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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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Investing: FAQ’s

Investing FAQs

With low-interest rates for savings accounts and a high rate of inflation, saving is no longer adequate to ensure financial security. You need to make your money work for you by investing it. However, the idea of investing can seem intimidating. If you’re just beginning your journey of investing and have some hesitation, read on for our answers to the most frequently asked questions about investing. 

What is the difference between saving and investing?

Saving is the practice of putting money aside for future use (mortgage payments, emergencies, retirement). Investing involves putting your money to work for you (through stocks, bonds, property, mutual funds, etc.) with the intention of increasing its value over time.

Why should I invest?

Investing allows you to grow your wealth and meet your financial goals (purchasing a home, preparing for retirement, building an emergency fund). It can also minimize your tax liability. Before choosing where to invest you need to balance your potential gains with the risk involved. You may choose very safe investment options (ie: GICs) medium-risk choices (ie: corporate bonds) or high-risk picks (ie: REITs). It’s important to have a variety of investment types in order to create a safe, well-rounded, diversified portfolio.

When should I invest?

The longer you invest, the less impact the short-term ups and downs of the market have upon your return. Consider investing as soon as you can. 

How much should I invest?

Invest the maximum amount that you can comfortably afford. Pay off your high-cost debt, set aside an emergency fund, provide for living expenses and short-term goals. Then invest the rest.

Is investing risky?

All investments carry some risk. The goal is to manage the risks. Have a plan and diversify your portfolio. Divide your money among many types of investments based on your risk tolerance and timeline. 

What do I need to consider?

There are a number of factors to keep in mind; your risk tolerance, your timeline (thinking about your future needs for money), your knowledge of investing, your financial situation and how much you can realistically invest. 

What are the different types of investment strategies?

  • Growth investing strategies are most suitable if you are a long-term investor and are willing to withstand market ups and downs. They involve investing in growth stocks; young or small companies whose earnings are expected to increase at an above-average rate. Growth investment is risky as young and/or small companies are untried.
  • Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Investors who use this strategy hope the stock price will rise as more people come to appreciate the true intrinsic value of the company’s fundamental business.
  • Momentum investing involves buying stocks experiencing an uptrend with the belief that they will continue to do so. This investment strategy often uses a data-driven approach to trading, looking for patterns in stock prices to guide purchasing decisions.
  • Dollar-cost averaging is the practice of making regular investments in the market over time and can be used with any of the above methods. This disciplined approach is particularly powerful when you use automated features that invest for you.

Does age affect which investment strategy I should choose?

Goals and strategies for investment often shift with age. Young investors with a long timeline might feel comfortable with risky investments. Older investors often focus on preserving their savings for retirement and tend to emphasize diversification and dollar-cost averaging.

What are the most common types of investments?

  • Stocks: Companies sell shares of stock to raise money for start-up or growth. When you invest in stocks, you’re buying a share of ownership in a corporation. You’ve become a shareholder. Investment returns and risks for stocks vary, depending on factors such as the economy, the political scene, the company’s performance and other stock market factors.
  • Bonds: When you buy a bond, you’re lending money to a company or governmental entity, such as a city, province or country. Bonds are issued for a set period of time during which interest payments are made to the bondholder. At the end of the set period of time (maturity date), the bond issuer is required to repay the face value of the bond (the original loan amount).
  • Mutual funds pool cash from investors to buy stocks, bonds or other assets offering investors an inexpensive way to diversify. They are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.
  • Exchange-traded funds (ETFs) are like mutual funds in that they pool investor money to buy a collection of securities, providing a single diversified investment. They can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. The difference from mutual funds is how ETFs are sold. Investors buy shares of ETFs just like they would buy shares of an individual stock.
  • Real estate: Traditional real estate investing involves buying a property and selling it later for a profit, or owning property and collecting rent as a form of fixed income. Another option is to invest in a REIT. A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. Modelled after mutual funds, REITs pool the capital of numerous investors making it possible for individual investors to earn dividends from real estate investment without having to buy, manage, or finance any properties themselves. 
  • Annuities: An annuity is a contract between you and an insurance company in which the company promises to make periodic payments to you, starting immediately or at some future time. You buy an annuity either with a single payment or a series of payments called premiums.
  • Guaranteed investment certificates (GICs) is a deposit investment sold by Canadian banks and trust companies. People often purchase them for retirement plans because they provide a low-risk fixed rate of return and are insured, to a degree, by the Canadian government. 
  • Cryptocurrency is a kind of digital electronic-only currency that is intended to act as a medium of exchange. It’s become popular in the last decade, with Bitcoin becoming the leading digital currency. Cryptocurrency is good for risk-seeking investors who wouldn’t mind if their investment goes to zero in exchange for the potential of much higher returns.
  • Life insurance products are often a part of an overall financial plan. They come in various forms, including term life, whole life and universal life policies. 

Investing is a great way to build your wealth over time. There is a range of investment options, from safe lower-return assets to riskier, higher-return ones. You’ll need to understand the pros and cons of each investment option and how they fit into your overall financial plan in order to make an informed decision. While it seems daunting at first, many investors manage their own assets while others work through a brokerage account.

Looking for investment advice for your business? 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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All About Deductible Business Expenses in Canada

Deductible Business Expenses

It may seem distant, but tax season will soon be upon us! It’s time to gather your receipts and organize your documents in preparation for filing your business tax return. Sole proprietorships use the same tax schedule as individuals, so returns are due on April 15. If your business is a corporation or a partnership, the return is due on March 15. Canada Revenue Agency offers a number of tax deductions to business owners. Some are deductible at 100% while you may only claim a portion of others. The following are some deductions you’ll want to keep in mind as you file your business taxes this year. 

  • Capital cost allowance: When your business purchases items such as buildings, computers, computer equipment, vehicles and/or a franchise, you can depreciate these articles over time providing a tax benefit for several years.
  • Bad debts are debts that remain unpaid after you have exhausted all means to collect. The CRA allows you to claim bad debts except those which are for a mortgage or resulting from a conditional sales agreement.
  • Start-up costs are costs incurred preceding the start of business operation and can be claimed as an expense. 
  • Fees, licenses and dues: You can claim fees for professional licenses, professional service fees and professional association fees (membership in a trade or commercial association).
  • Use of home expenses: If you operate your business from home, you can claim a portion of the following: interest on your mortgage, electricity costs, home insurance and heating costs. 
  • Delivery, freight and express: You can claim fees for services such as mail and delivery.
  • Fuel costs: You can deduct the cost of fuel (gasoline, diesel, propane) motor oil and lubricants used in your business. This does not include fuel used in your motor vehicle. 
  • Insurance: You can deduct all business insurance policies such as general business liability, business property insurance, business interruption insurance and fire insurance. You cannot deduct the insurance for your motor vehicle or your life insurance premiums.  
  • Interest and bank charges: You can write off any interest you have incurred on money borrowed for business purposes or to acquire property for business purposes and bank charges which are given when processing your payments.
  • Maintenance and repairs: You can deduct the cost of labour and materials for any minor repairs or maintenance done to property you use to earn business income.
  • Management and administration fees:  You can deduct any fees you paid to have your assets and investments managed.
  • Meals and entertainment:  When you attend a convention, conference, or similar event you can claim up to 50% of the cost for food, beverages, plane tickets, hotel rooms and gratuities. When you take a client to an entertainment or sporting event, you can claim 50% of the cost of tickets, entrance fees, cover charges, food, beverages, gratuities and room rental for a hospitality suite.
  • Motor vehicle expenses: If you incur expenses through the use of your personal vehicle for business purposes, you can claim those expenses by keeping an accurate log of use. If your business owns a vehicle or a fleet of vehicles, you can claim fuel, insurance, parking, repairs and maintenance. 
  • Legal, accounting and other professional fees: You can deduct the fees you incurred for external professional advice and/or services such as accounting and legal fees.
  • Prepaid expenses are expenses you pay ahead of time such as yearly rent and can be claimed.
  • Office expenses can be deducted such as the cost of pens, pencils, paper clips, stationery and stamps.
  • Other business expenses are expenses you incur to earn income that are not included on a previous line of your claim such as disability-related modifications, computer and other equipment leasing costs, property leasing costs, convention expenses, allowable reserves private health services plan (PHSP) premiums and undeducted premiums.
  • Property taxes: You can deduct property taxes you incurred for property used in your business such as taxes for the land and building where your business is located.
  • Rent: You can deduct rent incurred for property used in your business such as rent for the land and building where your business is located.
  • Salaries, wages and benefits: You can deduct gross salaries and other benefits you pay to employees but not a salary paid to yourself or your business partner.
  • Supplies: You can deduct the cost of items your business used indirectly to provide goods or services such as drugs and medication used in a veterinary operation, cleaning supplies used by a plumber, supplies used to manufacture a product or software used to supply a service.
  • Telephone and utilities: You can deduct costs for telephone and utilities (gas, oil, electricity, water, and cable) if you incurred the expenses to earn income.
  • Travel: You can deduct up to 50% of travel expenses incurred to earn business and professional income such as public transportation fares, hotel accommodations and meals.
  • Cloud Computing Service Fees: Cloud computing provides access to business data and applications from anywhere, at any time, on any mobile device and may be claimed as a business expense.
  • Donations: Don’t forget that you can claim donations made to registered charities, registered Canadian amateur athletic associations, registered national arts service organizations, registered Canadian low-cost housing corporations, government bodies, registered municipal or public bodies, registered universities, certain registered foreign charitable organizations and the United Nations. 
  • Advertising: You can deduct expenses for advertising and promotion, including amounts you paid for business cards and promotional gifts. You can also deduct expenses for advertising in Canadian newspapers, on Canadian television, Canadian radio stations and online or digital advertising.

 

When in Doubt: Check with your accountant or with the Canada Revenue Agency if you’re in doubt about the tax deduction potential of a particular business expense. 

Allowable tax deductions are constantly changing. If you’re not aware of or don’t understand all of the deductions possible, don’t despair! Get in touch with your CPA. No matter what type of business you operate, what size your business is or where you operate from, your CPA will ensure that you receive all the deductions you’re entitled to. Let your CPA help you determine how much you can save this year.

For all your tax needs contact Cook and Company Accountants. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, we can use our experience and expertise to make tax time a breeze. Contact us to request a meeting.

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How Does Passive Income Affect Corporate Taxes?

Passive Income Affects Corporate Taxes

Passive income can have a financial impact on a corporation’s tax burden. Strategic planning can reduce the impact of passive income on your corporation’s bottom line.

What is passive income?

Your business may generate income from many sources. Passive income is derived from the ownership of capital property/assets. It’s generally earned through rental, interest income and/or royalties and is achieved without excessive effort on the part of the stakeholder(s). Passive income is taxable in Canada.

What is considered passive income in Canada?

  • Investments: Guaranteed Investment Certificates (GICs) and personal savings accounts are low-yield sources of passive income. Moderate-risk investments like dividends from shares of a corporation are also considered passive income. Passive income can be earned through investments that are part of a non-registered investment plan or portfolio. 
  • Rental properties: Income earned through the leasing of a rental property is considered passive income. 
  • Online platforms are an increasingly popular method of earning passive income. Earning money online can be done independently through one’s own website or through partnerships with affiliates.
  • Corporations: Many corporations own shares in other corporations as a means to generate passive income.

How does passive income affect corporate tax in Canada?

Passive income in any amount is ineligible for the small business deduction (SBD). As such, corporations receiving any passive income will pay a high-rate corporate tax (upwards of 50%) on that portion of their pre-tax income.

Strategies to reduce the impact of passive income on corporate tax:

There are a number of ways that your corporation can reduce the impact of passive income on your corporate taxes. 

  • Withdrawals to permit RRSP or TFSA contributions: Consider withdrawing sufficient corporate funds to maximize your RRSP and TFSA contributions, rather than leaving the funds inside the corporation for investment. Given sufficient time, RRSP and TFSA investing will outperform corporate investing when earnings come from interest, eligible dividends, annual capital gains or a balanced portfolio. 
  • Tax-free withdrawals: If a shareholder previously made a loan to the corporation, and those funds are no longer required by the corporation, consider repaying the shareholder loan. Capital dividends can be paid without being included in a shareholder’s income. 
  • Investment strategies: Consider investments that lean towards growth rather than annual interest or dividend income, as you may better be able to time the recognition of a capital gain. Consider a “buy and hold” strategy to defer capital gains. It may also be possible to stagger dispositions of investments between calendar years.
  • Individual pension plans: An Individual Pension Plan (IPP) is a pension plan created for one person, rather than a large group of employees. 
  • Life insurance: Invest the after-tax income of the corporation into a corporately-owned life insurance policy that insures the life of the business owner or some other individual. There is generally a lower after-tax cost of the insurance premiums, which can be paid with funds that are taxed at a lower tax rate inside the corporation than funds that are earned personally. 
  • Donations: Your corporation will receive a deduction for the amount of the donation and making a donation will reduce the funds that may be invested in your corporation to produce passive income.

Be sure to discuss all tax strategies with your chartered professional accountant to make sure they are appropriate for your corporation. Your accountant can advise you regarding the best tactics to reduce the impact of passive income on your corporation’s tax burden. 

Need help with your passive income taxation strategies? 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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Tax Questions Frequently Asked by the Self-Employed

Self Employed Tax

If you’re self-employed, tax time can be confusing. Do you pay the same tax rate as an employee? What expenses can you deduct? When do you file? Can you get employment insurance? The following are some answers to the tax questions most frequently asked by the self-employed.

Do I qualify as self-employed?

According to the Canada Revenue Agency, a self-employed individual usually works independently. The worker does not have anyone overseeing their activities and is free to work when and for whom they choose. They may provide their services to different payers at the same time and can accept or refuse work from the payer. They typically use their own tools, space and equipment. The working relationship between the payer and the worker does not present a degree of continuity, loyalty, security, subordination, or integration, all of which are generally associated with an employer-employee relationship. The worker is responsible for paying provincial and/or federal sales taxes and may claim certain deductions as business expenses. 

Examples of self-employed positions:

  • Property and real estate managers
  • Farmers and ranchers
  • Brickmasons and blockmasons
  • Food Service Managers
  • Painters (construction and maintenance)
  • Carpenters
  • Lodging Managers
  • Tile and Marble Setters
  • Artists
  • Massage therapists
  • Financial advisers
  • Freelance writers
  • Independent business consultants
  • Local handypersons
  • Food truck owners
  • Photographers
  • Make-up artists
  • Event planners
  • Hairstylists
  • Tutors 

Do I need to charge GST/HST?

According to the Canada Revenue Agency (CRA), if you sell taxable goods or services in Canada and you are registered for a GST/HST account, you must charge your customers GST/HST for your province or territory. You must remit all net tax owing when you file your taxes. Be sure to keep records of the amount of GST/HST you’ve collected and how much you’ve paid on business expenses.

When do I file?

Self-employed individuals must file, like everyone, by April 30th. 

Can I deduct my kids and/or spouse?

If they work for you, you can pay your significant other and/or kids. 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. 

Can I get employment insurance?

To be eligible for EI, (including maternity, parental, sickness and compassionate care leave) you have to register.

How much should I set aside for taxes?

Set aside between 15 and 25 percent of your gross earnings to avoid the shock of an unmanageable tax bill at the end of the year.

What deductions can I claim?

Self-employed workers can take advantage of more write-offs than employees bringing home a T4. They can claim:

  • Operating expenses (rental on 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. 

The Canada Revenue Agency states that business income is income from any activity you carry out for profit. If you’re self-employed, you likely earn income from a business that you operate either as a sole proprietor or with someone else as your partner. It could include income from a business, profession, commission sales, farming, or fishing activities. You’ll need to file your taxes in a very specific way in order to meet CRA requirements.

 

Need advice and/or assistance filing your self-employed tax return? Need help 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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Should a Sole Proprietor Incorporate?

Should a Sole Proprietor Incorporate?

In Canada, a business can operate as a sole proprietorship or a corporation. Most small businesses initially operate as sole proprietorships and later incorporate. 

What is a sole proprietorship? 

With a sole proprietorship, one person owns the business and makes all the decisions, assumes all the risks, claims all losses and receives all profits. In terms of taxation, the owner/operator and the business are one and the same. The owner pays personal income tax on profits earned. This is the easiest type of business to establish and is a popular choice for contractors, consultants, small businesses, freelancers and other self-employed individuals. A sole proprietor may choose to register a business name, operate under their own name or both.

What is a corporation?

A corporation is a separate legal entity. It can enter into contracts and own property in its own name, separately and distinctly from its owner(s). When forming a corporation, the owner(s) transfer money, property and/or services to the corporation in exchange for shares. To set up a corporation you need to complete articles of incorporation and send the documents to the appropriate provincial, territorial, or federal governments. Corporations have higher administrative costs (set up fees, paperwork) and require the help of professionals to handle complex tax filing requirements.

What are the benefits of incorporating a business?

 Incorporation has many long-term benefits. 

  • Limited liability: Incorporation provides protection to owners and their families by limiting their personal liability. Personal assets of the owner(s) are protected against creditors and legal action taken against the corporation. An individual shareholder’s liability is limited to the amount they invested in the company. 
  • Lower tax rates: Corporations are taxed separately from their owners and at a lower rate than the individual tax rate. Corporations have the benefit of a small business deduction (SBD), further reducing income tax.
  • Income tax deferral: Surplus profit can be reinvested into the business or used for other investments, allowing you to defer personal taxes on withdrawals. You can also receive income from an incorporated business in the form of dividends rather than salary, which will lower your tax bill. 
  • Lifetime capital gains exemption: When you sell a corporation, you’re selling an independent entity with its assets and liabilities. If you make a profit from the sale, the Lifetime Capital Gains exemption (LCGE) could save you from paying taxes on all or part of the profits. Many small business owners incorporate their business for this tax advantage alone.
  • Income splitting: Incorporated businesses can pay dividends to shareholders/spouses/children, lowering the tax bracket of the company. Shareholders do not have to be employees to receive dividends. 
  • Easier access to capital: Corporations can borrow money at lower rates, raise money by selling shares/bonds to shareholders and more easily attract angel investors/venture capitalists. 
  • Continuous existence: You can buy and sell shares of a corporation without affecting the corporation’s existence. It continues to exist even if the shareholders die/leave the business or if the ownership of the business changes. It continues to exist unless it winds up, amalgamates, or gives up its charter. 
  • Increased business: People perceive corporations as more stable than unincorporated businesses. Some clients/customers will only do business with incorporated companies due to liability issues. Sole proprietorships are often overlooked in favour of incorporated businesses.
  • Business name protection: When you incorporate a business, the business name you choose is reserved for your use. If you incorporate your business federally, you have the right to use your business name throughout the country. Sole proprietorships have no business name protection.

As a business grows so too do the tax liabilities and operational risks. These may indicate that it’s time to prep articles of incorporation. Business owners should consult with a lawyer and accountant to determine if the increased costs are offset by the benefits.

Considering incorporating your business? Need advice and/or assistance? 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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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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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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Estate and Succession Planning for Businesses

Business Estate and Succession Planning

A stable and growing business is what every serious entrepreneur desires, but what about your company’s long-term future? After devoting much time, money, and effort to the creation and operation of your business, you’ll want to ensure a smooth succession process. Whether you’re selling it, passing it down to the next generation or closing it down, it’s important that you take the necessary steps to shape your business’s future in accordance with your needs. If you’re planning to sell, how can you get the most value for what you’ve built while enabling a successful transition of ownership? If retirement is on the horizon, who is best suited to take the wheel and bring the company to new heights? How can you protect your family, your personal assets and your business should you pass away? Whatever the circumstances, a smart exit strategy will make all the difference for you, your family and your business. The following are some estate and succession planning tips for business owners. 

Separate your Personal and Business Assets:

Without proper estate and succession planning, when you die default directives are applied that essentially lump your business assets in with all other assets you own. Your beneficiaries may be required to pay significantly more tax than necessary and the survival of your business may be threatened. To avoid this scenario, draft essential documents to separate your personal from your business possessions and make your wishes clear. 

    • A buy-sell agreement allows business stakeholders to retain or assume control of the business itself while letting you pass on the value of your stake to your personal beneficiaries. This type of agreement makes for less stressful outcomes for all concerned.
    • Powers of Attorney for your business interests/activities: These may differ from those authorized to administer your personal affairs.
    • A business succession plan: You may transfer your business outright to a beneficiary or set up a trust that can be used to control the assets of the business. 

Establish Estate Planning Asset Protection:

To do this you take nonexempt assets subject to creditors’ claims and reposition them as exempt assets through techniques such as family limited liability companies and irrevocable trusts for your spouse, children and other beneficiaries.

Undertake Estate Tax Planning:

In order to minimize the tax burden of settling your estate, there are estate planning concepts that can be applied to potentially taxable areas including RRSPs, RRIFs, and capital gains on real estate and shares.

Transferring the ownership and management of a company is a personally and professionally delicate process. Without skillful planning, a number of issues and mistakes are prone to arise. Revising and updating your succession and estate plan regularly is crucial. Constantly amend your plan for changes in desire and the current business environment. Everything is more achievable when you’re well-prepared and involve the right help. Talk to your Chartered Professional Accountant. They have the expertise, knowledge and experience to help you create and maintain a successful succession and estate plan for your business. Businesses deserve nothing less than to feel comfortable every step of the way.

 

Need help with business succession and estate 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 and succession planning services for a wide variety of privately-owned and managed companies. We possess a detailed and tactful understanding of business succession planning and its many moving parts. Contact us for a complimentary consultation.