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Corporate Tax Planning Tips for Canadian Small Businesses

Corporate Tax Planning Tips

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

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

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

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

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

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

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

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

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

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

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

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

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

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Strategies to Overcome a Cash Flow Crisis

Overcome a Cash Flow Crisis

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

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

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

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

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

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

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Tax Implications of Shareholder Loans

Tax implications of Shareholder Loan

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

What is a shareholder’s loan?

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

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

What are the benefits of a shareholder loan?

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

Understanding shareholder loan conditions:

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

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

Shareholder loan tax implications:

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

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

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

How to avoid shareholder loan tax problems:

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

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

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

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What is Goodwill and How is it Calculated?

What is Goodwill

The value of goodwill becomes apparent when a business is being acquired or sold. The amount an acquiring company pays over the target company’s net assets accounts for the value of positive goodwill.

What is goodwill?

Goodwill is an intangible asset that is built over time by the owner of a business. Tangible assets (buildings, equipment, land) are relatively simple to value. The calculation of goodwill is more complex and highly subjective, as goodwill doesn’t independently generate cash flow. The value of goodwill is determined by:

  • a company’s good name and positive reputation 
  • brand name 
  • solid customer base 
  • good customer relations
  • intellectual property/patents/copyrights 
  • domain name(s) 
  • licenses/permits
  • functioning consumer associations
  • good employee relations 
  • excellence of management 
  • proprietary technology
  • favourable contracts in place

Goodwill and Accounting:

Goodwill is an intangible asset that is listed under the long-term assets of a company’s balance sheet. It cannot be sold or transferred separately from the business as a whole. The value of goodwill is difficult to define as it doesn’t generate any cash flow for the business. Consequently, accounting standards require that a company regularly test its goodwill asset for impairment (a permanent decline in the value) and write down the asset if impairment can be proven. Companies must evaluate the level of their goodwill, at least once per year.

Types of Goodwill:

  • Purchased goodwill refers to when a business concern is purchased for an amount above the fair value of its net assets. It’s shown on the balance sheet as an asset.
  • Inherent goodwill is the opposite of purchased goodwill and represents the value of a business more than the fair value of its net assets. This type of goodwill is internally generated and arises over time due to reputation. It can be either positive or negative.
  • Business Goodwill is associated with the business, its position in the marketplace, and its customer service.
  • Professional Practice Goodwill relates to professional practices such as doctors, engineers, lawyers and accountants. It is classified as practitioner goodwill which is related to the reputation and skill of the individual professional and practice goodwill which arises from the practitioner’s track record, institutional reputation, location and operating procedures.

Factors affecting goodwill:

  1. Location of the business: A business that is located in a suitable area has a more favourable chance of higher goodwill than a business located in a remote location.
  2. Quality of goods and services:  A business that is providing a high quality of goods and services has a great chance of earning more goodwill than competitors who provide inferior goods and services.
  3. The efficiency of management: Efficient management results in an increase in profit for the business, enhancing goodwill.
  4. Business Risk: A business having lesser risk has a better chance of creating goodwill than a high-risk business.
  5. Nature of business refers to the type of products that a business deals with, the level of competition in the market, demand for the products and the regulations impacting the business. A business having a favourable outcome in all these areas will have greater goodwill.
  6. Favourable Contracts: A firm will enjoy higher goodwill if it has access to favourable contracts for the sale of products.
  7. Possession of trade-mark and patents: Firms that have patents and trademarks enjoy a monopoly in the market, which contributes to an increase of goodwill.
  8. Capital: A firm with a higher return on investment along with lesser capital investment will be considered by buyers as more profitable and have more goodwill.

How to Calculate It?

In principle, the goodwill calculation technique looks simple. However, it’s incredibly complicated.  Goodwill Formula = Consideration paid + Fair value of non-controlling interests + Fair value of equity previous interests – Fair value of net assets recognized.

Goodwill can be calculated by using the following five simple steps:

  1. Determine the consideration paid by the acquirer to the seller as part of the deal contract. The consideration is valued either by a fair valuation method or the share-based payment method. The consideration may be paid in the form of stocks, cash or cash-in-kind.
  2. Determine the fair value of the non-controlling interest in the acquired company. It’s the portion of equity ownership in a subsidiary that is not attributable to the parent company.
  3. Determine the fair value of equity in previous interests.
  4. Figure out the fair value of the net assets recognized in the acquired company. This is the net of the fair value of assets and the fair value of liabilities. It’s available on the balance sheet.
  5. The goodwill equation is calculated by adding the consideration paid (step 1), non-controlling interests (step 2), and the fair value of previous equity interests (step 3) and then deducting the net assets of the company (step 4). 

Goodwill encapsulates the value of the reputation of a company built over a significant period of time. It’s challenging to determine because it’s composed of subjective values. Transactions involving goodwill have a substantial amount of risk that the acquiring company could overvalue the goodwill in the acquisition and ultimately pay too much for the company being acquired.  

Need help understanding the complexities of calculating goodwill? Are you acquiring/selling a company and have questions regarding the determination of the goodwill value? 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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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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What You Should Know About Commission Income in Canada

Commission Income Canada

Commission employees in Canada are a specific category of taxpayers under the Income Tax Act. They have the option of deducting a broader range of expenses from their gross income. The sales expenses incurred by a commission employee are only deductible against the commission portion of the employment income and the amount cannot exceed the commission that is received by the taxpayer during the year. 

What is commission income? 

Commission income is usually a percentage of sales revenues, but it could also be a flat rate based on the sales commission agreement between the owner of a product and the seller of that product. Sharing the earnings means the owner receives less money from each unit, but may actually earn more money overall as a number of people are marketing the product for the owner.

Who qualifies as a commission employee?

Commission employees earn commission income or a combination of salary and commission. At least part of their income is based either on sales or another kind of achievement. To qualify as a commission employee, you must meet all of the following criteria:

  • As part of your employment contract, you must cover the cost of your own expenses
  • You are normally required to work away from your employer’s place of business
  • You are paid a portion or all of your earnings in commissions, based either on volumes of sales or on contacts you negotiated
  • You do not receive any non-taxable allowances for travelling, such as a kilometre allowance
  • You receive a form T2200, Declaration of Conditions of Employment, annually, which is completed and signed by your employer

Examples of commission jobs/positions:

  • Sales engineers: Sales engineers sell advanced technology and/or services to businesses. They may also help in the research and development of these products. 
  • Wholesale and manufacturing sales representatives sell products to private companies and government agencies. They assist clients in understanding and selecting products, negotiate prices and prepare sales contracts.
  • Securities, commodities, and financial services sales agents buy and sell securities (ie: stocks, bonds) and commodities (ie: gold, corn). They monitor financial markets, advise companies and sell securities to individual buyers.
  • Advertising sales representatives sell advertising space for online, broadcast, and print media platforms to businesses and individuals. They contact potential clients, maintain customer accounts and make sales presentations.
  • Insurance sales agents sell one or more types of insurance (life, health, property, etc.). They contact potential clients, explain the features of policies, help customers choose plans, manage policy renewals and maintain records.
  • Travel agents plan, book, and sell travel for individuals and groups. They book transportation, lodging and activities.
  • Financial advisors assess the financial needs of individuals to help them make important decisions regarding taxes, insurance and long or short-term investment options. Advisors interface with clients to understand their financial goals, perform financial analyses and calculations and make recommendations for meeting those goals. 
  • Sales consultants help companies sell products or services to target customers. They meet with clients, conduct research, analyze market statistics, identify existing issues and assess opportunities for strategic intervention. They create marketing strategies to promote products, advise companies on how to best execute their promotional campaigns and are responsible for making recommendations on how to train sales representatives and increase sales within retail locations.
  • Brokers facilitate large-scale business transactions. They serve as intermediaries between customers and sellers and are responsible for advising clients on how to make successful business investments regarding real estate, stocks, mutual funds land, insurance and more. 
  • Sales managers are leading members of sales teams. They provide guidance, mentorship and training for sales representatives and agents. Sales managers are responsible for setting goals, quotas and crafting successful sales plans to meet company targets while staying within budget.

What employers of commission employees need to know:

  1. If you pay commissions at the same time you pay salary, add this amount to the salary, then use the Payroll Deductions Online Calculator, the Payroll Deductions Formulas (T4127), or the manual calculation method found in Payroll Deductions Tables (T4032).
  2. If you pay commissions periodically or the amounts fluctuate, you may want to use the bonus method to determine the tax to deduct from the commission payment. See Bonuses, retroactive pay increases or irregular amounts to find out how to do this.

What expenses can a commission employee claim?

There are a variety of expenses that commission employees can claim on Form T777, Statement of Employment Expenses when they file their personal income tax return. Sales expenses are deductible only against the commission portion of an employee’s income. 

  • accounting fees
  • legal fees
  • costs for business cards, promotional gifts, cellphones, and computers 
  • a portion of the costs associated with work-related transportation including fuel, maintenance, insurance, registration fees, parking, and any interest or leasing costs
  • 50% of food and beverage costs for themselves (not clients) if they are away from the office for over 12 hours at a time
  • Costs of entertaining clients except for golf club and membership fees
  • advertising and promotions
  • accounting fees
  • Capital Cost Allowance 
  • work space-in-the-home expenses
  • home insurance and property taxes when claiming home-office expenses
  • salary of an assistant
  • lodging
  • parking costs
  • supplies
  • licensing fees
  • monthly home internet access fees
  • office rent
  • training costs

How are claims supported?

To support your claims as a commission employee you must keep all receipts, cancelled cheques, invoices, credit card statements and other documentation that supports your claims. Your records must include your name and address, the name and address of the seller, a full description of the product/service purchased and any GST paid on the purchase. Automobile expenses must be supported by a log that shows the total number of kilometres driven for employment purposes through the use of odometer readings. 

If your company employs commission workers but you find the rules and regulations regarding payroll and taxes confusing, you’re not alone! Contact your CPA for assistance. They can help you navigate the complexities and assist you with source deduction planning and remittance.

Need help with the tax complexities associated with commission employees? 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, making tax time a breeze. Contact us to request a meeting.

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Home Office Tax Deductions

Home Office Tax Deductions

Many Canadians choose to work from home. Canada Revenue Agency allows these workers to claim home office deductions on their tax forms. However, there are a number of rules regarding these deductions and not all home-based workers qualify.

What qualifies as a home office?

As an employee, if your employer wants/allows you to work from home, then there are home office deductions that may be claimed, provided the arrangement meets one of the two following criteria:

  1. Your home office must be exclusively for working
  2. You must use that space to complete more than 50% of your work

Additional requirements: 

How much can you claim?

The allowed claim for employees is limited to the amount of employment income remaining after all the other employment expenses have been claimed. You cannot create a loss from claiming home office expenses. Excess expenses can be carried forward and in most cases can be applied to future years. 

What can you claim?

To determine the number of deductions you can claim you must separate the expenses between your employment use and non-employment (personal) use of your home.

  • All salaried employees and commission employees can claim:
    • electricity
    • heat
    • water
    • utilities portion (electricity, heat, and water) of your condominium fees
    • home internet access fees
    • maintenance and minor repair costs
    • rent paid for a house or apartment where you live
  • Commission employees can also claim:
    • home insurance
    • property taxes
    • lease of a cell phone, computer, laptop, tablet, fax machine, etc. that reasonably relate to earning commission income

What cannot be claimed?

Salaried employees and commission employees cannot claim:

    • mortgage interest
    • principal mortgage payments
    • home internet connection fees
    • furniture
    • capital expenses (replacing windows, flooring, furnace, etc)
    • wall decorations

Are there any other limitations?

The expenses you can claim are limited when:

    • you work only a part of the year from your home
    • you have multiple income sources

When it comes to income tax, every deduction helps. Whether you file your own taxes or send them to an accountant, you should be informed of what home office expenses can be deducted from your income tax. Ask your CPA whether you meet the CRA’s requirements for home office deductions.

Need advice and/or assistance determining tax deductions for your home office? 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, financial and succession planning services for a wide variety of privately-owned and managed companies. Contact us for a complimentary consultation.

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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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Why Should a Business Undertake Financial Planning?

Business Financial Planning

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.

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? 

  • 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.

Every financial decision your business makes has a significant impact on the overall strength of your company. Financial planning helps you be better equipped to make decisions. 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 with financial planning? 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, financial and succession planning services for a wide variety of privately-owned and managed companies. 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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