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Audit Planning: Tips for a Successful Audit

tips for a successful audit

Your business file is chosen for an audit by the Canadian Revenue Agency. What does this mean? What happens next? How can you ensure a successful audit?  Read on to find answers.

What is a Tax Audit?

A tax audit is a detailed examination of a company’s records and books by the Canadian Revenue Agency (CRA). It’s intended to confirm that your records/books support your tax return. Audits ensure that the Canadian tax system is fair for all.

How is a Business Chosen for Audit?

11,328 small and medium-sized business audits occurred in 2020/2021. Files are chosen for audit based on a risk assessment; factors such as non-compliance with tax obligations, frequency of errors on tax returns, and comparison to similar files. If your company’s file is identified as high risk, a CRA officer reviews your information to determine whether the CRA should go forward with an audit.

What Issues Prompt an Audit?

The CRA may consider an audit due to any/all of the following:

  • Multiple or repeated errors on your tax returns
  • Expenses not in line with others in your industry
  • Major changes in income or expenses
  • Repeated losses
  • Overly large charitable donations
  • Under-reported earnings
  • Discrepancies between GST returns and Tax returns
  • Unsubstantiated home office deductions
  • Missing information
  • Shareholder loans that should be considered income
  • A lifestyle incongruent with your declared income
  • Real estate transactions
  • Vehicle expenses
  • Audit of a related party
  • Informant tips

What Happens During an Audit?

A CRA auditor contacts your company via mail or phone and sets a date, location, and time for the audit. A review is held at your business location, accountant’s/representative’s office, or a Canadian Revenue Agency office. Your company is given the CRA agent’s contact information and informed of the scope of the upcoming audit. You’re asked to provide supporting documents for the review. The auditor copies your records/books and/or borrows your documents. The agent discusses any questions and addresses any concerns that arise during the audit.

Tips for a Successful Audit

The following suggestions help smooth the audit process.

  • Provide all documents requested: This may include:
    • Business records (ledgers, invoices, bank statements, receipts,  journals, contracts, rental records)
    • Personal records (mortgage documents, bank statements, credit card statements)
    • Records of individuals related to the business (family members, spouses, corporations, partnerships, trusts)
    • Records from your accountant that relate to the books and tax returns of your company
  • Ensure books are accurate: 
    • Reconcile bank balances to ensure no mistakes have been made 
    • Review accounts  
    • Record every expense, categorizing expenses alongside cash flow tracking
    • Save and organize your receipts
    • Keep business and personal expenses separate
    • Backup your data
    • Use accounting software to increase accuracy and ease record-keeping
    • Consider outsourcing your accounting

  • Communicate with auditors: Keep auditors informed. Be courteous. Prep everything requested. Periodically request updates on the procedure. Ask questions for clarity.
  • Make yourself available to assist, to answer questions, and to gather further information. 
  • Review the findings: Ask for an explanation of any changes. Go over these changes with your Chartered Professional Accountant. Decide if you are in agreement or whether you wish to challenge the findings. 
  • Challenge the findings: If you disagree with the assessment, contact the auditor and explain your concerns. Provide documents to support your position. If you are unable to resolve the disagreement, you may appeal.

Filing taxes for a business is a complex and complicated procedure. A  Chartered Professional Accountant ensures your tax return is accurate/complete, you receive the deductions you’re entitled to, and the chances of your file being chosen for an audit are minimal.

Contact Cook and Company Accountants for all your tax needs. Whether you operate a sizable corporation with multiple subsidiaries or a sole proprietorship, we use our experience/expertise to make tax time a breeze. In the event of an audit, we’ll assist in dealing with the CRA. Contact us for a complimentary consultation.

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Succession Planning: Preparing Your Business for the Future

Succession Planing

All business owners/managers strive for a stable, growing, profitable company. They plan, innovate, create, and organize in pursuit of their goals. But, what about the future of the company? Who will take over when the business owner/management retires, sells, or passes? How can owners/managers ensure that the business will survive and thrive? How can they be sure the outcome meets their needs and desires? Succession planning is a large part of the answer.

What is succession planning?

When people hear the term succession planning, they often think of personal wills and handing down money and/or property to family members. But what is a succession plan in business? Business succession planning refers to an exit strategy for business owners/managers, the steps taken to shape the future of the company in ways that meet the owner’s desires and/or needs. If a company owner plans on selling, succession planning enables a successful transition of ownership. If retirement is what an owner chooses, succession planning is aimed at finding the person(s) best suited to take over and identifying and developing a future leader(s). Business succession planning typically involves: 

  • Assessing current/future business needs according to the company’s strategic plan and their priority goals, projects, and/ or programs
  • Identifying individuals whose potential, skills, and talents best help the company meet its needs/goals
  • Developing plans to manage gaps in skills and/or capabilities that may occur if a key leader/leaders leave the company
  • Cross-training employees/managers to assist in the development of skills, knowledge, and an understanding of the business
  • Preparing for future changes and/or emergencies (when the unexpected arises)
  • Ensuring smooth business operation should owners/managers/employees retire or leave the company

Business succession planning focuses on more than the senior manager/executive, encompassing all key positions and all functions that require experience, skill, and/or seniority. 

What is the importance of succession planning?

The following items illuminate the importance of business succession planning. 

  • Ensures survival of unforeseen events: Abrupt resignation, illness, death, personal problems, and/or arrest may result in an unexpected vacancy in an important company position. Though you can not foresee these events, your company can plan, prepare, and strategize possible responses to ensure the smooth operation of the business. 
  • Forces long-term thinking: It’s easy to focus on weekly meetings, quarterly earnings, and yearly reports. Business succession planning forces a company to consider the future, helping plan and create a wise course for the company. 
  • Promotes communication: Succession planning requires the cooperation and participation of all department heads and senior management members. This promotes communication, improving day-to-day work. 
  • Saves money: Being unprepared for vacant positions risks your business incurring considerable costs as you search for suitable replacements. Attracting qualified people from their current positions can be an expensive undertaking. Succession planning can save you the cost of hiring outside employees for key roles as you have access to employees prepared for promotion from within. 
  • Motivates employees: A succession plan informs employees that you are planning for the future, committed to business growth/survival, dedicated to stability, and interested in internal promotion (developing staff for leadership positions). This creates confidence and motivates employees to give their best.  

What are the benefits of succession planning?

There are many advantages for employers and employees to having a well-developed succession plan in place.

  • Awareness that there is a chance for advancement/ownership empowers employees and results in higher job satisfaction
  • Succession planning reinforces employees’ career development
  • Commitment to succession planning results in supervisors mentoring employees to develop knowledge and expertise
  • Planning promotes tracking of employee value/skill/knowledge/loyalty with the intention of internally filling positions that arise
  • Promotes sharing of company values/vision with leaders/employees
  • A new generation of leaders is prepared for eventual need(s)
  • Reassures investors/shareholders during times of change

The steps of business succession planning:

There are a series of logical, beneficial steps that assist with successful business succession planning.

  • Identify possible serious business challenges for the next one to five years.
  • Identify employment positions that are critical for supporting business continuity.
  • Identify skills, competencies, and knowledge that are critical factors for success.
  • Consider high-potential employees, assessing possible future positions.
  • Select the skills/knowledge/competencies employees need to be successful in their positions and to meet the business challenges identified.
  • Capture the knowledge possessed by individuals before they depart the organization (mentorship programs, personal productivity tools, knowledge maps, manuals, storytelling, interviews, etc.).
  • Use targeted career development strategies to create a talent pool of individuals/employees to step into critical positions.

Transferring the ownership and/or management of a business is a professionally and personally delicate process. Without careful planning, a number of issues and/or mistakes may arise. Updating and revising your company’s succession plan regularly is critical. Constantly amend your plan, making changes as your needs/desires change and to meet the current business environment. Smooth transitions are achievable when you’re well-prepared. Talk to your Chartered Professional Accountant. They have the expertise, experience, and knowledge to help create and maintain a successful business succession plan. 

Need help with business succession planning? Looking for business guidance and/or advice? Cook and Company Chartered Professional Accountants are based out of Calgary and Edmonton, Alberta, serving clients across the United States and Canada. We provide high-quality assurance, succession, and tax planning services for a variety of privately owned and managed companies. Our detailed and tactful understanding of succession planning and its many parts is available to assist your company. Contact us today for a complimentary consultation. 

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Common Errors in Accounting and How to Avoid Them

common errors in accounting

Keeping accurate up-to-date books helps a company make informed financial decisions and avoid mishaps that can affect financial health. However, tracking your business’ income, expenses, taxes and vendor payments is complicated and time-consuming. Including an item in the appropriate account, applying the correct description or code for the item and entering the correct amount takes time and attention. Accounting errors inevitably occur. The following are the most common types of errors in accounting that business owners make and suggestions on how to prevent accounting errors. 

What is an error in accounting?

Accounting errors are unintended accidents; inadvertent mistakes. Sometimes accounting errors are caused by transposing a number or hitting an incorrect key. Other times they stem from a misunderstanding of accounting rules and/or company policy. Accounting departments attempt to limit errors, especially in data that flows into financial reporting used by stakeholders. 

What are the most common errors in accounting?

  • Improper record keeping: Record keeping is the act or practice of recording important information for future reference. It involves identifying a transaction, recording it, classifying it, posting it and balancing the account. It may involve paper copies but can also be managed digitally. To avoid improper record keeping, implement a receipt capture, filing and backup system and enforce its proper use. 
  • Failing to do monthly reviews of your financial statements: A profit and loss statement provides a snapshot of a company’s sales, expenses and profit for a given accounting period. A balance sheet statement reports the ending balance of a company’s assets, liabilities and equity for a given accounting period. These statements provide insight into a company’s financial health. Financial statement analysis should be done on a regular basis (preferably monthly) to ensure all expenses have been categorized accurately and account balances have been reconciled. Add this task to the monthly duties schedule.
  • Neglecting to analyze budget vs. actual expenses: A budget versus actual expense analysis should be performed at the end of each month and each quarter to be sure your business is adhering to the budget. This analysis uncovers variances that require corrective action and helps determine areas where you can cut back. Schedule this analysis into your monthly duties roster. 
  • Neglecting reconciliations: When you reconcile your accounts at the end of the month, you validate the information in your books against an external document (the bank or credit card statement). Regularly reviewing business bank accounts against your books helps reduce the incidence of fraudulent transactions. It ensures you discover errors and thus prevents issues from developing. Put a note in your calendar to reconcile your bank and credit card accounts each month.

  • Failing to reconcile loan accounts: It’s important to reconcile your loan account each time you receive a statement as this is the easiest way to ensure the liabilities portion of your balance sheet is accurate. Put a note in your calendar to ensure your loan account is reconciled regularly.

  • Leaving undeposited funds on the books: Undeposited funds on the books means the payment has been posted but the deposit hasn’t been. This makes revenue look larger than it is, causing incorrect tax payments and inaccurate assumptions about business growth. This error can be avoided with proper workflows.

  • A lack of data backup: In case the device that stores your business’ financial information is lost, stolen or hacked, it’s important to have the information backed up. There are many backup options available.

  • Not utilizing accounting software: Investing in the right accounting software helps you avoid mistakes and makes it easier to handle your finances. Accounting software ensures you have all the historical data you need to manage your books, payroll and taxes. Choose accounting software that integrates with your bank account and has backup capability.

  • Inadequate checks and balances: No one person in the business should handle business funds without oversight. Ensure the person who does the bookkeeping in your business isn’t the same person making deposits for the company. Avoid giving employees signing authority on your business bank accounts. Make sure you review your business’s bank statements, including images of cancelled checks, on a monthly basis.

Accurate accounting information is critical for a business. Though there is no sure way to eliminate all accounting errors, understanding what errors are common and where to look for them is an important first step. Processes and controls help minimize their occurrence. Using good accounting software and preventive controls helps create a less error-prone accounting environment. Accurate books allow you to make informed decisions that will help improve your bottom line. Correction of errors in accounting is crucial.

Need help establishing a good accounting system and/or incorporating accounting software? 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 various privately-owned and managed companies. Contact us for a complimentary consultation.

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Innovations in Accounting Software

Innovations in Accounting Software

The use of accounting technology increases efficiency and streamlines a business’ approach to managing finances, enabling them to be competitive. Accounting technology enables accountants to connect effectively with the businesses they serve, allowing them to provide ongoing advice and guidance. Remaining current with recent innovations in accounting technology is critical for both accountants and businesses. The following are some of the most recent innovations in accounting software.

  • Blockchain technology is an advanced database mechanism (involving the distribution and decentralization of database tech) that allows transparent information sharing within a business network. It’s intended to protect encrypted data, reduce redundancy, improve efficiency and enable the maintenance of an expanding number of transactions. Blockchain technology enables a complete, automated digital audit of each individual transaction. Using modern encryption methods, this technology allows companies to use a common data retention infrastructure (involving the use of a shared ledger) even as each accountant, auditor and company maintains a privately managed database.

  • Cloud computing applications allow the storage and accessibility of data online rather than on a hard drive. They don’t require expensive hardware, hosting, ongoing updates and dedicated IT to maintain. They handle everything from payroll and invoicing to taxes and benefit payments. Financial information is updated as changes occur and can be monitored and managed from a user-friendly dashboard, enabling a free flow of information, no matter where you are or which device you’re using. Cloud computing makes it easier to collaborate and exchange information. The flexibility of cloud accounting software makes it simple for growing businesses to scale. Adding new users/features is as simple as upgrading your monthly subscription. Cloud-based software also helps companies to reduce their carbon footprint.

  • Automated accounting technology uses software to automate important financial operations. It limits the number of steps in workflows and makes the accounting operation a more hands-off experience by decreasing time spent on data entry. This tech is capable of highlighting anomalies or patterns without manual data input, creating greater efficiency. It reduces human error, often translating to higher profitability. From invoice approval processes to inputting sales data and automating revenue recognition, automated software features are expected to continue to develop. Automated accounting technology helps accounting teams work smarter, not harder.

  • Optical character recognition applications (also referred to as text recognition) scan printed/handwritten documents and convert them into machine-readable text that can be shared with colleagues/clients. This data can be copied and/or edited as required and allows for the performance of a simple digital search to find the information needed. This technology reduces time spent on tasks such as itemizing receipts, organizing invoices and tracking expenses. It eliminates paper clutter.

  • Artificial intelligence and machine learning make accounting more effective and efficient, improving productivity by up to 40%. AI can conduct repetitive, rudimentary tasks including auditing, payroll, uploading files and sorting through data. This frees up time for tasks such as analyzing and interpreting data and building more effective, efficient recommendations for corporate growth and stability.  AI substantially reduces the likelihood of frustrating and time-consuming mistakes. Deviations from the established pattern can be caught before calculations move beyond the problem. This leads to more accurate reporting, reducing the need for audits.

  • Real-time reporting is the process of updating your books at all times; revenue, account balances and profit. It allows the entire company to view all metrics/insights and make better use of analytics to make decisions.

  • Personalization technology is about delivering a valuable service or product to a customer based on personal experiences and historical customer data. It’s becoming more common, from sales and marketing solutions to consumer apps to accounting software programs. It allows specific functionality.  

By organizing everyday finance management, accounting software allows companies to grow their businesses. The administration process is streamlined, data can be processed remotely and the margin of error is reduced. Daily finances are better understood, empowering the business as a whole. Tasks that took hours can be done in minutes. Financial data is quickly and easily accessed in an easy-to-understand format. Innovations in accounting software save time and money while adding value to a company. 

Need help establishing a good accounting system and/or incorporating accounting software? 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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Financial, Community and Accounting Resources for New Canadians

Attending resources for new Canadians

In the year 2022, Canada welcomed 437,180 immigrants and saw a net increase in the number of non-permanent residents estimated at 607,782, a population growth of  2.7%. International migration accounted for 95.9% of all growth recorded. Much of this increase is related to efforts by the Canadian Government to ease labour shortages, drive our economy and help bridge the demographic gap. 

The decision to immigrate to Canada is a big step. Those arriving require advice and guidance from the time they decide to immigrate until they’re settled in Canada. They need to get familiar with financial institutions, navigate the education system, find housing and secure a job. It may be necessary to become informed about work and study permits, visitor and business visas, inadmissibility, permanent residence and citizenship. In short, they need to become aware of Canadian systems and the resources and tools available. So what financial, accounting and community resources are available to new Canadians?

Resources available to immigrants:   

There are many government and community resources and tools for new Canadians to help them navigate the laws and culture of their new home. Don’t forget CPAs! They can help newcomers and more established immigrants answer the many financial questions that arise when people come to this country.

New to Canada? Looking for 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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How to Make your Business Taxes Easier Next Year

Two people sitting down sharing how to make business taxes easier

Business income taxes are a year-round experience, not a single event. Having just paid your taxes, you likely aren’t thinking of the next tax season. However, there’s no such thing as “too early” to think about future business taxes. So, how can you make tax preparation easier next year? How can you simplify the process? The following are some ways to make the next tax season less complicated and more relaxed: 

  • Stay informed: If you’re looking for useful tips, helpful resources and current information, check out the Government of Canada’s web page for small businesses and the self-employed. 
  • Establish a tax calendar: This essential tax-planning tool helps you keep track of important dates and deadlines. Find these dates and deadlines on the Government of Canada’s website for important dates for corporations/businesses. 
  • Classify your business correctly as this affects the taxes required. For information on Sole Proprietors, Corporations and Cooperatives, see the Government of Canada’s website. If you’re still not sure what classification your business comes under, consult your CPA. 
  • Keep accurate, detailed, and updated records: This makes it easier to organize, check and file your business taxes without missing possible deductions or increasing your risk of an audit. Invest in accounting software to simplify accurate record keeping. Keep all financial information (such as your profit and loss statement, balance sheet, etc.) up to date to make filing easier during next year’s tax season.
  • Track expenses: As the government allows credits and tax deductions for qualified business expenses, it’s wise to keep track of all business-related expenses throughout the year. As the CRA does not accept credit card statements as proof of expenses, in order to take advantage of these tax deductions you must collect receipts for all business-related activities including 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, and parking fees. Record and file them appropriately. You can keep physical receipts or digital copies.
  • 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 or your business card for personal purchases.
  • Get organized:  Place your tax return and tax documents in a safe place where you’ll be able to quickly and easily find them. Separate any documents you receive that might have tax implications into at least four different categories including income items, deductions, business changes and others. Organize documents into each file accordingly. Better yet, digitize. It’s stressful keeping receipts, forms and other necessary paperwork organized and easily available. There are cloud-based platforms you can use to take pictures of receipts and categorize the expense.
  • Hire a CPA: Most small businesses prefer to have a Chartered 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.

As a business owner, you have a lot to think about such as daily operations, growth strategies, building/maintaining your customer base, hiring/retaining quality employees, etc. Use these tips to help make your business taxes and tax filing easier next tax season. It’ll be one less thing to worry about!

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 Improve your Business’s Accounting

Business accounting

If you want to weather the current economic climate and encourage growth for your business, you need a well-planned and implemented accounting strategy – an approach that tracks revenues, expenditures and profits, systematically. Being on top of your financial situation enables you to make decisions best suited to your circumstances. The following are some strategies to improve your business’s 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. 

Reconcile bank statements

to get a fair picture of your financial health. Make sure the figures in your accounts are registered on your bank statements and vice versa. 

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 and/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.

Make accounting a joint effort

Educate new employees on how your accounting process works and how they can contribute to smooth operations. Ensure that staff are aware of deadlines and cutoffs for payroll, expenses and payment runs. Inform your team of key performance indicators and how they can provide financial information that would support your goals.

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 business. Try these accounting strategies 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 accounting 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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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.