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Should You Set up a Trust for Your Assets?

Set up a Trust

You probably know of others who have set up a trust(s) to protect their assets. Maybe you’ve heard mention of trusts on a TV special regarding inheritance and finances. Ever wondered what a trust is? Inquisitive as to how a trust might benefit you, your family and your business? The following is information regarding trusts and how they can protect assets. 

What is a trust?

A trust is a legal entity that allows you to transfer the legal title of an asset(s) to a person while assigning the benefit of the asset to another. The creator or original owner of the asset is called the grantor. The person who manages the trust is known as the trustee (often an attorney or accountant). The person who receives the benefits is known as the beneficiary. Depending upon the type of trust, the grantor can retain the right to make some or all decisions regarding the trust. A well-designed trust helps save time, paperwork and other challenges when settling an estate. It can reduce the amount of estate taxes beneficiaries have to pay when they inherit assets. 

Categories of trusts:

Trusts are either revocable or irrevocable and may take effect during your lifetime or after death.

Revocable trusts are most common and can be changed or revoked at any time. They instruct the trustee on how to distribute your assets to beneficiaries while you’re alive, after death or if you become incapable of doing so. Income from trust-held assets is taxable at Canadian trust tax rates.

Irrevocable trusts are set in stone the minute the agreement is signed. Only in rare circumstances may changes be made. Irrevocable trusts remove the benefactor’s taxable estate assets, meaning they are not subject to estate tax upon death. The benefactor is also relieved of tax responsibility for any income generated by the assets. The trust is protected from creditors and legal judgment.

What are the advantages of a trust?

There are a variety of benefits to the establishment of a trust. You can:

  • Control assets and provide security for both the grantor and the beneficiaries.
  • Provide for beneficiaries who are minors or require expert assistance managing money.
  • Minimize the effects of the estate or income taxes.
  • Provide expert management of estates.
  • Minimize probate expenses.
  • Minimize the time to accomplish probate. 
  • Maintain privacy.
  • Protect real estate holdings and/or a business.

What are the disadvantages of a trust?

There are a few issues to be aware of when considering the establishment of a trust(s).

  • Cost: An estate attorney usually does the paperwork involved in setting up a trust and transferring your assets into the trust.
  • Time: You’ll need to spend time dealing with paperwork. You may need to have uncomfortable conversations about who gets what.
  • May not be necessary: Some people can indeed save on estate taxes with certain trusts, but most estates aren’t subject to estate taxes in the first place.

Reasons to set up a trust:

There are a number of reasons that you may seek to establish a trust(s).  

  • You want to leave assets to minors or young adults
  • You have children from a previous marriage
  • You want a professional to manage your assets when you’re gone
  • You have a disabled or special-needs child
  • You want to support your spouse in the case of his/her incapacity
  • You want to save taxes

If you’re seeking to ensure that your finances are well managed as you pass your assets on, a trust is useful. A trust helps make sure that your assets are directed toward the people and causes that are important to you. 

Need help understanding the benefits of a trust? Want assistance setting up a trust? Contact Cook and Company Chartered Professional Accountants. We are based out of Calgary, Alberta, serving clients across Canada and the United States. We provide high-quality tax, assurance and succession planning services for a wide variety of privately-owned and managed companies. Contact us for a complimentary consultation.

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The Best Strategies for Small Business Accounting

Strategies for Small Business Accounting

The process of bookkeeping may seem complicated and daunting. Yet, it’s crucial that your small business has accurate books. Detailed financial records reduce problems; unpleasant financial surprises, forgotten paperwork, missed goals, large bills from your accountant, and payroll and tax challenges. Accurate and efficient bookkeeping helps a business make and keep long-term goals, smooth out the ups and downs of seasonal cash flow, improve profits and alleviate troubles with the CRA. The following are some strategies for effective small business accounting. 

  • Keep business and personal banking separate: Open a dedicated bank account for your business, preferably one with online access as this makes it easier to make payments and do bank reconciliations. If you need business money for personal expenses, do a regular transfer to your personal account. This will make bookkeeping much easier.  Don’t use your personal credit card for work purchases and vice versa.
  • Recognize business vs. personal expenses: You need to know what type of expenses can and can’t be claimed against your profit for the purpose of reducing tax. An expense that is directly related to the operation of the business and towards producing income is tax-deductible. An expense that is for your personal pleasure is not. Mixing personal and business does not mean a full claim for business can be made. If you’re in doubt about whether or not to claim an expense, contact your accountant.
  • Develop a budget: Begin by coming up with revenue projections and a list of anticipated expenditures. Compare this budget to actual expenses and revenue. Adjust the budget as needed.
  • Keep an eye on high-cost expenses: Labour and inventory costs are the largest expenses for most small businesses. To reduce labour expenses, consider outsourcing  work to contractors that bill at an hourly rate. They may not need 40 hours/week to complete your work and they don’t require benefits. Time-tracking software makes it easier to understand how much certain tasks cost your business, enabling you to find ways to control expenses. Track inventory carrying costs, inventory turnover ratio, amount lost to obsolete inventory and other key metrics.
  • Plan for major investments. Consider what expenses will arise in the next one to five years (upgrade of facilities, new office equipment, peaks in staffing costs, emergencies). By planning for major expenses, you can avoid taking money out of the company during good months and finding yourself short in slow months. Track expenses and revenue to help identify the best time for large investments. Business credit cards help establish a credit history giving you a better chance at qualifying for financing (lines of credit, loans) and they often offer perks such as business or travel rewards.
  • Utilize bookkeeping software: There are free bookkeeping software packages if you are on a tight budget (Wave, ZipBooks, Akaunting, SlickPie, GnuCash, CloudBooks). If you can afford it, purchase a good quality program that comes with occasional updates (Cashbook, Quickbooks, Xero, Sage, Freshbooks, Zoho). Choose one that is easy to use, customizable, produces charts for quick reference and combines different aspects of reporting from one period to the next. 
  • Organize and store source documents: Quotes, orders, delivery dockets, sales and purchase invoices, credit and debit notes, payment/remittance advice, cheques, receipts, wage records and deposit slips need to be filed and archived for 5 to 7 years. Keeping source documents at your fingertips makes it easier to prevent fraud in your business, improve your accuracy and ease finding transactions when needed.
  • Read and understand monthly reports: Keep your bookkeeping system up to date and produce reports monthly. Learn to read and understand these reports, in particular the income statement and the balance sheet. 
  • Keep on top of sales invoices: Late and/or unpaid bills hurt cash flow.  As soon as a job is complete or a product is delivered, prepare and send out customer invoices. Put a process in place to track your billing carefully (issuing a second invoice, a phone call reminder, penalties or extra fees). Be organized.
  • Ensure inventory data is accurate. To prepare financial statements you need accurate inventory data. Track physical inventory either manually, by counting items on a regular basis, or by pairing counts with an inventory management system that automatically adjusts the numbers as sales happen (via integration with your point-of-sale system). Inventory management software makes it much easier to track inventory and the information will be more accurate.
  • Know when to outsource: If you find bookkeeping too difficult or don’t have enough time for it, outsource the task. This can be cost-effective and professional help will ensure accuracy. Professional bookkeepers often give great business advice and assist with many tasks (recommend good software, attend meetings with your banker, explain accounts you find difficult, prepare annual budget and cash flow reports, etc).

Don’t let accounting be the downfall of your small business. Try these bookkeeping tips to help you improve your business, spend less time on finances, focus on growing your company and enhance your customer relationships. When it’s time, get professional bookkeepers and/or accountants involved. 

Need help establishing a good bookkeeping system? Looking for business advice? Contact Cook and Company Chartered Professional Accountants. We are based out of Calgary, Alberta, serving clients across Canada and the United States. We provide high-quality tax, assurance and succession planning services for a wide variety of privately-owned and managed companies. Contact us for a complimentary consultation.

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Common Problems with Business Succession Planning

Business Succession Planning

Operating and growing a business is engaging and demanding. Business owners often become consumed with the day-to-day operations of their company, leaving little time and energy for planning for the future. Eventually, companies change hands; through retirement, transferring of ownership or death. Succession planning is a way to prepare for the future, making transitions smoother and maximizing financial rewards for business owner(s) and/or their heirs.  

What is succession planning?

Succession planning is the process of identifying the critical positions within an organization and developing action plans for individuals to assume these positions. It’s a business strategy used to pass leadership to an employee or group of employees. Succession planning ensures the continuity of a company’s success in the future.

Why do you need a succession plan?

Planning for the future of a company has many and varied benefits. Succession planning:

    • prepares the way for the change of leadership in a company. The right leaders make a difference in the success of an organization. Succession planning ensures the stability of a company and prepares it for growth and change by planning who will lead the organization in the future. 
    • helps a company survive unforeseen events such as death, illness, personal problems, abrupt resignation, arrest, etc. It puts a strategy in place for filling important leadership roles.
    • encourages company owners to think long term. Rather than focusing only on weekly meetings and quarterly earnings, succession planning forces you to think about your company’s future. 
    • motivates communication. Talking about the future promotes communication between departments and/or employees, improving how everyone works together on a daily basis. 
    • saves money. Being unprepared for a sudden vacancy risks incurring significant costs to lure qualified people to your position, on short notice. A documented succession plan saves the costs of hiring outside people for key leadership roles.
    • keeps staff motivated. Succession planning sends a positive message to staff as they are considered for future leadership positions. It increases confidence in a company and motivates the best efforts of employees. 

Common problems with business succession planning:

There are a number of issues and problems to be wary of when planning for the succession of your business. 

    • Lack of Strategy: Make sure you identify your company goals and priorities and that your succession plan lends itself to achieving these. Your plan needs to be a cohesive, overall strategy. 
    • Ambiguity: An effective succession plan provides clear, well-defined guidance for a smooth transition. It identifies key positions and how they will be filled. If it is to be functional, it must be detailed.
    • Procrastination: Many business owners find it difficult to find the time and energy to create a succession plan. Thinking about their mortality, disability and/or future sale of their company seems impossible. Get the process started by bringing in outside help to coordinate the complicated factors associated with preparation for the future. Let the experts (accountant, lawyer, banker, advisor, etc.) help formulate the plan. 
    • Choosing successors by gut rather than data: When choosing successors for key positions in your company, consider performance scores, number and quality of projects completed, engagement survey scores and supervisory/leadership experience. Be careful of making succession decisions solely based on your attitudes and beliefs. These are formed by experience and the experience of any individual is limited. 
    • Making assumptions about your talent: Make a point of understanding the skills, talents and goals of those in your organization. Empower employees to chart their own career development within your business, giving them a sense of control over their careers. Steer clear of assuming you know what they want and whether they’re interested in taking over a leadership role in the future.
    • Forgetting company morale: Discussion of succession can have a negative impact on morale, lead to fear regarding the future of the company and create jealousy and competitiveness. Be straightforward about the process of planning for the future of the company. Encourage discussion and collaboration. Allow employees to air concerns and give them time to get on board with the plan. Make the process simple and open.  
    • Ignoring retention of candidates: It’s important to retain those you are training to lead one day. To fend off head hunters and motivate future leaders to stay with your company, offer development opportunities, training incentives and mentoring. Be clear about why and for what role you have selected them.
    • Considering only executive positions: If you are advancing an internal candidate to an executive position, you will need a competent employee to fill the vacancy you produce. Create a comprehensive strategy to fill executive and middle management positions. This helps avoid issues, making your plan stronger. 
    • Thinking succession planning is complete: Because companies are constantly changing (new products/services, new employees, new markets, additional layers of leadership), the succession plan you have in place will need to be reviewed and tweaked periodically. 
    • Failing to support succession planning with technology: Succession planning software (SAP, Succession Wizard, Cornerstone OnDemand, Plum, UltiPro, TalentGuard, etc.) supports a company by providing insight into the capabilities of employees and their succession potential. It empowers HR to identify skilled employees and accelerate their development and enables them to evaluate, monitor, engage and develop existing talent. 
    • Not maintaining a current, accurate business valuation: Though the succession plan is a means of readying for the future, be prepared to make sudden and challenging choices by keeping a current, accurate valuation of your business. This serves as a benchmark, giving you control and secure data on which to base decisions.

Succession planning is critical to ensuring access to a talent pool for future vacancies. It makes tackling future changes and challenges easier. Align your plan with your goals. Revisit it periodically and adjust as needed. Utilize software to provide data for decision-making and let the experts help ease the process. If you haven’t already formulated one, get started on your succession plan today.   

Need help creating a succession plan for your business? Want to avoid the common challenges of succession planning? Contact Cook and Company Chartered Professional Accountants. Our expert staff will help you navigate the complex maze of succession planning, with ease. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook and Company uses their experience and expertise to help your business. Contact us for a complimentary consultation.

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Tips for Effectively Managing Business Debt

Managing Business Debt

Debt is a necessary part of running a business, allowing a company to purchase inventory, invest in equipment and finance growth. If not handled carefully, debt can cause serious problems. It’s important to develop methods for debt management so that a company’s credit rating may be preserved and operations sustained. The following are strategies and tactics for effectively managing business debt. 

  • Take inventory of your debt: List the money owed and to whom (business loans, lines of credit, business credit cards, outstanding amounts due to vendors). Include the total amount owed, interest rate and monthly payments. This information will help with the prioritization of payments.
  • Create a plan: Develop a budget and a plan for repayment. Decide which debts to pay first and which pose less of an immediate threat. Decide whether you wish to use the avalanche strategy (paying off your debts, starting with the loan with the highest interest rate) or the debt snowball strategy (paying off the smallest of all your loans as quickly as possible) to settle your outstanding balances. 
  • Improve cash flow management: Improving cash flow requires measurement and forecasting, improving the management of payables and receivables and being prepared for shortfalls.
    • Cut unnecessary spending: Review all costs (inventory, shipping, purchasing, rent, utilities, payroll, equipment, etc.). Look for costs that can be reduced or cut. Explore the possibility of alternative buying strategies. Negotiate with current suppliers in order to cut costs and/or find new suppliers with better pricing. Rewrite your budget.
    • Increase your earnings: Fine-tune your invoice collection, using collection strategies for a more predictable cash flow. Promote your business (social media, community events, etc.) to increase income. Bundle products to reduce selling price and improve sales volume. Provide employee training to enhance sales performance. Find ways to retain customers and attract new ones.
  • Renegotiate, refinance and/or consolidate debt: Reach out to your creditors to negotiate more favourable terms. Try refinancing as it often results in lower payment terms and interest rates. Consolidating multiple debts reduces the number of creditors to pay and payments you make, often allowing you management of debt through a single monthly payment. 
  • Plan for the long term: Establish an emergency business account. Put aside a portion of business profits each month as a reserve against the ups and downs of business. 
  • Get professional help: There’s no need to confront your small business debt alone. Consider working with your CPA. They are available to answer questions and have knowledge, experience and skill with debt management. 

Managing debt is a necessary and important aspect of operating a business. It’s fundamental to business success. Debt management allows a business to manage cash flow and capital for growth. Tackling debt may seem tricky and stressful but, using these tips, you can make headway. Though these strategies aren’t solutions, they provide opportunities for relief of the risk that comes with debt. Remember that your accountant is on your side and is an essential source of help and support in debt management for your business.

Need help with debt management strategies? Contact Cook and Company Chartered Professional Accountants. Our expert staff will help you navigate the complex maze of debt management, with ease. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook and Company uses their experience and expertise to help your business. Contact us for a complimentary consultation.

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Estate Planning Questions to Ask Your Accountant

Estate Planning Questions

When you hear the phrase “estate planning” you likely think of death, taxes and a will. These are important parts of estate planning but they’re not the full picture. 

What is estate planning?

Estate planning involves setting up a plan that establishes who will eventually receive your assets and makes known how you want your affairs to be handled in the event you are unable to handle them on your own. Estate planning is about people; who they love and how they wish to provide for them. It’s not only about death but also about preparing for the possibility of becoming dependent through age, disability or injury. 

What is the role of your accountant in estate planning?

Intricate knowledge of taxes allows your accountant to keep you informed regarding the tax implications of your estate plan. They ensure that your plan minimizes taxes and maximizes the portion of your estate that can be passed on to your beneficiaries. Your accountant works together with your lawyer to help:

  • Clearly define your estate planning goals.
  • Organize and create your estate planning team (experts on law, finance, and taxes).
  • Evaluate and recommend estate planning options.
  • Prepare, organize and review your estate planning documents including current wills, trusts, health care and power of attorney.
  • Decrease the problems and expenses associated with probate.
  • Lessen taxes at the time of death.
  • Arrange for management of your estate in the event you are incapacitated.
  • Draft a working plan for conserving and effectively managing your estate after death.
  • Transfer the assets of your estate to heirs the way you want.
  • Organize fair and adequate liquidation of estate to cover taxes and other expenses.
  • Amend your plan as needed.

Your accountant is as helpful as your lawyer when planning your will, discussing accounts, debts, and assets, determining bequeathals, deciding who you’d like to have as executor of your estate/joint bank accounts and who you’d prefer as Power of Attorney for your affairs if you become incapacitated. Both professionals guide you in making the best decisions for you and those you leave behind.

Who needs estate planning?

If you wish your estate distributed according to your wishes as opposed to statutory guidelines, you need an estate plan. If you have assets that are susceptible to high taxes, estate planning is beneficial. If you own a business, estate planning is essential. If you want planned distributions of benefits for your descendants, estate planning is helpful. If any of your heirs need financial assistance upon your passing, estate planning is for you.

Questions to ask your accountant regarding your estate planning:

  • Can you help with probate? Your accountant will have a thorough understanding of your assets and tax liabilities enabling him to deal with the probate process quickly. Much of the work involved in probate is familiar to an accountant.
  • Can you handle my accounts when I pass? An accountant can manage a deceased’s accounts while the estate is being settled. This ensures heirs that money is being managed and spent properly. 
  • Who will prepare my final tax return? Accountants can handle final income tax returns, as well as the estate tax return. They understand what taxes need to be paid at the provincial and federal levels, exemptions that exist for particular circumstances and how to help your estate save money.
  • Can you help my beneficiaries? A CPA is able to help heirs with their individual tax filing (at provincial and federal levels) avoiding costly government fines and reducing family discord. 
  • Can you help with the tax obligations of the estate? Estates have many tax obligations especially if your estate has several assets. Your accountant can handle these tax matters, help calculate the value of your estate and determine the impact of the tax laws. An account makes sure you fulfill your tax obligations, avoiding the risk of costly fees and penalties. 

Dealing with the loss of a loved one is hard. Simplify your heirs’ situation with estate planning so that they need not undergo a stressful ordeal. When it comes to the financial intricacies of your business and its future, consult a team of financial professionals who can offer a specialized set of expertise. Your accountant can help you prevent fines, fees and penalties. They can ensure all aspects of estate accounting are complete and accurate. Protect your legacy for your loved ones. Take charge of your financial endowments. Talk to your accountant today. 

Need help ensuring that the money and assets you’ve worked hard to build aren’t destroyed after you’re gone? Want help with business estate planning? Contact Cook and Company Chartered Professional Accountants. Our expert staff will help you navigate the complex maze of estate planning with ease. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook and Company use their experience and expertise to help your business. Contact us for a complimentary consultation.

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What’s the Difference Between an Auditor and a Tax Accountant?

Auditor and Tax Accountant

Accountants and auditors work with financial statements and ensure they are accurate, up-to-date, and in compliance with various regulatory standards. They require similar skill sets but subtle differences exist in their duties. Organizations and businesses often enlist the services of both tax accountants and auditors when preparing and submitting financial statements. What is the difference between a tax accountant and an auditor? 

Tax Accountant:

Tax accountants specialize in helping businesses and individuals plan for, minimize and file taxes. Accountants influence business practices, cash flow management and how businesses report their earnings to the government. Accounting requires a person who is detail-oriented and focused. Small mistakes can cost millions, particularly for large companies dealing with massive sums of money. An accountant can be a dedicated employee of a company or work for a third party hired by businesses to manage their books and prepare their taxes. An accountant:

  • prepares financial statements (balance sheet, income statement, statement of cash flows, statement of owner equity)
  • undertakes bookkeeping 
  • tracks expenses and revenues 
  • forecasts future profits and cash flows
  • evaluates and addresses tax liability
  • answers complex business tax questions
  • provides corporate tax advice 
  • does tax preparation
  • assists with change in the structure or nature of your company

Auditor:

Auditors ensure that accountants’ work is correct and follows the law. They work with organizations after they’ve made decisions regarding business practices, cash flow management and how to report their earnings to the government. They examine the financial statements prepared by accountants and ensure they represent the company’s financial position accurately. Auditors search for errors or problems. They require the ability to pay attention to detail, but also need strong investigative skills. While auditors sometimes uncover intentional wrongdoing (subterfuge, fraud, misstatements, tax evasion), they typically find unintentional mistakes. Like accountants, an auditor can work internally for a specific company or for a third party, such as a public accounting firm. Many auditors are employed by government and regulatory bodies. Auditors:

  • collate, check and analyze spreadsheet data
  • examine company accounts and financial control systems
  • gauge levels of financial risk within organizations
  • check that financial reports and records are accurate and reliable
  • ensure that assets are protected
  • identify if and where processes are not working as they should and advise on changes needed
  • prepare reports, commentaries and financial statements
  • liaise with managerial staff and present findings and recommendations
  • ensure procedures, policies, legislation and regulations are correctly followed and complied with
  • undertake a review of wages

The key difference between tax accountants and auditors is that tax accountants specialize in helping businesses and individuals plan for, minimize and file taxes while auditors ensure that accountants’ work is correct and following the law. Your business likely needs the services of both a CPA and an auditor.  

As one of Calgary’s most respected business tax and accounting professionals, the Cook & Company team is proud to empower the success of businesses both local and abroad. To learn more about our tax planning and audit & assurance services, give us a call at (403) 398-2486 today or fill out the request for meeting form.

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Corporate Tax Planning Tips for Canadian Small Businesses

Corporate Tax Planning Tips

There are many legal strategies for reducing income taxes in Canada. Part of running a successful business is knowing these strategies and utilizing them. The following are some of the top strategies to lower your taxes and keep more money in your business.

Collect receipts: As the CRA does not accept credit card statements as proof of expenses, in order to take advantage of tax deductions available you must collect receipts for all business-related activities (accounting fees, business advertising and promotional expenses, business licenses and memberships, use of home expenses, interest and bank charges, insurance premiums, meals and entertainment, office expenses, rent, repairs and maintenance, tools and equipment, vehicle expenses, parking fees). Record and file them appropriately. You can keep physical receipts or digital copies.

Consider use-of-home deductions: You can claim business-use-of-home expenses if your home is your principal place of business or you use a workspace in your home solely to earn your business income and use it regularly to meet with clients, customers or patients. Home-based businesses can deduct a portion of many home-related expenses (heat, electricity, home maintenance, cleaning materials, home insurance, portions of property tax, mortgage interest, capital cost allowance). The percentage you can claim is determined by the size of your office in relation to the total size of the home. You cannot claim business-use-of-home expenses if you are also conducting business elsewhere or because you sometimes work on business matters at home.

Claim non-capital losses: If your expenses exceed business income in any year, use this loss to decrease your income tax bill. The loss can be carried back three years or carried forward up to 20 years. Your Chartered Professional Accountant can help you decide if it makes sense to use the non-capital loss in the current tax year, carry the non-capital loss back to recover income tax you’ve already paid or carry it forward to offset a larger tax bill.

Strategize your capital cost allowance: Instead of deducting the cost of the depreciable property you’ve acquired in your business in a particular year, deduct this cost over a period of years through a capital cost allowance claim. You can use as much or as little of this claim in any year and carry any unused portion forward to help offset a larger income tax bill in the future. Also, consider buying and selling your assets at the right time. Buy new assets before the end of your fiscal year and sell old assets after the current fiscal year.

Manage RRSP and TFSA contributions: Registered Retirement Savings Plans and Tax-Free Savings Accounts are excellent income tax deductions for small-business owners. Since some or all of your allowable RRSP contribution can be carried forward into subsequent years, you’re better off saving RRSP contributions for years in which you expect a high income. If you’ve maxed out your RRSP contributions and need a tax-free place to put cash or investments, the TFSA is a good choice. TFSAs allow you to shelter savings and investment income from taxes. Income and capital appreciation from stocks, bonds, or other interest-bearing instruments are tax-free inside a TFSA. Your Chartered Professional Accountant can help you maximize savings using RRSPs and TFSAs.

Incorporate your business: Incorporating your business lets you take advantage of small business tax deductions. The income of qualifying Canadian corporations is taxed at a reduced rate. Incorporating your business as a tax strategy will only be effective if your business has grown enough for incorporation to be worthwhile. You can also take advantage of certain tax benefits that are not available to unincorporated businesses (income tax splitting, capital gains exemptions) when you sell the business. Talk to your CPA to determine whether incorporation is right for you. 

Increase your charitable donations: Donations made to registered Canadian charities earn you tax credits. Consider giving more to the registered charities of your choice. Be aware that non-Registered Canadian charities, American charities and political parties do not count as charitable income tax deductions.

Split your income: This strategy takes advantage of the marginal tax rate disparities. The higher your income, the higher the marginal tax rate. Transferring a portion of your income to a family member (spouse, child) reduces the marginal rate on your income. Keep your claims reasonable, properly invoice for work performed and complete all the paperwork as you would when hiring any employee or contractor. As the rules for income splitting are complex, consult your CPA.

Balance your dividend salary mix: You’re entitled to withdraw cash from your corporation as a dividend or a salary. Ask your CPA to help determine what mix will maximize your earnings. The mix you decide upon is determined by current circumstances as well as future predictions. 

Hire a CPA: Most small businesses prefer to have a certified professional accountant complete their Canadian income tax returns. This saves time and effort, provides assurance of accuracy and increases your chances of efficient tax planning.

While not all corporate tax-saving strategies work for every small business, some strategies have proven useful for many companies. With planning, you can reduce your taxable income and keep more money working for your company. Consult a Chartered Professional Accountant to ensure that you save the maximum amount possible.

Not sure what tax deductions your company qualifies for? Need help with tax planning strategies? Contact Cook and Company Chartered Professional Accountants. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, we use our experience and expertise to assist you. Contact us for a complimentary consultation.

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Strategies to Overcome a Cash Flow Crisis

Overcome a Cash Flow Crisis

Even thriving, profitable businesses can have cash flow problems if payables (amounts due to vendors or suppliers) are due before receivables arrive (money due to a firm for goods or services delivered or used). In fact, 29% of businesses fail because they run out of cash. During a cash flow shortage, a business may not have enough money to cover payroll or other operating expenses. It’s imperative that businesses have a strategy or plan in place to overcome a cash flow crisis.

Strategies for avoiding and/or overcoming a cash flow crisis:

There are a number of strategies and approaches that can help companies correct and or avoid cash flow difficulties.

  • Lease: When leasing (supplies, equipment, real estate) you pay in small increments helping to improve cash flow. Also, lease payments are a business expense and can be written off on your taxes. 
  • Offer discounts for early payment: Create an incentive for customers to pay their bills ahead of time by offering an early payment discount. This is a win for you and your customers.  
  • Obtain short-term loans for working capital: Short-term loans are borrowings undertaken for a short period to meet immediate monetary requirements. They support a temporary business capital problem. Though they have a higher interest rate, they’re easy to get approved and are less expensive than most long-term options.
  • Use a business line of credit: A line of credit is an arrangement between a bank and a customer that establishes a preset borrowing limit that can be drawn on repeatedly. Borrowers pay interest on the outstanding balance and not on the entire credit line. Interest rates are often more favourable.
  • Try business credit cards: Credit cards provide smaller limits than short-term loans and lines of credit but are easy to obtain and sometimes offer reward options on purchases. Use them for small purchases and operational needs.
  • Conduct customer credit checks: Before signing up a new customer, conduct a credit check. If the client’s credit is poor, assume you won’t be receiving payment on time. If you decide to opt for the sale, set a high-interest rate on overdue payments.
  • Form a buying coop: Many suppliers give discounts to firms who buy in bulk. Find like-minded companies willing to pool cash in order to lower prices with suppliers. 
  • Improve inventory: Goods you buy that aren’t moving at the same pace as your other products hurt your cash flow. Reduce them or get rid of them.
  • Invoice immediately: Automate your invoicing system to reduce the number of errors and improve the speed of invoicing. Provide easy-to-read invoices with clearly stated terms.
  • Use electronic payments: This allows you to pay a bill on the actual due date, increasing the time before cash flows out of your business.
  • Negotiate better terms: Maintain friendly, regular communication with suppliers so you can negotiate better terms. Offer early payment for a discount or negotiate extended payment options.
  • Increase pricing: Experiment with pricing to find the perfect number; the limit of what customers are willing to pay for your products and/or services.
  • Ask new customers for a deposit or partial payment up-front, rather than billing the entire amount due in a single invoice after services have been rendered or products have been delivered.
  • Focus on past due accounts: Identify past due clients and make phone calls. Ask for partial payments.
  • Make payment convenient by offering additional methods (credit card, electronic, mobile).
  • Raise investor capital: Bring in new business partners by selling equity.
  • Reduce expenses: Prioritize company expenses. Eliminate unnecessary expenses and only spend on the costs that keep you operational and generate revenue. Shop around to see if there are cheaper options available for phones, internet, and third-party information technology.
  • Sell non-essential assets: Although this is a temporary fix, it’s a quick and effective way to raise some cash when you’re in a bind.
  • Pre-sell products or services: Encourage sales sooner by pre-selling. It’s a way for consumers to plan ahead. 
  • Finance purchase orders: If you’re a manufacturing or merchandising company and you require a significant amount of cash to fulfill your orders, financing purchase orders may be helpful. The financing company pays the vendor so you can acquire the merchandise/inventory you need to fulfill the order. This allows you to take large orders that you don’t yet have the cash to fill.
  • Turn down, shift or postpone work to manage the volume of business for consistency over time. Offer good clients a discount for postponing their work, order or service. This will not be a viable strategy for companies with strong seasonal business (retailers, accountants, etc.).
  • Invoice factoring involves selling your invoices (an asset) to a factoring company. Instead of waiting 15, 30 or 60 days for your money, your business gets payment upfront.
  • Hire an accountant: A chartered professional accountant will have the knowledge and experience to offer you creative solutions to your cash flow problems. 

Working capital is the fuel that powers small businesses. Managing cash flow is critical to running a profitable long-term business. Constantly look for new ways to improve cash flow management in your company.

Looking for ways to examine and improve your cash flow? Contact Cook and Company Chartered Professional Accountants. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook and Company use their experience and expertise to help your business. Contact us for a complimentary consultation.

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Tax Implications of Shareholder Loans

Tax implications of Shareholder Loan

The Canadian Income Tax Act contains numerous provisions relating to the tax treatment of shareholder loans, many of which are designed to prevent their abuse by shareholders. But, what is a shareholder’s loan, how are they used and what are their tax implications? 

What is a shareholder’s loan?

Your shareholder loan account is made up of all capital that you contribute to the corporation and all purchases made on behalf of the corporation (using personal funds or personal credit cards) netted against cash withdrawals and personal expenses paid by the company on your behalf.

  • Owner cash withdrawal: An owner withdrawing money from a corporation is the most basic shareholder loan. If the withdrawal is not designated as a dividend or a salary, it creates a loan from the corporation to the shareholder. Accountants call this a “due from shareholder” transaction because the loan amount is due from the shareholder to the company.
  • Purchase of a personal item with company funds: Another version of an owner withdrawal is when a shareholder purchases a personal (non-business) item using company funds. The purchase would be recorded as a loan from the company to the shareholder and the funds need to be repaid.
  • Owner cash contribution: Sometimes a shareholder of a company deposits personal funds into the company to cover expenses. Essentially the shareholder has loaned the company cash and the company needs to pay it back. An accountant would call this a “due to shareholder” transaction because the amount loaned to the company is now due back to the shareholder.
  • Pay for business expenses with personal funds: Another common version of an owner contribution is when company expenses are paid with personal funds (usually a credit card) of the shareholder. The purchase is recorded as a loan to the company. The shareholder expects to be reimbursed for this legitimate expense.

What are the benefits of a shareholder loan?

One of the benefits of a shareholder loan is the ability to withdraw funds from the corporation without triggering a tax liability. If a shareholder loan is repaid within one year from the end of the taxation year of the corporation (the taxation year in which the loan was made) it will not be included in the income of the borrower. This creates planning opportunities but it also creates opportunities and incentives for shareholders to abuse the rules. Therefore, the Income Tax Act will, by default, include the principal loan amount of any shareholder loan into the taxpayer’s income. It’s imperative that your loan meets certain conditions to avoid costly or unintended tax consequences. 

Understanding shareholder loan conditions:

The following are common scenarios regarding shareholder loans and the conditions required: 

  • The shareholder loan was made to you or your spouse to buy a home to inhabit, you received the loan in your capacity as an employee of the corporation and bona fide arrangements are met. As an employee of the corporation, you must be actively involved in the operations and not merely a passive shareholder. A bona fide arrangement requires that the loan repayment terms and the interest rate charged is reasonable and would reflect terms similar to a contract entered into between two parties in normal business practice. 
  • The shareholder loan was made to you to acquire a motor vehicle to be used for the business’s operations. You received the loan in your capacity as an employee of the corporation and bona fide arrangements are met. The loan cannot be part of a series of loans and repayments and the loan must include interest charged at the prescribed rate.
  • The shareholder loan was repaid within one year after the taxation year-end in which the loan was made. For instance, assuming the corporation has a calendar year-end, a loan issued February 28, 2020, would have to be repaid by December 31, 2021. There are no tax liability issues under these circumstances.

Shareholder loan tax implications:

Ensuring that you are not penalized by the Canada Revenue Agency (CRA) for improperly withdrawing a Shareholder Loan is critical within your personal and corporate income tax planning. Understanding the tax planning opportunities is also important.

  • Any loan to a shareholder that does not meet the conditions is included in the shareholder’s income and no expense is allowed to be deducted by the corporation, resulting in double taxation.  
  • Any subsequent repayment of the loan may be deducted from income in the year it is repaid.  
  • In certain circumstances, this rule creates tax planning opportunities.  For instance, if a $10,000 shareholder loan was made to your adult child studying full-time there would be no tax liability as the $10,000 income inclusion would be sheltered by the basic personal tax credit. Upon commencing work and repaying the loan, your child would deduct $10,000 from income in a higher tax bracket.  If their marginal tax rate at that time is 30% that would create a tax savings of $3,000. Ultimately, the corporation is in the same cash position after the loan is repaid but your child is $3,000 richer.  

In the worst-case scenario, the CRA can have the full amount of the loan plus interest added to the shareholders’ income for the year of the loan and not allow a deduction at the corporate level.  Planning for repayment within two corporate fiscal year ends is a reliable course of action to mitigate any worry of penalization from the CRA. Having an experienced accounting team in place to not only plan but to monitor and execute is pivotal when a corporation has transactional deposits and withdrawals out of the corporation.

How to avoid shareholder loan tax problems:

There are a few straightforward ways to avoid taxation problems. These include:

  • Repaying the loan: If the shareholder repays the loan permanently within one year, he won’t have to pay tax personally on those funds.
  • Taking the cash as a salary or wage: If the owner wants to earn money from his company and avoid double taxation, he could take the funds as a salary or wage. The salary would act as a tax deduction for the company and the owner would include it in his employment income. This avoids double taxation.
  • Taking the cash as a dividend: Avoid double taxation by taking the money as a dividend. A dividend would be declared and the owner would transfer the cash into his personal account. Dividends are taxed at lower rates than employment income so double taxation is avoided. If you issue dividends, you will need to issue T5 and prepare corporate documents called dividend resolutions. 

Shareholder loans are a useful way to manage short-term personal cash needs. They allow shareholders flexibility in how and when cash is withdrawn from a company. If you need a short-term loan for less than a year, a shareholder loan could be an easy way to obtain the funds. The loan needs to be repaid within the year to avoid having to include the amount in your personal income. If repayment isn’t possible, a dividend could be issued and you would pay personal tax on the amount at a reduced rate. The rules relating to shareholder loans can be very complex. To successfully navigate subsection 15(2) of the Income Tax Act and its many exceptions, proper planning is essential. Talk to a Chartered Professional Accountant. They can help you successfully navigate the intricacies of shareholder loans.

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Do You Need an Accountant for Your Small Business?

Accountant for Small Business

Are you in the planning stage of a business venture? Do you own and operate a recently started business? Are you planning a business expansion? When should you hire an accountant to help? The following is some information that can help with the decision of when to hire an accountant. 

What are the duties of an accountant?

An accountant’s duties vary from company to company, but typically they are responsible for:

  • Data management: An accountant is responsible for ensuring a business’ financial data is stored, updated and managed appropriately. They make sure proper procedures are used for data entry and accounting software is up to date, secure and regularly backed up.
  • Financial analysis and consultation: Accountants act as a resource when a business is making financial decisions. They provide tips on spending, discuss options for credit and tax deductions and help interpret financial jargon. They help troubleshoot the day-to-day management of finances in a company. 
  • Financial reports: Accountants supply documents that provide deep insight into a business’s performance (income statements, balance sheets, cash flow statements, profit and loss statement, accounts receivable aging, revenue by customer, accounts payable aging, statement of retained earnings, general ledgers, etc.). A business and its investors make decisions based on the reports their accountant provides. 
  • Regulatory compliance: There are many rules and regulations that affect businesses. An accountant ensures that your income and expense reporting follows applicable provincial and federal laws. 

When do you need an accountant?

An accountant can save you time, money and headaches. There are several key times when an accountant can make a significant difference for a business. 

  • When starting your business: A chartered accountant can assist you in writing your business plan, help you acquire funding, aid you in leasing a space and provide you with direction and goals. They can advise you on the best structure for your business (Sole Proprietorship, Partnership, Corporation), help you get the appropriate licenses (GST number, business license) and assist you in setting up business accounting software. 
  • For compliance and tax issues: An accountant makes sure you are in appliance with applicable tax laws, helps with complex payroll issues and assists with reporting requirements. 
  • When being audited: A chartered accountant provides advice to work within the auditing process. They can recommend accounting software that incorporates an audit trail, easing the transactions needed during an audit.
  • When applying for a loan: An accountant improves your chances of receiving a business loan. They can present facts and figures that back up your application for funding. They can advise you regarding the best type of loan and whether the terms, conditions and interest rates offered are favourable for your company. 
  • When expanding: A chartered accountant can help you handle growth transitions (hiring, larger office space, increased product/service line) and look after details (payroll, tax management, property tax, utility payments) allowing you to focus on company growth. They can analyze cash flow, inventory and pricing to provide insight into how to grow your business successfully. They can even help determine the best time to introduce new products and/or services. 
  • Before taking on a franchise: Franchise contracts vary widely. An accountant can help determine whether the fees and percentages charged will allow for a reasonable income. They assist in providing sufficient information for making the decision regarding franchising. 
  • Before buying a business: Consult an accountant before buying an existing business. They can look into the company’s accounts and determine whether the purchase is a financially sound decision.
  • Before you sell your business: A chartered professional accountant can put your company’s financial records in order and produce statements of accounts that you can show to prospective buyers. They create charts and tables to clearly show your company’s position. They can also structure your financial affairs so that you get the most from selling your business.
  • Every step of the way: The truth is, a chartered professional accountant can help your business at every stage of its development. They can make life easier for you so you can concentrate on operating your business. 

A chartered professional accountant can interpret your financial data in order to help you make better business decisions, assist you with business start-up, aid with tax and compliance issues, be of service during auditing, help you expand and/or buy a franchise, aid in acquiring a loan and help out at various stages during the growth of your business. Every business benefits from working with an accountant! 

Need help with the financial complexities of your business? Want advice regarding your business’ situation? Contact Cook and Company Accountants. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, we use our experience and expertise to assist you. Contact us to request a meeting.