies that have been sold recently or if their value is publicly listed. Companies in the same industry should be compared with another keeping in mind the difference in the value of a fortune 500 company and a small business. Annual industry conferences can shed some light on the value of companies in your industry and help you with your business valuation.
Accounting services in Edmonton use these basic valuation techniques to determine the worth of your business. Knowing the difference between them will help you understand the business valuation process better.
A family-run business is built on value and trust. It becomes a strong foundation within a community. Family-run businesses usually pass the ownership to the next kin. If you run a business and you decide that it’s time to hand over the reins to your next of kin, you could be wondering what’s the best way to do that.
One of the options to transfer business ownership to next of kin, current management or even a friend is through an estate freeze. If you want to get estate freeze right, it is best to hire an accountant.
What is an Estate Freeze?
An estate freeze is quite possibly the most tax efficient manner to transfer the ownership. You transfer ownership without making a sale. After transferring ownership, you continue to receive shares worth the current value of your business and defer the income taxes on the capital gain to the time of the actual disposition.
In a usual estate freeze, you exchange your business shares for preferred shares. Preferred shares have a permanent or frozen value, which is equal to common shares’ fair market value at the time of the estate freeze. Basically, preferred shares ensure that you receive a fix dividend with a high priority than common share dividends.
Furthermore, the new owner can subscribe new common shares and sell them to raise capital for the business. Upon your death, the preferred shares will go back to the business.
If you have an incorporated business worth $3,000,000 that undergoes an estate freeze, you will be issued preferred shares worth $3,000,000.
A key facet of an estate freeze is that the reduced tax liability is fixed in respect with your company’s shares.
Preferred shares serve as a source of retirement income
You have the option of creating a family trust to hold common shares. The family trust allocates dividends to family members with lower marginal tax rates.
An estate freeze may turn into a difficult option if children create a dispute to control the business
Divorce and separation can impact your estate freeze
How much control you maintain after an estate freeze depends on how much control you decide to relinquish to your successor. You can remain on and have voting rights or be present on an advisory capacity. It is entirely up to you.
Before you settle down for an estate freeze, it is crucial to discuss it with all the stakeholders. Resolve any succession disputes before you start the estate freeze process. Once your family is in agreement, you should hire an accountant to ensure that the estate freeze is implemented correctly. You will find ATS Accounting is quite adept at fulfilling yours and your business’s needs.
Incorporating, or turning your small business into a corporation simply means that the business is a corporate entity, separate from its owners. When you incorporate, your business removes the sole proprietorship or partnership ownership.
Incorporation is a big step, so here what you need to know.
Advantages of Incorporation
Disadvantages of Incorporation
So, should you incorporate your business?
The purpose of mentioning the pros and cons of incorporation was to generate a basic understanding of how your small business will be transformed. This has given you the information to make a decision. Incorporation is perfect when your vision of the business is to grow and develop on a large scale.
However, if you know that your business is not going to grow beyond what it is now, then incorporation is not right. Furthermore, if you are the sole employee, then incorporation is definitely not appropriate.
Each person’s situation is different. To get the best answer to this question, consult with ATS Accounting, where we will completely understand your business and business vision to give you the right answer.
There are many ways to earn money without doing any work. Which is the best way? Arguably, to own property and rent it out. It’s easy, the value of the property depends on where it is located, and the real estate market in Edmonton is booming. So, as a landlord, you are in a pretty good position.
And, one of the many things that you have to worry about is tax.
You have to ensure that you are your paying the tax right so you don’t incur any penalties or fines. Here are some tips to help you do just that.
1. Rental Income or Business
First of you have to decide whether your property rental qualifies as a business or not. According to Canada Revenue Agency (CRA), the more services you provide, the higher the chance you qualify as a business. It is considered not a business if you rent a space and provide the basic amenities like heat, light, parking, and laundry facilities.
As long as you are not providing the same number of services offered by a hotel, you should be fine.
2. The T776
T776 is the tax form you need to file for your rental income. It is a Statement of Real Estate Earnings Form. You can’t fill up a single form for all your properties, rather, you have to fill up one form for each property that you have on rent.
The net rental income is calculated by deducting rental expenses and your capital cost allowance (CCA) for the rental property from your gross rents.
3. Deductible Expenses
You can claim tax deductions on your property. Here’s a quick list of what all you can claim tax deductions on:
- Legal, accounting, and other professional fees
- Management and administration fees
- Maintenance and repairs
- Salaries, wages, and benefits
- Property taxes
- Car expenses
- Office and other expenses
It is also vital that you have documents, in the form of bills and receipts, as proof of these expenses.
4. The T2125
Don’t miss out on the T2125 form. It is a Statement of Business or Professional Activities Form that summarizes your property management income.
5. Miss Filing for Tax Deductions
The list of rental tax deductions is long so later on you may realize that you have missed something. So what can you do? Simple, you can file another return called T1 adjustment. You can consult an expert for the same, because filing T1 adjustment can be daunting as the filer must have all of the backup documents.
6. Record Keeping
You don’t run a business, but it is still advisable that you have a good record keeping system in place. Every piece of document that involves your rental property should be saved. You never know when it will come in use like an income tax audit.
Stick to these tips to ensure you get rental tax right. However, it is always best to consult with an accountant as each landlord’s situation is different.
Are you struggling to get some funding for your new venture? Don’t expect an angel investor to pop in and shell out the moolah just like that. That only happens to a small percentage of new businesses. Before you are able to catch the attention of venture capitalists, you just have to find a credit line on you own. One option is to shell out money from your own pocket while another, and a better one, is to take a loan.
Taking a bank loan is no easy task. A bank won’t just hand over money unless they think that your business idea will work. The bright side is they are your best chance of getting funds because they’re in the habit of giving out loans.
Here are 6 tips to get that bank loan for your business.
1. Make the Best Business Plan that you can Make
A business plan is not just for your banker, it is for you too; and the success of your business hinges on it. A business plan consists of 5 basic parts:
Be as detailed as you can be, and don’t miss any of these 5 parts.
2. Have a Financial Plan
Detailed financials have to be ready. Where are you going to use the money? How is it going to benefit the business plan? Here are things you need to cover:
3. Have a Good Credit Score
Your personal credit score is going to weigh in here. Have a bad credit score and your loan application is going to be in deep soup. So before you file in the bank loan application, pull up your credit score.
If you have a bad credit score, the banker will assume that if you can’t even manage your own personal finances, you won’t be able to manage a business’s.
4. Make a pitch in your lender’s shoes
Not everyone gets an opportunity to give a pitch (since banks work more on applications than meetings and pitches). Either ways, you need to know what it means to be in a banker’s shoes to give a successful pitch and get that loan. Any bank is taking a risk when they loan money. You need to convince them that your business is worth the risk. The best way to do that is by stepping in their shoes and telling them how it’s gonna pay off for them big time. Speak in numbers; that’s the only thing that the banker understands.
5. Take a Loan that you can Afford
The best way to get a ‘denied’ stamp on you loan application is to ask for too much money. You need to take an amount that you can afford. Don’t think from your perspective, think from your lender’s. The banker will analyze your current revenue, future plans and how much revenue your business will make and then decide if the loan amount you’re asking for is feasible.
6. Go Local
As a startup, your chances are always better with a local bank. Local banks want to invest in the community and investing in a local startup is just that.
When it comes to getting a loan, make sure you’re in line with these points. Keeping your accounts un-organized and un-presentable is one of the most common mistakes amateur entrepreneurs make. If managing accounts is not your strongest area, get professional accountants in Edmonton sort them out for you.
This year, small business owners will be paying more tax Advisor to Client (Keyword) on the dividends they draw from their corporations.
The 2013 federal budget expressed concern that taxpayers who receive these dividends are getting disproportionately more, from a tax perspective, than if that income was paid as salary. The government has since enacted changes that target corporate income, which uses the small business deduction to try to close the gap. Previous changes already addressed corporate income that had been subject to full corporate tax rates—the so-called eligible dividend regime introduced in 2006 and rolled out over the following six years.
A PSB exists where, if there were no corporation separating the worker and the payer, the relationship would reasonably be considered to be one of employment.
The consequences of a corporation being assessed as carrying on a PSB are onerous and can include:
In some cases, rather than dispute with CRA, the employer/payer paid the tax bill on behalf of the worker such that the business could continue operations without further human resource and morale issues. Not only is this a risk to ICs, but also to the payers as they need ICs to focus on the work and not a CRA audit or reassessment.
On May 22, 2014 CRA stated at the Ponoka CA/CRA Roundtable meeting that there were currently no national PSB projects. There was no comment on the presence of regional projects.
Since then we have not seen a major project, however; as of late, increased activity in this area has prompted many ICs and payers to take a defensive strategy to possible reassessments.
Some industries that may be at higher risk of a PSB audit include oil and resource extraction, construction, transportation, and Information Technology. Technical consultants (e.g. engineer consultant) and upper management both within and outside these industries may also be at higher risk.
Regular Corporation vs. PSB
How would CRA determine whether a business is a PSB?
To determine whether a business is a PSB or not, CRA will generally apply the same criteria as described in the Employee vs. IC section, with the exception of “intent”. RC4110, http://www.cra-arc.gc.ca/E/pub/tg/rc4110/README.html
Recent Court cases have noted that the intent of the parties may not be relevant when determining whether a worker is carrying on a PSB. Determining whether a corporation is a PSB is a grey area and subject to much interpretation.
Some steps worker corporations may take, if appropriate, to demonstrate that they are not a PSB include:
Doing work for a number of customers. If this is not possible, it may be advantageous to have documents to support that work is being sought outside of the current limited customers list (e.g. a copy from an advertisement from a newspaper, correspondence with potential clients, etc.). As well, documents which demonstrate a history of various customers may also be useful.
• Having a contract with the payer (with no terms similar to that of an ‘employment contract’).
• Engaging in shorter term and project-based contracts.
• Registering for GST/HST.
• Providing invoices.
• Having more than 5 full-time employees involved in the business line.
• Ensuring that characteristics of the contract indicate a “self-employed” status.
As well, some taxpayers are looking to mitigate the downside if assessed as a PSB. In these cases, taxpayers are, for example, choosing to limit deductions in the worker’s corporation to those that would be available to employees (e.g. not deducting meals and entertainment expenses), paying all profit out as salary to oneself, and avoiding income splitting with family members.
Some workers are also resorting to complicated partnership or trust structures that are beyond the scope of this paper.
To appeal an assessment, review CRA publication P148 – Resolving your dispute: Objections and appeal rights under the Income Tax Act.
In Canada, roughly 2.7 million individuals are self-employed. Generally, an individual is self-employed if they have a business relationship with a payer and also have the right to determine where, when, and how the work is done. These individuals may or may not have an incorporated company. This relationship may sound complicated; however, it is very common, and the implications are often overlooked by the self-employed individual and/or the entity hiring the self-employed person.
In this issue we will focus on matters from the perspective of the self-employed person – critical to ensure proper reporting, administration and organization of the business. Businesses engaging the services of these individuals should also be aware of these matters. In the July 2014 Canadian Tax Planner issue, we will dig into matters facing businesses engaging self-employed persons, as well as issues that may arise if CRA assesses the self-employed individual to be an employee of the payer or a personal service business.
Specifically, we will discuss the following:
PART 1: How are Self-Employed Individuals Taxed?
Self-employed individuals earn income from a variety of sources: a business, a profession, commission, farming or fishing. Business income tends to be the broadest category and can include income earned from any activity carried out with a reasonable expectation of profit. This may include, for example, selling goods online or in a retail store, or providing services such as consulting or landscaping.
Reporting Self-Employed Income
Self-employed income, for unincorporated individuals, is reported on the Statement of Business and Professional Activities, T2125, which is included in an individual’s personal tax return. This is different than corporations which must complete a corporate tax return.
The net profit (income less expenses) is taxed at the individual’s marginal personal tax rate – income over certain thresholds are taxed at higher rates.
If an individual incurs a business loss in the year (quite common in the first few years of operation), the loss can offset other income the individual earns. If the loss exceeds income from other sources, the excess can also be carried-back to offset income earned by the individual in the prior 3 years, or carried forward to offset income earned by the individual for the subsequent 20 years.
Taxpayers must be aware of whether they are carrying on a business or engaging in a hobby or personal activity – losses from a hobby or personal activity are not deductible.
CRA tends to look closely at business losses. In January 2014, the CRA sent targeted letters to a group of taxpayers who previously claimed business losses, reminding them of the possibility of an audit, and encouraging them to correct possible inaccuracies in tax returns filed in prior years.
Accrual or Cash Method?
Most self-employed individuals are required to report business income using the accrual method – that is, they report the income when they earn it (whether or not they receive the cash) and deduct expenses in the fiscal period in which they incur the expense (whether or not they pay the amount). CRA allows certain specific individuals, such as commissioned salespersons to use the cash method to report income and expenses, as long as it accurately shows income for the year. Taxpayers may elect to report farming or fishing income using the cash method.
When does my Business Start?
CRA generally considers a business to have started when it begins some significant activity that is a regular part of the operation, or that is necessary to get the business going. In some cases a business may have started even if there are no revenues yet earned. Each business is looked at on a case-by-case basis. Expenses incurred before a business actually ‘starts’ are not generally deductible.
Tip: Consider maximizing the value of excess losses by applying them against income on which you paid the highest tax rate.
PART 2: Deductible Expenses
As a general rule, a taxpayer can deduct any reasonable expense incurred to earn business income.
Some common deductible expenditures include: advertising, bad debts, business fees, licences or dues, capital cost allowance, insurance, some legal and accounting fees, management and administration fees, office expenses, property taxes, salaries (including some salaries to family members), supplies and travel.
Self-employed individuals can also deduct home office expenses as long as the home office is either,
• the principal place of business; or
• used exclusively to earn income and, on a
regular and continuous basis, is used for meeting customers, clients, or patients.
Home office expenses may include, for example, insurance, utilities, property taxes, repair and maintenance, and mortgage interest. A portion of these amounts, relating to the business, can be deducted. This is most often calculated by determining the portion (i.e. square footage) of the home used in the business.
Some expenditures are not deductible, the most common of which are listed below:
• Capital Expenditures – Amounts paid to acquire a capital property (ex. a building or furniture), which is something that provides an enduring benefit over a period of time, cannot be fully deducted in the year of acquisition. As these properties wear out or become obsolete over time, these costs are deducted over a period of years. This deduction is called Capital Cost Allowance (CCA). For further discussion, see March 2014 Canadian Tax Planner.
• Personal Expenses – These are not deductible, and may include, for example, a personal vacation or a laptop used entirely for personal purposes. In scenarios where there is a personal portion of the expense (ex. home office expenses – insurance for the entire house), the individual can only deduct the business portion of the expense.
• Meals and Entertainment – Only half of the amounts paid for meals and entertainment are generally deductible.
Private Health Service Plan (PHSP)
A PHSP is a type of health spending account which allows employers to pay for certain medical
expenses of employees and their families. Amounts paid are deductible as a business expense. Payments made by an unincorporated business to a PHSP are subject to unique rules and may be deductible in some cases. First, self-employment must be the individual’s primary income source (more than half of the taxpayer’s income in either the current or prior year, unless income from other sources is less than $10,000). Second, with limited exceptions, all employees of the business must receive equivalent coverage.
In cases where fewer than 50% of those insured are unrelated employees, the maximum deduction is based on the sole proprietor and his/her spouse and dependents – $1,500 for each the sole proprietor, spouse, and dependent age 18 or more, and $750 for each dependent under 18. Amounts deducted as a PHSP premium cannot also be claimed as a medical expense.
A payer may sometimes reimburse the sole proprietor. This may include, for example, travel costs to fly to the payer’s locale, or a fixed amount to compensate the individual for using his/her own vehicle. Regardless of the reimbursement, the sole proprietor must include the amount received in income. However, the individual can then deduct associated expenses. In the flight example above, an individual may be reimbursed $1,000 for the flight which cost $1,000 – the $1,000 income and expense must both be reported by the individual. In the automobile case, the individual must report the income and then consider any expense deduction, which is generally the total operating costs prorated for the business use. Likewise, fixed fee payments intended to offset additional costs are treated in the same manner. See PART 6 for a discussion on automobile expenses.
PART 3: Unreported Income
Many taxpayers may be confused about what income they need to report to the CRA. Income from T-slips (such as a T4 for employment) is generally reported correctly; however, taxpayers may be unsure as to other income that should be reported as well. Income earned from, for example, painting a house, taking photographs for a fee, or even selling goods on EBay must be reported. Barter transactions (when two people agree to exchange goods or services without using money) must also be reported: the income inclusion is generally the amount taxpayers would normally charge for their services, or would have sold the goods or property to a stranger.
CRA is targeting unreported income. Whether intentional or not, the consequences of not reporting can be very costly. These can include interest on unpaid taxes, penalties, and in extreme cases, criminal fines or imprisonment.
Most commonly, CRA may levy penalties of up to 50% of the tax evaded, plus interest accrued on the amount in cases when a taxpayer knowingly, or in circumstances amounting to gross negligence, makes a false statement or omits information from a tax return.
If taxpayers voluntarily tell CRA about an amount they failed to report, CRA may waive the penalties under the Voluntary Disclosures Program (VDP).
Recently, the Minister of Finance passed a bill providing for the application of penalties and criminal offence charges relating to Electronic Suppression of Sales (ESS) Software. ESS Software (commonly known as “zapper” software) selectively deletes or modifies sales transactions in point-of-sale systems (ex. electronic cash registers) and business accounting systems, leaving no record of the original transaction.
Tip: The VDP can be complex, and assistance by a tax professional is advisable.
PART 4: Employment Insurance (EI) for Self-Employed
Self-employed individuals can voluntarily choose to pay EI premiums to be eligible to receive EI benefits (maternity, parental, sickness, and compassionate care benefits, and benefits for parents of critically ill children). If a taxpayer is registered in 2013 to participate in this program, premiums for this year will be calculated on their 2013 income tax return and will be payable by April 30, 2014. Going forward, if they pay their income tax by instalments, EI premiums may be included in their instalment payments. EI premiums are payable on self-employment income for the entire year, regardless of the date of registration.
A self-employed individual can opt out of this EI program at the end of a tax year if the individual has never claimed benefits. In cases where an individual has claimed benefits, they must contribute on self-employed earnings for as long as they have self-employed income. This may be an expensive decision for some self-employed and has led many individuals to choose not to opt into the EI program.
EI premiums are payable on self-employed income up to an annual maximum amount of $2,193 for 2014. A regular employee would only pay a maximum EI premium of up to $914 (in 2014), while the employer would pay the remainder. The maximum EI premium level is hit when an individual’s insurable earnings reach $48,600 (in 2014).
PART 5: GST/HST Issues
GST/HST is a tax that applies to the supply of most property and services in Canada. HST applies to the same base of property and services as does GST.
Almost everyone has to pay GST/HST on purchases of taxable supplies of property and services (other than zero-rated goods). A limited number of sales or supplies are exempt from GST/HST. Additional info on this can be found http://www.cra-arc.gc.ca/tx/bsnss/tpcs/gst-tps/gnrl/menu-eng.html but is beyond the scope of this article.
Although the consumer pays the tax, businesses are generally responsible for collecting and remitting it to the government whether incorporated or not.
Do I need a GST/HST Number?
Most sole proprietors that provide taxable supplies (goods or services subject to GST/HST) in Canada must register for a GST/HST number. However, they may be considered a small supplier and be exempt from registering (though may voluntarily register) if their total revenue from taxable supplies (before expenses) from all their businesses is $30,000 or less:
• over the last four consecutive calendar quarters, and,
• in any single calendar quarter.
Caution: Taxi and limousine businesses and non-resident performers selling admissions to seminars and other events must register for the GST/HST, even if they are small suppliers.
Details on GST/HST registration can be found at http://www.cra-arc.gc.ca/tx/bsnss/tpcs/gst-tps/rgstrng/menu-eng.html.
GST/HST Registrants collect the tax on most of their sales and pay the tax on most purchases they make to operate their business. They can claim an input tax credit (ITC) to recover the GST/HST paid on the purchases they use in their business. In other words, the businesses are required to track all of the GST/HST paid and offset this amount against the GST/HST collected on sales. The net amount is either remitted to or refunded from CRA on a regular basis.
Depending on the value of the ITC, various information is required on invoices in order to claim the ITC. Most commonly, invoices with total sales in excess of $150 should include the name of purchaser, invoice date, total amount paid, GST/HST charged, vendor’s name and business number, description of good or service and terms of payments. If an invoice is examined by CRA and is missing one of the above, the ITC may be disallowed.
GST/HST Reporting Periods
When a business registers for a GST/HST number, CRA assigns a reporting period; however, businesses can also choose one of the options in the below
As the above traditional method can be very onerous, many small businesses elect to use the Quick Method to report and remit GST/HST. The Quick Method is substantially simpler, resulting in reduced paperwork and bookkeeping costs. As well, this method may benefit certain businesses with low expenses relative to income, by requiring lower GST/HST payments than would otherwise be remitted.
Tip: A calculation of the savings/cost should be considered before converting to the Quick Method.
GST/HST payable under the Quick Method is a percentage of sales (including GST/HST). The percentage varies depending on:
• whether the business purchases goods for resale or provides services,
• the location of sales and operations, and
• whether the business provides a service, sells goods or is in manufacturing.
Businesses using the Quick Method cannot claim most ITCs, however ITCs remain available on capital asset purchases. An additional 1% credit is also provided on the first $30,000 of annual sales.
Most businesses with annual worldwide taxable sales of up to $400,000 (for reporting periods beginning in 2013) can elect to employ the Quick Method. Some businesses, including accountants, tax consultants, financial consultants and lawyers, cannot use the Quick Method.
Form GST74 is used to elect to use the Quick Method, or to revoke such an election (only available after one full year). The election must be filed by the due date for the return for which the Quick Method is to commence, except for annual GST/HST filers who must elect by the first day of their second fiscal quarter.
PART 6: Administration
Self-employed individuals are required to maintain adequate records that provide sufficient details to determine tax obligations and entitlements. Records must be supported by source documents. These records or source documents can come in the form of account books, sales and purchase invoices, receipts, contracts, bank statements and cancelled cheques.
Generally, taxpayers are required to keep records for six years. Specifically, taxpayers must retain records (other than certain documents for which there are special rules) for six years from:
• the end of the last taxation year to which they relate,
• the end of the year to which they relate for GST/HST and excise duty purposes, and,
• after the goods are imported or exported.
In cases where an individual files their income tax return late, they must keep records and supporting documents for six years from the date that the return was filled.
If an individual is dealing with an objection or appeal, an individual must keep records until the later of,
• the date the matter is resolved and time for filing any further appeal has expired, and
• the above mentioned six year period has expired.
Tip: Failure to retain proper and complete records tend to increase the risk of penalties.
Confusion often arises around the documents required to deduct automobile expenses. CRA expects unincorporated self-employed individuals to maintain a detailed log, identifying each and every business and personal kilometre driven, to establish the percentage of business use. Receipts for driving costs, such as repairs and fuel, must also be maintained. An estimate, such as a fixed amount per kilometer, is typically challenged by CRA.
Some relief, however, is provided in the form of a Simplified Logbook for these self-employed individuals. The rules for this logbook are fairly specific, but generally state that a business must maintain a full logbook for one complete year to establish the base annual business use of a vehicle. After one complete year, individuals can use a three-month sample logbook to project the business use for the year, as long as the usage is within the same range (10%) of the base year.
Tip: CRA expects unincorporated proprietors to keep all automobile receipts and a log. Reduced or denied expenses are common where such support is not maintained.
Internet Business Activities
Commencing in 2013, CRA requires self-employed individuals to provide information on their Internet Business Activities. Such information includes: percentage of gross income generated from webpages and websites, the number of webpages and websites that the business earns income from, and a listing of the main webpages.
PART 7: Important Dates
Certain filing and important dates are as follows:
• March 15 – Due date for personal tax 1st installment
• April 30 – Personal tax payment due date
• June 15 – Filing due date for self-employed individuals or spouses or common-law partners of self-employed individuals. Any taxes owing are due April 30; interest starts accruing at this date.
• June 15 – Due date for personal tax 2nd installment
• Sept 15 – Due date for personal tax 3rd installment
• Dec 15 – Due date for personal tax 4th installment
If any of these dates fall on a Saturday, Sunday or public holiday, the due date is the next business day.
Personal tax installments must be made for 2014 if the individual’s net tax owing is more than $3,000 in both,
• 2014, and,
• either 2013 or 2012.
Issues related to self-employed individuals continue to be questioned by CRA and contested in the Courts. As the costs of errors can be high, attention should be paid to properly reporting this income. Also, very importantly, taxpayers should ensure proper structuring of the relationship at inception and on an ongoing basis.
In the next issue of the Canadian Tax Planner, we will focus on issues facing the business engaging the services of self-employed persons, as well as issues that may arise if CRA assesses the self-employed individual to be an employee of the payer or a personal service business.