Business Tax Changes and Action to be Taken

Many people have recently noticed that federal Finance Minister Bill Morneau announced he will be considering certain business tax changes with the goal of “improving fairness in the tax system by closing loopholes and addressing tax planning strategies.”

Yet, it’s not quite so straight-forward as he would have us believe. The measures are quite complicated, and may affect small business owners in a very negative way. While some of the principles I have no issue with, such as proving that adult children who are receiving pay are actually contributing to the business, there are other items I do have problems with. This includes the high taxation of investment income in the corporation. This will increase the effective tax rate so much that it can become useless to hold money in the company. And the complications involved in figuring this out are so high that many small businesses will not (or do not) have the resources to understand or calculate the requirements on this.

If you want to see more details on this, here are some newspaper articles that have recently run to give you some more insight:

What can we do about it as citizens and small business owners? Currently, the government is accepting feedback on this, until October 2, 2017. To give your feedback write your MP. A simple note stating what you feel, why, and what action you would like your MP to take is sufficient. Me, I’m asking them to scrap the whole thing, even though it will make tax laws more complicated, which gives me more work. I’d rather people have a fair deal. Thanks!

To contact your MP, you can search by postal code here.

The Most Important Part of Business?

Every professional seems to feel that they are the most important part of the business. The Sales team feels that they are most important; Finance & Accounting may feel they are most vital; and Marketing may feel the same, as could those who are in product development, purchasing, or manufacturing.

Every business has to have something to sell, of course. It could be a product or a service. Without this, it has no business. Yet, if people don’t know about the product or service, it can’t be sold. That means no money. And while a company can operate for a limited time without tracking its finances, that will only go for a while, and this ignoring of the accounting will eventually sink the company one way or another.

So which part is most important? Sales and Marketing? Product? Accounting? These are the three pillars of a business. Each of them has to work in harmony and equally hard in order to make the company successful. For a business owner who has a background in sales, this tends to be the part that is concentrated on. Sales become the number one pillar and drive the business. This can make for some great success, of course. But it can also hold the company back. If the other pillars are not managed, then they will become weak and the company can fall. It’s the same as if a company only watches the accounting. This can be perfect. But without a good product or enough sales, the company will still fail.

In the accounting business, the aim is to help keep that one pillar solid, so that our clients can concentrate on the other two in their businesses. It’s also the intention of any business owner who hires sales and marketing people. In these instances the owner is either a product person – someone who knows and develops the product or delivers the service, or has reached a point where s/he needs help doing the sales and marketing that s/he is already doing to capacity. Too many small businesses either try to d it all themselves or try to cut costs by getting a lower quality service to manage one of those pillars. And it costs in the long run.

Far too often we see, at Makes Cents Accounting, people who have either completely neglected their finance pillar or have come from a firm that didn’t really care about them. Sometimes they come from dong things themselves, when they really didn’t know how to. And sometimes they come from places that really are a lower level firm that is only capable of basic bookkeeping, if that. And sometimes they come from a big, reputable firm that really isn’t interested in the smaller businesses, so assigns the work to a junior staff member who doesn’t have the skills or experience necessary to a good job. And those small business owners find Makes Cents. Thankfully for both of us!

We, of course, like getting clients. And those clients really appreciate that what we do for them fits their needs and does it right, giving them the attention they need. That’s why we are small business accounting specialist. We don’t work with the big companies. Our biggest clients have only two or three owners. And those owners do the main work in the companies. Always. Most of our clients don’t have any staff other than the owners. And our biggest client has eight, including the owner.

While at Makes Cents we do know all of the three pillars of business, otherwise our business wouldn’t still be around, we specialize in helping with only one of those pillars. That is the foundation of our business! And it’s why we sometimes use the consultation of others for our sales or marketing. They do something on one of these pillars better than us. We recognize that it’s important – as important for our success as our service is, and as important as taking care of our own finances and accounting (luckily we’re already good at that part).

Who do I recommend for the pillar Makes Cents is not good at? That would be Vision Cast. And for your small business and personal accounting needs, please contact us!

The Casual Labour Myth

I don’t know where the whole concept of hiring people under a label of “casual labour” and paying them cash came from. I have seen other websites (in Canada) that even advise that paying cash or casual labour is okay. They are wrong for many reasons.

CRA Doesn’t Recognize Casual Labour

Paying someone out of the til and then trying to expense this in the business is something that a lot of businesses want to do. The problem is, it isn’t permitted by the Canada Revenue Agency. Trying to write off this expense is a big flag to the CRA and could open up a company to an audit. At the very least, the company will be liable for any payroll deductions that are owed, including CPP, EI, and (possibly) tax deductions. Whenever someone is hired, they must be either an employee or a subcontractor. Therefore, even the kid you hire for an afternoon to help clean a store, or the old guy who really knows how to make the trim for that cabinet, has to be on payroll or have their own company, and be treated accordingly.

What About WCB?

Many businesses are required to cover employees with WCB. If you are a contractor, then your subcontractors must also be covered, unless they have their own coverage. Part of the responsibility of the business is to ensure that WCB coverage exists. This means that if someone is a subcontractor, it is necessary to check. The subcontractor should have their own WCB number that can be checked with the provincial board, usually online. If a WCB audit is conducted, then the business becomes liable for the amount of coverage that was supposed to be paid to WCB, plus any possible penalties.

subcontractor, check GST registration, contractor accounting, bookkeeping services, business tax, tax returns, subcontractor bookkeeping, subcontractorContractors, some of your subcontractors also want to charge GST! Ensure that they have a GST number, and that it is still valid. I can’t count the number of times that I’ve seen contractors pay the GST on a subcontractor’s invoice only to find that the number wasn’t valid. And that means that the contractor is unable to use the GST paid as an ITC, instead it becomes part of the expense. It is better for the business to have the ITCs, as that is 100% refundable, rather than as an expense, which only saves the tax rate (for combined small businesses in Alberta, this is 14%). Which would you rather have? You can check that on the CRA site here.

Your Best Option

Any employer should make sure that anyone hired, whether for a few hours or a few days, is either put on payroll or has a contract. Putting someone on payroll requires obtaining their social insurance number, date of birth, address, and setting a rate of pay. It also requires that deductions are done correctly. This can be found on the CRA website (here).

If a contractor is hired, then it is best to have a contract in place. This should include the rate of pay, whether hourly or by the job, as well as the pertinent information including their business number or SIN. Make certain that any subcontract states that the subcontractor is responsible for paying income taxes, CPP, and that they are a subcontractor, not an employee.

And it’s always a good idea to review any labour agreements you have with your accountant to be sure that they are in line with current legislation. If you have questions, please contact me, and I will be glad to help.

What Are You Looking for in an Accountant?

I’m a sole practitioner, which means that I work alone. Someday I’ll have an assistant or two. And maybe I’ll even get ambitious enough to hire an accountant or take on a partner. But I’m not sure about that. I worry about losing the quality of my service and my work. Really! That is my biggest concern with expanding and growing.

choosing an accountantWhile I would love to have the extra income that comes with this kind of growth, I know that it has the potential to change my business, whether I want it to or not. And so I’m careful about that and want to make sure that I do whatever I can to minimize this. Which brings to me another concern: what people look for in an accountant.

It’s tax time. Or at least the beginnings of it. And that means that I’m starting to get calls from people who are looking for an accountant. And every single one of them, so far, cares only about one thing: price. But price isn’t the main factor in having an accountant. Sure, I know at my prices are lower than most professional firms. And for most things, even lower than H&R Block. But most of my clients are small business owners. They want an upfront quote. I’ve been trapped with that before, so am reluctant to give it. Why? Continue reading

Being Forthright: Good Bookkeeping Practices in Small Business

While it’s not the rule, most small business owners (and the CRA) are aware that it’s possible to hide a few transactions here and there in a retail establishment and no one would be the wiser, even during an audit. Whether this is morally right or not is not at issue here and not relevant for this discussion. The biggest issue is what effect it has on the owner’s knowledge of the business and what is really happening. How can one know what is really happening if things aren’t tracked?

If an owner has a habit of hiding transactions, such as not ringing sales into the cash register, there are a few issues that should be addressed.  Whether this is honest or moral is not to address here. Such an action will never allow the true overall sales and cost of goods sold to be known. This makes it very hard to have accurate financial statements. And if an owner wants to turn from simply being self-employed to becoming a true business person, then this accuracy is important! There is also the issue of loss. When an owner fails to ring in transactions, it sets an example for employees, making it easier for them to follow suit. And then what happens to the cash from such transactions?

These discrepancies also make compiling financial statements, and the connected tax returns, more difficult for your accountant. How is the accountant to know when a classification is correct if there is no backup documentation to show why imbalances happen? Many accountants will take the safest route possible (for them) when deciding where to put such imbalances, since this is what is in “the public’s best interest” and written into the ethics codes of professional associations. But that isn’t always in the owner’s best interests, and it could be incorrect as far as what really happened.

Accounting, corporate tax, financial statement preparation

For example, if there is a few hundred (or thousand) dollars discrepancy on the balance sheet that shows some money came out of the company, but there is no way to show where or how, it is likely the safest move to consider it as money taken by the owner. While this is “in the best interests of the public”, and follows proper accounting guidelines, it does not favour the owner. Instead, it increases the owner’s personal income, which increases personal taxes. And if the discrepancy is because of missing expenses or stolen cash from un-entered transactions, a whole different set of financial statements and tax liabilities result. And there is the issue of the owner knowing what is really going on in the business! Perhaps there is loss happening that cannot be traced because the owner is also not entering transactions into the books. It would be in the owner’s best interests to know what the true picture of what’s happening in the business.

So, it’s actually in the owner’s best interests to track everything and to never try to “hide” transactions and income, as then the owner knows what is really happening in the business and can make better decisions and thus increase the profits of the business legitimately. And this is what true business ownership is all about.

Catching the Dream – Sticking with Goals & Principles

“I love the man that can smile in trouble, that can gather strength from distress, and grow brave by reflection. ‘Tis the business of little minds to shrink; but he whose heart is firm, and whose conscience approves his conduct, will pursue his principles unto death.”

-Thomas Payne,   1776

In business and life we often have ideas and goals that we dream about and truly want to accomplish, yet our fears and those of the people who surround us will beat us down, sometimes defeating us before we truly get started. Catching your own dream and pursuing it is often elusive. Even finding that dream and what it truly is can be a great difficulty for many people. Some will spend years, even decades, in the pursuit of a goal that is not truly their own, only to find that they’ve lived an unsatisfactory life. This is one of the 5 greatest regrets of the dying – they wish they had lived a life more true to themselves, rather than the expectations of others.

It seems that most people will reach a point in their lives where they realize that they have not honoured even half of their dreams and die knowing that it is because of the choices they had made.  As business owners people often leave out much of their personal dreams in order to pursue their financial dreams and become a success. While this is laudable and certainly helps to keep some parts of life happy and fulfilled, we must remember not to sacrifice too much of this and still stick with our personal goals and dreams as well. There is no point in making lots of money if we cannot enjoy it!

Sticking with our principles means more than simply following our dreams; it also means to do what we believe is right, regardless of what others think. It means pursuing a higher path, whether it be in our business dealings or our personal lives. And that can be tough! There’s always pressure to give way, sometimes just a little bit, in order to make more or help someone else out. And this is sometimes at our expense or at the expense of our goals and principles. And these should never be compromised!

When posed with a decision, ask this question, “Would my young children be proud of the choices I make at this time?” Or ask, “Would someone I admire approve of the choice I am making?” And make sure that it is also something that you would be proud of and sticks with your goals and principles.

In my business I will sometimes get people asking me ways to lower their taxes, and some of the ideas they get are either incorrect, illegal, or sadly misinformed. Part of my dream is to run a business that is ethically pure and 100% honest, while still saving my clients as much as possible on taxes and improving their business’s bottom lines. I can only do this by being completely open and honest with them about all of these items. And, yes, I have lost a client because I refused to accept certain items on his financial statements that I knew were not business related. They would have been rejected in an audit – and I told him so. He walked away. I ran into him again sometime later, and he brought it up to me, saying that he should have listened, because he was audited. The penalties and interest he ended up paying weren’t worth the risk. His business no longer exists. I may have lost the revenue from a good business client, and even more from dealing with a difficult audit. But I can live with myself better knowing that the choice I made was the right one, and would have been for my client had he chosen to follow my advice.

Making these kind of choices isn’t always easy. And they aren’t always business decisions; they can be personal ones, too. Our business and personal lives really are intertwined and we shouldn’t have one set of values for each. Trying to do so really becomes a reflection of who we are. If we have the highest ideals in our home and personal lives, then these should also be in our professional lives. People will respect us more, and the rewards will show in the long run. And making such a choice allows us to better integrate our dreams in all aspects of our lives.

The Purpose of Business Planning

Occasionally I have a client who wants me to develop a business plan for a new business. Of course I’m happy to help out with this! However, most of those who approach me do not realize that the majority of a business plan’s work must come from the person who owns (or will own) the business – the person actually operating and managing that business!

Now why would I use that approach, when there are competitors out there who will prepare a plan with very little input from the client?

It’s simple. The client is going to know the business best. I know my business. I know the direction I want it to go. And I know how to get it there. Each client should also know this about his or her business. And the best way to learn this – and make it work – is to actually participate in the planning of that business. Learn each part of the plan and decide (that’s what managers should do) what’s the best approach for you within the context of your current environment.

Each business plan has to have certain elements.

  • There needs to be a market analysis, telling you what the industry is like and how the service or product for the business fits into this market. It’s great to have some further input and analysis elaborating on the strengths and weaknesses, threats and opportunities that are available. (Yes, this is a SWOT analysis.)
  • There should be an overview of the management team. Include any partners who will be helping.
  • There needs to be a simple product/service overview, explaining what it is that your business actually does.
  • There needs to be some kind of actual marketing plan (this is different from a market analysis, which shows about the industry & market). A marketing plan explains how people are going to find out about your business and why they would buy from it.
  • And there needs to be a financial analysis. This is where projections are done, based on realistic expectations. And this is often the hardest part for people who are not accountants. And that’s where I do the lion’s share of the work. Yes, I need basic information, and there will be a lot of questions for the owner to answer. That’s just part of trying to run a business. And these are things the owner needs to learn! Projections are often done for 3 to 5 years, and include at least a Profit & Loss statement and Cash Flow statement. Some plans also include the Balance Sheet, which I think is a good idea.
  • And all plans include a summary (usually called and “Executive Summary”) that gives a quick overview of the entire plan. This is most often only one page long.

Several hours of both the owner’s and my time go into planning, so be prepared! It typically takes my clients three to four weeks to come up with all of the information needed for a decent business plan. However, with a  bit of research and being prepared ahead of time, a plan can be completed much sooner. Yes, there is a cost involved. After all, you are getting financial statements prepared. And if you go to any of the larger accounting firms you will pay thousands just for that portion of the plan. Save yourself some money that can be better used in your new venture – work with me!

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I always welcome legitimate questions regarding this and other business issues. Please feel free to contact me or post your questions directly on my blog.

GST for Annual Filers Due on March 31

Argh! Those pesky GST returns…

Every year, all GST registrants have to file these returns, whether they like it or not. For many small businesses this filing is only done once a year. The threshold is at $1,500,000 in “taxable supplies” (what does that mean?) to remain an annual filer. This means that if you have sales in your business (or businesses, because if you have more than one business they are considered together for the threshold purposes) over $1.5 million you have to start filing on either a quarterly or monthly basis, depending on your next threshold. If it’s more than $6 million, then you must file monthly!

The returns are fairly straight-forward if your records are kept really well! You have to declare the gross revenue of your company for the period (how much you billed); how much you collected in GST, and how much you paid in GST. What gets complicated for people is knowing which items in their books include qualifying Input Tax Credits (ITCs), and which don’t. There are some things that have them, but are sort of hidden (like parking fees). And there are some items that exempt (like certain grocery items).

Now, if you are at all confused about this, speak to us! Ask questions… It’s our job to help you out with these kinds of things. The big issue will be whether your company’s books are in order or not. If they are and you’ve claimed everything correctly, then it shouldn’t take you very long to fill out the form and file your return. If they aren’t, talk to us. We’ll help!

And don’t forget the March 31 deadline!

T4 and T5 Slip Deadline is February 28

With the February 28 deadline approaching, there could be some worries about getting these slips prepared on time. Depending on the size of your company, you should allow at least a couple of hours to complete these slips, including the summaries that must be submitted to CRA. If you have more than 10 employees or slips to prepare, you should consider getting someone else, such as Makes Cents, to prepare these for you.

The Canada Revenue Agency does have an extensive information page for employers on how to fill out and file all of the T4 information. There is quite the extensive amount of information, including all of the normal information as well as exemptions, deferred income, amending, and information on penalties and more. Go to their site now for more reading on this.

The T5 slip, for those of you who are unfamiliar with it, is the slip that is used for investment information. Most people will see one of these if they have open (non-RSP) investments that make money in the year, whether it’s interest income, dividends, or capital gains. What a lot of people, including some small business owners, are unaware of is that when a corporation pays dividends to its shareholders, this slip must be filled out, and the corporation must also file a T5 summary to CRA.

There are options for business owners on how to pay themselves. The easiest, for most people, is to take a salary, which requires monthly submission of personal tax with-holdings  However, there is also the option of dividends. Dividends are paid out from the corporation’s retained earnings – the amount of money left after corporate taxes are paid. If you choose this option for paying shareholders, it is required that the T5 information slip and summary be done before the February 28 deadline of the year they are paid in (for 2012, this deadline is February 28, 2013). The CRA has a webpage with more information about this here. There you can read all about the T5 slip, deemed dividends, and more. If these things are confusing for you, then you will need help from a professional. And that’s where we come in!

 

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