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What to Remember for This Tax Season

What to Remember for This Tax Season - Cook & Company - Chartered Professional Accountants - Featured Image

Tax season is upon us and it’s a busy time! Each business must undertake the process of reporting earnings and paying income tax on business profits. It’s important to report income in the fiscal period you earn it, no matter when you receive it. It’s crucial to deduct business expenses but only if you incur them to earn income and if you are able to back up the claim. With filing deadlines approaching, what do you need to remember for this tax season? The following are some reminders for your business in this hectic time. 

  • File on time: If you wish to receive the benefits/credits your business is entitled to and avoid penalties, it’s important to file your return on time. File your return no later than six months after the end of each tax year. The tax year of a corporation is its fiscal period. If your business’ tax year ends on the last day of a month, file the return by the last day of the sixth month after the end of the tax year. If your tax year ends on March 31, your filing due date is September 30. If your tax year ends on August 31, your filing due date is February 28. If your tax year ends on September 23, your filing due date is March 23. When a filing due date falls on a Saturday, Sunday, or public holiday recognized by the CRA, your return is considered on time if the CRA receives it or if it is postmarked on or before the next business day. For more information, go to Important dates for corporations.
  • File online: To receive your refund faster, sign up for a direct deposit and file your return online through NETFILE-certified tax software or the services of an authorized service provider who can use the CRA EFILE service. 
  • Claim all benefits, credits and deductions: Your business may be able to claim tax deductions, credits and/or expenses on your return. Top deductions for business owners include advertising expenses, business-use-of-home expenses, meals and entertainment, office expenses and vehicle expenses.
  • Remit GST: You may be required to register and file a GST/HST return. Your GST due date depends on your tax filing period. Some businesses choose to pay their GST/HST quarterly or annually. For more information on how to (pay) your GST/HST, the CRA has additional guidance here.
  • Reduce adjustments: To reduce the number of changes made to your business return each year, find information about common adjustments, including how to get forms, guides and other publications.
  • Pay on time: To avoid interest charges, pay any balance owed by the deadline. If this is not possible, work out a payment arrangement with the CRA. 
  • Keep receipts/documents: In case you are selected for review,  keep all receipts/documents for at least six years. If you’re self-employed or a sole proprietor, you may need to keep some of your business records for a longer period of time.
  • 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 contributions 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.

Business taxes are complex and complicated. Consider hiring a CPA. Most 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. 

Need help with your business’ tax returns? 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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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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Financial Planning, Where to Start?

No business can expect to make money without also managing it effectively. Establishing and achieving key financial milestones is essential to the health of a business. Every financial decision you make can have a significant impact on the overall strength of your company, ultimately defining the future of your business. This is why financial planning is crucial. 

What is financial planning for a business?

Financial planning is the task of determining how your business will finance its strategic goals and objectives. The plan is a document that describes the activities, resources, equipment and materials needed to achieve these objectives. It sets time frames for your goals and strategies for achieving them. It helps you be in control of your company’s income, expenses and investments and is essential to building a successful business. A good plan includes an assessment of the business environment, company goals, resources needed to reach these goals, team and resource budgets and risks that might be faced. It ensures a company is equipped in advance to deal with changing circumstances at both personal and business levels. 

Why create a financial plan for your business? 

There are a myriad of reasons to create a financial plan for your company. 

  • To manage your risk and respond quickly to financial issues: A business must plan for a lot of risks (death or disability of central figures, illness, property ownership loss, lawsuits, interruption of business, lower than expected revenue, high overheads, etc.). By regularly reviewing risks and planning a response, a company is prepared to tackle issues quickly, before they become hard to manage. 
  • To provide a road map for growth: It’s easy to focus on daily issues and neglect long-term planning. A financial plan helps a company focus on the future by providing clear goals for company growth and performance.  It helps you analyze your current situation and project where you want the business to be in the future.
  • To help you develop a good tax strategy: Financial planning is helpful when it comes time to submit your tax return or if you sell the company.
  • To identify sales trends: A financial plan that includes quantifiable targets and sales records helps determine which individual products and which initiatives are most lucrative, making it possible to adjust your marketing strategy appropriately.
  • To prioritize expenditures: A financial plan sets clear expectations for cash flow and helps a business owner to consider spending priorities. 
  • To identify necessary cost reductions: A financial plan helps you refer to past spending and identify unnecessary or over-inflated costs so you can adjust accordingly. 
  • To create transparency with staff and investors by sharing key figures (revenue, costs, profitability, etc.).
  • To show progress: A financial plan is helpful in showing increased revenues, cash flow growth and overall profit in quantifiable data, encouraging business owners.

How to get started with your financial plan: 

The following are the basic steps of creating a financial plan for your business. 

  • Determine your financial goals:  Are you looking to expand your business? Do you wish to increase your product/service’s market share? Are you interested in strengthening your customer service? Do you need more equipment and/or staff? The financial plan you build for your company largely depends upon your goals and your unique stage of business development.
  • Take stock of your assets: What is the balance of your business bank accounts? What are your accounts receivable, cash equivalents and short-term investments? How much stock do you have on hand? How many supplies are presently in storage?  
  • Determine your income, expenses and debt: Where does all your money go? Examine your cash flow and track your spending. Look at salaries (including your own), rent or mortgage payments, communication expenses (internet, telephone services, etc.), utilities, storage, distribution, promotion, office supplies and general maintenance. What is your monthly, quarterly and yearly income? What debt do you carry (bank loans, lease payments, income taxes payable, etc.)
  • Develop financial projections: Create monthly projections based on sales forecast and anticipated expenses (labour, supplies overheard). Prepare a projected income (profit and loss) statement and a balance sheet projection. This is a crucial part of your business plan if lenders and/or investors are involved.
  • Arrange for financing (if needed): Use your financial projections to determine your financing needs. Approach your financial partners to discuss options. Well-prepared projections reassure bankers/investors that your financial management is solid.
  • Plan for contingencies: Decide what you will do if your finances suddenly deteriorate. Establish emergency sources of money (maintain a cash reserve or keep some room on your line of credit).
  • Monitor your progress: Periodically, compare actual results with your projections to see if you’re on target or need to adjust. Monitoring helps you spot financial problems before they get out of hand.
  • Get help: Consider hiring an expert to help you put together and monitor your financial plan. Your accountant is an invaluable resource. They can provide you with powerful financial planning solutions. By carrying out a detailed analysis of your current processes, bringing your objectives into focus, and developing viable strategies, they’ll help you utilize your company’s finances in the most effective ways possible. The result? Greater clarity, measurable results and long-term growth. 

A financial plan affects day-to-day fiscal decision-making, defining the future of a business and shaping a company’s journey. A detailed financial plan brings a company’s objectives into focus and helps in developing viable strategies. Corporate financial planning demands a strong understanding of commerce and how companies operate fiscally. It also calls for attention and care for the immediate financial needs and specificities of your enterprise. 

Need help preparing a financial plan for your business? Contact Cook and Company Chartered Professional Accountants. We can provide you with powerful financial planning solutions. 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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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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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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Employee vs. Independent Contractor: Tax Differences

Employee and Independent Contractor Taxes

For employees that receive a salary, taxes are fairly straightforward for both employee and employer. The employer deducts the appropriate amount of tax, employment insurance and pension contributions from each paycheque. The employee fills out a standard tax form at tax time. When you’re an independent contractor, taxes are more complicated and so are the required tax forms. The deductions for self-employed contractors are unique as are their contributions for Employment Insurance and the Canadian and provincial pension plan.

Who qualifies as self-employed or independent contractor?

According to the Canada Revenue Agency, a self-employed individual:

  • usually works independently 
  • does not have anyone overseeing activities
  • is free to work when and for whom they choose 
  • may provide their services to different payers at the same time
  • can accept or refuse work from the payer 
  • has a limited relationship with the payer (not ongoing), often restricted to a specific job
  • does not personally have to carry out the work for which they’ve been hired, can hire another party to complete all or part of the work 
  • typically uses their own tools, space and equipment  
  • generally takes on a measure of financial risk and can incur losses 
  • often has fixed operating costs relating to operating a workspace or hiring helpers/assistants 
  • has a working relationship with the payer that does not present a degree of continuity, loyalty, security, subordination, or integration, all of which are generally associated with an employer-employee relationship 
  • is responsible for paying provincial and/or federal sales taxes and may claim certain deductions as business expenses 
  • is not entitled to benefit plans

Who qualifies as an employee?

According to the Canada Revenue Agency, an employee:

  • works for one client or company (payer)
  • the payer has direct and effective control of how and when work is carried out
  • tools and equipment are usually provided by the payer, who is responsible for repair, maintenance and insurance costs and retains the right to use the tools and equipment provided 
  • does the work they have been assigned and cannot decide to hire helpers or assistants without the express consent of the payer 
  • is generally reimbursed for any expense incurred in completing their work 
  • is not usually responsible for any operating expenses nor financially liable if they do not fulfill the obligations of their contract 
  • relationship with an employer is continuous and not limited to a specific task
  • is entitled to benefit plans such as registered pension plans, group accident, health and dental insurance plans 

Tax benefits of hiring an independent contractor:

  • save on labour costs
  • no need to pay benefits (disability, accident, life insurance, health and dental insurance)
  • not necessary to pay the employer portion of the Canadian pension plan, healthcare, workers compensation and employment insurance
  • less paperwork and responsibility
  • more flexibility to meet the ups and downs of business,
  • better manage cash flow
  • no paid training

Tax benefits for independent contractors:

  • larger take-home pay
  • can pay your significant other and/or kids and the money paid to them is tax-deductible, as long as the salary you’ve paid them is reasonable for the work they’ve done
  • more write-offs you can claim:
    • Operating expenses (rental of space, office supplies, repairs, maintenance, inventory, payroll, utilities, professional fees)
    • Home office expenses: If you run your business from your home and use the space for the majority of your activities, then you can deduct a fraction of the cost of your home rent for the tax period. 
    • Meals and entertainment costs associated with a self-employed business are eligible for tax write-offs as sanctioned by the CRA. These costs must be incurred in the company’s name (client dinners, employee lunches, etc.) and only 50% of the total cost of the meals and entertainment can be written off. You’ll need to show evidence that the food or entertainment costs were reasonably and appropriately used for your business. A guide to claiming meals and entertainment can be found on the CRA site.
    • Travel: The CRA allows tax write-offs for self-employed persons who travel outside their usual area of business for work-related reasons (meet a client, pick up inventory, attend a professional conference).
    • Vehicle expenses: Personal vehicle use is not eligible for any type of write-off, but a fraction of such costs can be written off if you drive your car for work-related reasons. You’ll need to track your mileage. If a vehicle is only used for business purposes, then almost all costs associated with its running are eligible for deductions (gas, mileage, repairs, maintenance, insurance, oil changes).
    • Advertising/marketing: A part of your advertising and marketing costs can be deducted. 
    • Websites and software: The CRA dictates that certain costs associated with your business website are tax-deductible (software/website development, cost of products, contractor fees for installation and/or technical help). 
    • Bad debt refers to money owed to you by others that cannot be paid back. It’s uncollectible revenue and it is considered a business expense. In order for bad debt to be expensed and written off, you must have done one of two things: establish that an account receivable is a bad debt expense within the specific tax year and/or include the bad debt in your receivable income. Then you are able to claim bad debt under business expenses using the T2125 form.
    • Private health service premiums: If you pay for a private health plan each year, then the premiums you pay on that plan are tax-deductible. 
    • Industry/professional fees: The expenses associated with professional certification required to work in your industry are eligible for write-offs (licenses, certifications, dues and requirements).
    • Professional development and educational expenses: Further learning and professional development can be deducted from your personal returns. 
    • Interest and bank charges attached to your business accounts can be written off. There are strict limits on the interest you can deduct depending on what the loan was for. 

Tax disadvantages of being an independent contractor: 

  • have to pay both the employer and employee amounts for Canada Pension Plan and Employment Insurance
  • large tax bill because taxes aren’t withheld at the source
  • required to complete Form T2125 (Statement of Business or Professional Activities)
  • must follow complex rules regarding tax deductions
  • must be familiar with all of the tax rules
  • must budget and set aside money for taxes owed 
  • required to charge your clients GST

The largest tax advantage for an independent contractor is the potential for tax deductions that aren’t available to employees. A self-employed person can generally deduct all reasonable business expenses. However, an independent contractor must properly estimate and remit income taxes on a regularly scheduled basis as dictated by the Canada Revenue Agency. The biggest tax advantage when hiring an independent contractor is the savings on the cost of labour and benefits as well as reduced paperwork. Individuals and companies need to weigh the tax benefits and disadvantages of hiring/becoming independent contractors. 

Need help with the tax complexities of being an independent contractor? Want advice regarding the advantages/disadvantages of hiring a self-employed contractor? 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.

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Options for Financing a Business

Options for Financing Business

Businesses come in all shapes and sizes, from large corporations with hundreds of employees to mom-and-pop enterprises. But there is one thing that all businesses need, financing. Being aware of the financing possibilities available for businesses can help a company succeed. The following is a list of various financing alternatives.

  • Bank loans: A commonly used source of funding, bank loans require a solid business plan and often a personal guarantee from the entrepreneurs. More than 50% of small businesses use some type of institution-based credit to start, operate or expand their business.
  • Government grants: Government agencies provide financing such as grants and subsidies that are available to many businesses. Check the Government of Canada website for business grants and financing options. 
  • Business incubators: A business incubator is a program that gives early-stage companies access to mentorship, investors and other support to help them get established. There are a number of business incubators in Alberta such as Innovate Calgary at the University of Calgary, The Northern Alberta Business Incubator in St. Albert, Tecconnect in Lethbridge and the Agrivalue Processing Business Incubator for food-based businesses in Leduc.
  • Venture capital: A venture capitalist is a person or firm that invests in small companies, generally using money pooled from investment companies, large corporations, and pension funds. Though less than 1% of small businesses in Canada receive equity-based funding from venture capitalists, there are ways to find this type of funding by networking and meeting people at local start-up groups, or by researching, contacting or joining groups like the Venture Capital Association of Alberta. Venture capitalists are generally looking for technology-driven businesses and companies with high-growth potential in sectors such as information technology, communications and biotechnology.
  • Angel investors: Angels are wealthy individuals or retired company executives who invest directly in firms owned by others. They often contribute their experience, technical knowledge, management skills and contacts. Angels tend to finance the early stages of a company. They often reserve the right to supervise the company’s management practices and may be looking for some sort of share in a company. Check out this bdc site for information on finding angel investors and the National Angel Capital Organization.
  • Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture. It makes use of the easy accessibility of vast networks of people through social media and crowdfunding websites and brings investors and entrepreneurs together. Crowdfunding has the potential to increase entrepreneurship by expanding the pool of investors beyond the traditional circle of owners, relatives, and venture capitalists. The National Crowdfunding Association of Canada is a good place to find information on crowdfunding for small businesses. If you’re considering the crowdfunding route, ensure that your intellectual property is protected. Read the fine print on crowdfunding websites.
  • Peer-to-peer lending: P2P lending is the practice of lending money to individuals or businesses through online services that match lenders with borrowers. It allows investors to lend money directly to other individuals via a P2P platform. Check out Peerform and Funding Circle.
  • Microloans are simply small business loans that are issued by individuals rather than banks or credit unions. These loans can be issued by a single individual or aggregated across a number of individuals who each contribute a portion of the total amount. They are a great option if you need a bit of capital to fund specific operational costs, expansions, or projects. They typically have specific limitations in regards to how much you can borrow. Check out Accion, LiftFund and Kiva.
  • Pitch competitions are contests where entrepreneurs present their business concept to a panel in the hope of winning a cash prize or investment capital. Even if you don’t win, the pitch competition can be a way to introduce yourself to the elite world of venture capital and angel investment. Check out Hatch Pitch, Disrupt and PITCH.
  • A business line of credit: This is an option for those who need cash quickly and have good credit. Check with your local bank.
  • Personal funds: Many businesses use some type of personal funds to finance themselves (savings, mutual funds, collateral).
  • Love money: This refers to money loaned by a spouse, parent, family member and/or friend. 

If you’re interested in starting or expanding a business and you require financing, there are many and varied options available. No matter the size of your business or the amount required, there is a method to finance your company that suits your needs. Contact us for a complimentary consultation.

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Mutual Funds vs. Exchange Traded Funds

Mutual Funds and Exchange-Traded Funds

You may have heard about mutual funds and exchange-traded funds (ETFs). How do you decide which best fits your investment needs? Both offer many benefits for your portfolio and they have a lot in common, but mutual funds and ETFs have some key differences. The following are the similarities and differences and how to determine which of the two instruments is best for you.

What is a Mutual Fund? 

A mutual fund is an investment vehicle that pools money from investors to buy a basket of stocks, bonds, and other securities. This allows you to invest in different companies or bonds at the same time so as to diversify your investments and reduce your risk. Investors buy shares of a mutual fund directly from the company issuing shares or through a broker who purchases shares for investors. Since you buy and hold shares of a mutual fund with the fund company, you cannot move the assets to another financial institution without selling. Mutual funds typically have minimum initial purchase requirements and can be purchased only after the market is closed when their net asset value (NAV) is calculated and set. These funds are generally actively managed by professional money managers so they try to beat their benchmark and may charge high expenses and/or sales commissions. 

Advantages of Investing in Mutual Funds:

  • able to react quickly to changing market conditions (flexibility)
  • a single mutual fund may contain dozens or even hundreds of separate stocks or issuers (diversification)
  • mutual funds can be bought and sold once every trading day (liquidity)
  • a manager is involved in the funds’ investment selection and management, offering investment advice and providing a simpler, more hands-off experience
  • can easily set up automatic investments in fixed amounts

Disadvantages of Investing in Mutual Funds:

  • are expensive and often perform only as well as passive automated investments
  • management fees tend to be high, eating into your returns.
  • may have built-in “loads,” which are essentially sales commissions
  • advice is often an additional cost
  • the vast majority of actively managed mutual funds fail to outperform benchmarks
  • many active mutual funds fail to outperform the market yet you still pay for “active” management
  • traded only once per day at the closing NAV price
  • most mutual funds are not guaranteed
  • the level of risk in a mutual fund depends on what it invests in

 

What is an Exchange-Traded Fund (ETF)?

An exchange-traded fund (ETF) is an investment vehicle that pools money from investors and uses the funds to buy a basket of stocks, bonds, and other securities. You can buy and sell shares of an ETF just like you would buy shares of a stock from a stock exchange. There are various types of ETFs available to investors that can be used for income generation, speculation, price increases and to hedge or offset risk in an investor’s portfolio.

  • Bond ETFs include government bonds, corporate bonds and local or municipal bonds
  • Industry ETFs track a particular industry, such as technology, banking or the oil and gas sector
  • Commodity ETFs invest in commodities, including crude oil or gold
  • Currency ETFs invest in foreign currencies, such as the Euro or the Canadian dollar
  • Inverse ETFs attempt to earn gains from stock declines by shorting stocks (selling a stock, expecting a decline in value and repurchasing it at a lower price)

Advantages of ETFs:

  • access to many stocks across various industries
  • low expense ratios and fewer broker commissions
  • risk management through diversification
  • ETFs exist that focus on targeted industries
  • no investment minimums
  • no fees or sales charges
  • can trade on an exchange throughout the trading day
  • you control the managing of your investments
  • usually generate fewer capital gain distributions overall which makes them somewhat more tax-efficient than mutual funds.

Disadvantages of ETFs:

  • actively-managed ETFs have higher fees
  • single industry focus ETFs limit diversification
  • may contribute to market instability
  • many ETFs are based on unproven models

 

Which is right for you?

Understanding the differences between ETFs and mutual funds can help you decide which is best for you and your business.

Use ETFs if:

  • Tax efficiency is important: If you’re investing in a taxable brokerage account, having more control over capital gains distributions may be important.
  • You’re an active trader: ETFs allow you to set limit orders, stop-limit orders or use margin in your investing strategies as they trade just like stocks. 
  • You want to gain low-cost exposure to a specific market without researching individual companies: A lot of ETF options benchmark niche market indexes.
  • You may change brokers in the future. ETFs are easily transferred between brokers. 

Use Mutual Funds if:

  • You value the potential to outperform the market through active management.
  • You’re investing in less-efficient parts of the market. Actively managed funds have the best potential to outperform in these areas.
  • Comparable ETFs are thinly traded.

 

If you’re not sure whether a mutual fund or ETF is best for you, consider consulting your Chartered Professional Accountant. They understand these products and can offer advice that meets your specific needs. 

 

Need help deciding whether ETFs or mutual funds are right for you? 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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