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 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

Dividends or Salary, Which is Best for the Business Owner?

It’s a tough question that is often asked of small business owners, “Which is a better way to pay myself, a salary or dividends?” And it’s a valid question, since there are pluses and minuses to each of these. A dividend paid from the retained earning, which is the profits left in the company after all expenses and taxes are paid. For more on this, see the Wikipedia entry, which does a pretty good job of explaining them for the layperson. A salary is something that most people are familiar with and is considered an expense to a corporation. If you are a sole proprietor, then this whole question is irrelivent, since you are the company and any money made after expenses is taxed as if it were earned income. But which is better for the small corporate owner?

The dividend comes from money that is already taxed. For 2012, in Alberta, that means that there has already been a total of 14% taxes paid to the federal and provincial governments. Because of this the dividends are taxed at a lower rate than a salary would be. For example, if your only income was dividends and you earned $60,000, then you would have $5,034 in taxes payable. It seems paltry on $60,000. But remember that there has already been $9,767 in taxes paid to get that $60,000 – the corporation paid it. Therefore the actual earnings were $69,767 and the total taxes are going to be $14,801. Seems confusing? Well, this brings the marginal take rate up to about 21% when all is said and done. That’s pretty good! But that’s about what you’d pay on a salary, excluding EI and CPP.

The other option is paying yourself a salary. Most who ask this question (at least my clients) own more than 10% of the shares of the company, so they aren’t eligible for EI. However, everyone must pay CPP. The CPP rate is 4.95%, after the exemption of $3500 (earnings), and up to a maximum of $2,306.70 in CPP payments for each of the corporation and the employee. This is a total of $4,613.40. This does give you the advantage of now having contributed to CPP and can, therefore, collect (claim) it later in life. And earned income is also eligible for RRSP contributions, which can reduce taxes payable. (Amounts contributed to an RRSP are taken directly out of earned income and are not taxable until withdrawn from the RRSP.) What it really comes down to is what your goals are with your business.

There are other issues, such as how your balance sheet and income statement will then look to outsiders (say if you’re trying to get a business loan). And how you can control how much you take from the business, using these strategies for tax deferrals (which allows better cash flow in the current year so taht you can build your business), and more. Yes, it does start to sound complicated! Of course that’s why you should have an accountant to help with these decisions. It’s all part of financial planning, and your goals need to be expressed in order to know the best route for you.