Tax Tips
Making Business Taxes
Work for You
Tax Considerations
of Incorporating
Federal Tax Changes
for Entrepreneurs
Changes to Income
Splitting
Should Your Business Work
with an External CPA?
Specific Advantages of Working
with an External CPA
Many business owners have a good grasp on managing the finances of their company. That being said, there are countless reasons why you will need the help of a certified public accountant specializing in accounting and tax planning for businesses. Let’s take a quick look at how a CPA can make your businesses taxes work for you, some key considerations when deciding to incorporate, how taxes have changed for Canadian entrepreneurs — with a deeper dive into the changes to income splitting specifically, and the benefits of working with a reputable CPA.
Making Business Taxes
Work for You
Keeping business taxes in order while maximizing the viability of your company is one of the most important challenges of the business world. A key part of maintaining this balance is simply knowing what deductions to take advantage of. Here are a few to think about.
Capital Cost Allowance
If your business acquires and uses a piece of property, the CRA may allow you to claim a capital cost allowance and recalculate your taxable income. This can help you contend with the expenses involved in maintaining that property, including legal, accounting, and maintenance fees. It may be furniture, buildings, equipment, or other eligible items, often known as depreciable capital assets. How it’s calculated depends on the type of property and several other factors. It’s important to note that deductions are calculated annually in the long term. You cannot claim the deduction all at once for the tax year in which the property was purchased.
SR&ED Tax Incentives
Through the SR&ED Tax Incentive Program, corporations have access to federal and provincial tax benefits that are designed to encourage scientific research and experimental development in Canada. These incentives allows a corporation to claim both tax deductions based on expenditures on SR&ED and investment tax credits, which can reduce the amount of Part I taxes owed. In order to qualify, the corporation must fall under various categories of basic scientific research, applied research, experimental development, and other types of work as designated by the program. Be aware that certain provincial considerations may apply.
Employee Gifts
Employers can claim tax deductions on certain gifts given to employees. As an added bonus, the eligible gift will not be considered taxable income for the recipient. However, it must, of course, fall under the CRA’s criteria to qualify. For instance, the value of the gift must not exceed $500 in fair market value, although there is no limit to the number of qualifying deductible gifts that the employee can receive per year. Be aware that cash bonuses, performance-related awards, or anything easily converted into cash are not deductible. Gifted stocks are also not deductible, but within a corporation these will only be taxed when they are sold.
Navigating corporate taxes doesn’t have to be overwhelming or nerve-racking. You also don’t have to work with an unaffordable firm to get results. Our team offers the expertise of a big firm with the personal touch of a small one.
Tax Considerations of Incorporating
The journey of starting and running a business involves a number of landmark moments, many of which may come with new tax considerations.
One of the most important is incorporation. How do you know when it’s time to make it happen and what does it mean for your taxes?
What Does Incorporation Mean?
If you’re considering incorporation, you probably know that it establishes your company as its own distinct legal entity with ownership split between shareholders. However, incorporations involves more than just that. Most notably, it reduces the personal liability of shareholders for the debts and other obligations of the company, with certain exceptions. You’re generally only obliged by what you’ve invested in the form of shares. It’s important to note, however, that shareholders of small corporations will be held liable for bank loans in the early stages of funding. Furthermore, personal liability for issues such as negligence or fraud are still retained.
Knowing When It’s Time
The first question to ask yourself is, “Where is my company now and where do I want it to go?” In other words, it’s important to assess the current size and projected aspirations of your proprietorship or partnership. Is it large enough that you don’t want to risk personally losing your assets through heightened liability? Do you have enough financial legroom to bear the costs of the incorporation process? Do you want to take the next step in raising more capital for your company, building relationships internationally, and passing the company down to your heirs? Answering yes to these questions means you have a strong indication that it’s time to seriously consider incorporating.
Thinking About Your Taxes
Incorporation will change the tax considerations of your business significantly. For instance, with the small business deduction, a CCPC pays a lower federal tax rate on the first $500,000 of active income each year. These and other upsides significantly lower personal tax burden. Overall, incorporation requires considerable setup and administrative costs, a more complicated structure, and more administrative work, but if you’re earning significantly more from your business than you need to live, the tax benefits can really pay off when you have a good corporate accountant to help you secure them.
If you’re about to incorporate, you’ll need an accountant who has both big-league corporate tax experience and the ability to work on a personalized level.
Federal Tax Changes for Entrepreneurs
In July of 2017, Finance Minister Bill Morneau put forth a handful of proposed changes to corporate tax rules. These had far-reaching implications for any business with CCPC status. They’ve developed significantly since their initial introduction, so here’s what you should know.
Corporate Capital Gains
Many CCPC owners have elected to save on tax expenses by converting after-tax earnings of the company into capital gains rather than receiving them as shareholder dividends. This is because the former is typically taxed at a lower rate than the latter. The changes proposed last year were designed to modify the existing rules and curtail this strategy. However, after responses from many business owners concerning unintended consequences, such as double-taxation on shares acquired between siblings or through intergenerational transfer of businesses after death, the Department of Finance has decided not to pursue these changes.
Corporate Capital Gains
Many CCPC owners have elected to save on tax expenses by converting after-tax earnings of the company into capital gains rather than receiving them as shareholder dividends. This is because the former is typically taxed at a lower rate than the latter. The changes proposed last year were designed to modify the existing rules and curtail this strategy. However, after responses from many business owners concerning unintended consequences, such as double-taxation on shares acquired between siblings or through intergenerational transfer of businesses after death, the Department of Finance has decided not to pursue these changes.
Passive Investment Income
Another affected practice is the earning of passive income with investments made through the company. Investing with surplus revenue from the corporation avoids paying personal tax on those investments until they are withdrawn later. Last year the Department of Finance proposed measures to tax this passive investment income at the top personal tax rate. Once again, revisions to this have been made more recently, such as a $50,000 annual threshold. However, larger corporations will still need to re-strategize if they have previously used this method to build savings cushions for economic downturns, retirement, or other purposes.pursue these changes.
Changes to
Income Sprinkling
Income sprinkling is a method used by business owners to distribute company dividends or income to family members in a way that secures a lower personal tax rate. This practice is already regulated by the Tax on Split Income (TSOI), often referred to as “kiddie tax,” which applies the highest marginal tax rate of 33% to split income gained by family members under 18. The changes proposed in July of 2017 aimed to extend the scope of the TSOI to family members aged 18 to 24, also requiring assessment of their contribution of labour or capital to determine the legitimacy of the earned income.
The Revisions
In response to mounting concerns, the Department of Finance has made several revisions to the proposed changes that simplify their contents, offer exemptions, and loosen criteria for reasonable involvement in the business. Family members over 24, for instance, may be exempt if they own at least 10% of the corporation. Income received by the spouses of certain shareholders above 64 may also be exempt. The Department has also modified proposed restrictions to the Lifetime Capital Gains Exemption that could have applied the income sprinkling taxes to capital gains earned by family members after the death of the shareholder.
What It Means for You
It’s key to note that the new revisions have been drafted to accommodate the circumstances and concerns of certain small businesses and their related families. For owners of high-income businesses and corporations, however, the new income sprinkling rules will have a particularly pronounced effect. In addition to this, certain aspects of the new rules retain a complicated nature that may be disorienting for some high-earning business owners. It’s as important as ever to consult with your corporate accountant to find the best adjustments for you. An extensive CIBC pamphlet on the revisions can be found here.
The security and success of your business rests significantly on how well you navigate a wide range of tax issues. The new tax policy changes we’ve discussed, will be coming into effect for this tax year, and we’re here to help every step of the way.
Should Your Business Work with an External CPA?
There’s no aspect of a company’s structure that does not in some way require tax planning and accounting strategy. Even if you’ve been operating your company for many years, it’s wise to seek advice from a CPA on a routine basis. However, it’s especially important when undergoing significant developments. Are you in the early stages of founding your company or a subsidiary? Do you need to prepare detailed reports for investors? Are you changing legal status, such as from a partnership to a corporation? Speaking with a CPA specializing in entrepreneurial accounting and tax planning is essential to keeping your operations in good order whenever part of your business is in flux.
A major part of any CPA’s job is to be as informed as possible as to ongoing developments in tax policy. When you build a strong relationship with a business tax accountant, they will be able to optimize your tax planning strategies accordingly. Just like any type of legislation, tax law is subject to change, and the last thing that any business owner wants is to be left out of the loop. This can lead to missed opportunities for tax savings, issues with compliance, and other unpleasant consequences. The Department of Finance’s recent tax law changes pertaining to entrepreneurs, which we discussed above, are perfect examples.
Business accounting and tax planning can be challenging, and if you’re selected for an audit by the CRA, it may seem as though things are only going to get more difficult. However, auditing is a fairly misunderstood process, and there are a few things to know if you want it to go smoothly.
First things first: Audits are not cause for panic in and of themselves. You may be inclined to think that the way you’ve prepared your business taxes has raised a red flag with the CRA, but this may or may not be true. Whether or not an audit is taking place to investigate a serious issue or discrepancy, the nature of this can vary widely and will result in different types of audits. Sometimes it’s because your business is showing financial activity that is atypical relative to other similar companies, and sometimes it’s simply random selection. A smart first step is therefore to find out and take note of why you’re being audited so that you can better prepare.
Speaking of preparation, this is one of the most important pieces of advice you can follow if you want an audit to go smoothly. Regardless of the nature of the audit, smart organization of your company’s financial records is everything. From bank statements to income records and balance sheets, it’s essential to have everything in immaculate order. In fact, even when there isn’t an audit on the horizon, you should proactively keep records as thorough and well-systematized as possible. Anything pertaining to expenses and deductions is particularly important. This is the key to fully cooperating and being able to answer inquiries promptly, clearly, and accurately.
Running a company involves an often overwhelming amount of financial paperwork and records keeping, and preparing for an audit is liable to introduce extra stress into your day-to-day operations. This is why it can be a game-changer to seek out external help from a CPA who is experienced with business audit preparation and assurance.
Not only should you work with a professional if there’s an impending audit, but also on a continuous basis in order to minimize the likelihood of an audit in the first place. There’s no better way to prepare than working with a great business accounting team to take all the right preventative measures.
Specific Advantages of
Working with an External CPA
Every business owner wants to fortify the financial integrity of their enterprise, but not all of them take the necessary measures to make it happen. Company growth and longevity are always intertwined with skillful accounting, so what specific advantages can an external CPA provide?
Greater Efficiency
One of the foremost advantages of working with a CPA for your corporate taxes and accounting is increased efficiency, both with regard to time and cost. Your need for a CPA will fluctuate and change throughout the fiscal year. Working with an external firm therefore carries the benefit of producing excellent results in a timely manner without the need for investing in the salary, office resources, and benefits required for a full-time internal corporate accountant.
Specialized Expertise
As long as you’ve chosen the right firm, external corporate CPAs typically bring a range and depth of experience to your company tax planning and accounting that is quite difficult to beat. In the best cases, this experience amounts to a highly specialized skill set and a greater degree of fluency in corporate finances, tax law,
and tax planning in the context of multiple industries and enterprise types. The power of this versatility can be considerable for any business owner.
Objectivity
When it comes to corporate accounting and taxes, depending too heavily on an internal perspective can introduce a number of issues. Errors can potentially be glossed over and the company finances won’t be able to benefit from a second opinion. This is an important yet often underestimated advantage of bringing an external CPA into the mix. It makes for a collaborative process that may reveal certain solutions and strategies that haven’t already been considered.
Peace of Mind
If there’s one advantage that encompasses all others, it’s knowing that you’ve taken the right measures to secure the prosperity of your business. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, one thing that all entrepreneurs have in common is a desire for long-term financial strength and tax-efficiency. With the support and services of a respected CPA, you’ll have this and the enduring peace of mind that comes with it.
Cook & Company is Calgary’s finest team of corporate and entrepreneurial tax accountants. If you’re a hard-working business owner hoping to minimize the strain of tax expenses on your company, we can help. Our chartered professional accountants are driven to provide the most approachable and dependable corporate accounting services available to businesses across North America, and when you experience the quality of service and level of expertise offered by our CPAs, you’ll see why Cook & Company has become one of the most esteemed business accounting firms in Canada. To ensure prosperity for your company, call (403) 768-4380 and we’ll be by your side.
