Your business file is chosen for an audit by the Canadian Revenue Agency. What does this mean? What happens next? How can you ensure a successful audit? Read on to find answers.
What is a Tax Audit?
A tax audit is a detailed examination of a company’s records and books by the Canadian Revenue Agency (CRA). It’s intended to confirm that your records/books support your tax return. Audits ensure that the Canadian tax system is fair for all.
How is a Business Chosen for Audit?
11,328 small and medium-sized business audits occurred in 2020/2021. Files are chosen for audit based on a risk assessment; factors such as non-compliance with tax obligations, frequency of errors on tax returns, and comparison to similar files. If your company’s file is identified as high risk, a CRA officer reviews your information to determine whether the CRA should go forward with an audit.
What Issues Prompt an Audit?
The CRA may consider an audit due to any/all of the following:
- Multiple or repeated errors on your tax returns
- Expenses not in line with others in your industry
- Major changes in income or expenses
- Repeated losses
- Overly large charitable donations
- Under-reported earnings
- Discrepancies between GST returns and Tax returns
- Unsubstantiated home office deductions
- Missing information
- Shareholder loans that should be considered income
- A lifestyle incongruent with your declared income
- Real estate transactions
- Vehicle expenses
- Audit of a related party
- Informant tips
What Happens During an Audit?
A CRA auditor contacts your company via mail or phone and sets a date, location, and time for the audit. A review is held at your business location, accountant’s/representative’s office, or a Canadian Revenue Agency office. Your company is given the CRA agent’s contact information and informed of the scope of the upcoming audit. You’re asked to provide supporting documents for the review. The auditor copies your records/books and/or borrows your documents. The agent discusses any questions and addresses any concerns that arise during the audit.
Tips for a Successful Audit
The following suggestions help smooth the audit process.
- Provide all documents requested: This may include:
- Business records (ledgers, invoices, bank statements, receipts, journals, contracts, rental records)
- Personal records (mortgage documents, bank statements, credit card statements)
- Records of individuals related to the business (family members, spouses, corporations, partnerships, trusts)
- Records from your accountant that relate to the books and tax returns of your company
- Ensure books are accurate:
- Reconcile bank balances to ensure no mistakes have been made
- Review accounts
- Record every expense, categorizing expenses alongside cash flow tracking
- Save and organize your receipts
- Keep business and personal expenses separate
- Backup your data
- Use accounting software to increase accuracy and ease record-keeping
- Consider outsourcing your accounting
- Communicate with auditors: Keep auditors informed. Be courteous. Prep everything requested. Periodically request updates on the procedure. Ask questions for clarity.
- Make yourself available to assist, to answer questions, and to gather further information.
- Review the findings: Ask for an explanation of any changes. Go over these changes with your Chartered Professional Accountant. Decide if you are in agreement or whether you wish to challenge the findings.
- Challenge the findings: If you disagree with the assessment, contact the auditor and explain your concerns. Provide documents to support your position. If you are unable to resolve the disagreement, you may appeal.
Filing taxes for a business is a complex and complicated procedure. A Chartered Professional Accountant ensures your tax return is accurate/complete, you receive the deductions you’re entitled to, and the chances of your file being chosen for an audit are minimal.
Contact Cook and Company Accountants for all your tax needs. Whether you operate a sizable corporation with multiple subsidiaries or a sole proprietorship, we use our experience/expertise to make tax time a breeze. In the event of an audit, we’ll assist in dealing with the CRA. Contact us for a complimentary consultation.
Keeping accurate up-to-date books helps a company make informed financial decisions and avoid mishaps that can affect financial health. However, tracking your business’ income, expenses, taxes and vendor payments is complicated and time-consuming. Including an item in the appropriate account, applying the correct description or code for the item and entering the correct amount takes time and attention. Accounting errors inevitably occur. The following are the most common types of errors in accounting that business owners make and suggestions on how to prevent accounting errors.
What is an error in accounting?
Accounting errors are unintended accidents; inadvertent mistakes. Sometimes accounting errors are caused by transposing a number or hitting an incorrect key. Other times they stem from a misunderstanding of accounting rules and/or company policy. Accounting departments attempt to limit errors, especially in data that flows into financial reporting used by stakeholders.
What are the most common errors in accounting?
- Improper record keeping: Record keeping is the act or practice of recording important information for future reference. It involves identifying a transaction, recording it, classifying it, posting it and balancing the account. It may involve paper copies but can also be managed digitally. To avoid improper record keeping, implement a receipt capture, filing and backup system and enforce its proper use.
- Failing to do monthly reviews of your financial statements: A profit and loss statement provides a snapshot of a company’s sales, expenses and profit for a given accounting period. A balance sheet statement reports the ending balance of a company’s assets, liabilities and equity for a given accounting period. These statements provide insight into a company’s financial health. Financial statement analysis should be done on a regular basis (preferably monthly) to ensure all expenses have been categorized accurately and account balances have been reconciled. Add this task to the monthly duties schedule.
- Neglecting to analyze budget vs. actual expenses: A budget versus actual expense analysis should be performed at the end of each month and each quarter to be sure your business is adhering to the budget. This analysis uncovers variances that require corrective action and helps determine areas where you can cut back. Schedule this analysis into your monthly duties roster.
- Neglecting reconciliations: When you reconcile your accounts at the end of the month, you validate the information in your books against an external document (the bank or credit card statement). Regularly reviewing business bank accounts against your books helps reduce the incidence of fraudulent transactions. It ensures you discover errors and thus prevents issues from developing. Put a note in your calendar to reconcile your bank and credit card accounts each month.
- Failing to reconcile loan accounts: It’s important to reconcile your loan account each time you receive a statement as this is the easiest way to ensure the liabilities portion of your balance sheet is accurate. Put a note in your calendar to ensure your loan account is reconciled regularly.
- Leaving undeposited funds on the books: Undeposited funds on the books means the payment has been posted but the deposit hasn’t been. This makes revenue look larger than it is, causing incorrect tax payments and inaccurate assumptions about business growth. This error can be avoided with proper workflows.
- A lack of data backup: In case the device that stores your business’ financial information is lost, stolen or hacked, it’s important to have the information backed up. There are many backup options available.
- Not utilizing accounting software: Investing in the right accounting software helps you avoid mistakes and makes it easier to handle your finances. Accounting software ensures you have all the historical data you need to manage your books, payroll and taxes. Choose accounting software that integrates with your bank account and has backup capability.
- Inadequate checks and balances: No one person in the business should handle business funds without oversight. Ensure the person who does the bookkeeping in your business isn’t the same person making deposits for the company. Avoid giving employees signing authority on your business bank accounts. Make sure you review your business’s bank statements, including images of cancelled checks, on a monthly basis.
Accurate accounting information is critical for a business. Though there is no sure way to eliminate all accounting errors, understanding what errors are common and where to look for them is an important first step. Processes and controls help minimize their occurrence. Using good accounting software and preventive controls helps create a less error-prone accounting environment. Accurate books allow you to make informed decisions that will help improve your bottom line. Correction of errors in accounting is crucial.
Need help establishing a good accounting system and/or incorporating accounting software? Looking for business advice? Contact Cook and Company Chartered Professional Accountants. We are based out of Calgary, Alberta, serving clients across Canada and the United States. We provide high-quality tax, assurance and succession planning services for various privately-owned and managed companies. Contact us for a complimentary consultation.
Business income taxes are a year-round experience, not a single event. Having just paid your taxes, you likely aren’t thinking of the next tax season. However, there’s no such thing as “too early” to think about future business taxes. So, how can you make tax preparation easier next year? How can you simplify the process? The following are some ways to make the next tax season less complicated and more relaxed:
- Stay informed: If you’re looking for useful tips, helpful resources and current information, check out the Government of Canada’s web page for small businesses and the self-employed.
- Establish a tax calendar: This essential tax-planning tool helps you keep track of important dates and deadlines. Find these dates and deadlines on the Government of Canada’s website for important dates for corporations/businesses.
- Classify your business correctly as this affects the taxes required. For information on Sole Proprietors, Corporations and Cooperatives, see the Government of Canada’s website. If you’re still not sure what classification your business comes under, consult your CPA.
- Keep accurate, detailed, and updated records: This makes it easier to organize, check and file your business taxes without missing possible deductions or increasing your risk of an audit. Invest in accounting software to simplify accurate record keeping. Keep all financial information (such as your profit and loss statement, balance sheet, etc.) up to date to make filing easier during next year’s tax season.
- Track expenses: As the government allows credits and tax deductions for qualified business expenses, it’s wise to keep track of all business-related expenses throughout the year. As the CRA does not accept credit card statements as proof of expenses, in order to take advantage of these tax deductions you must collect receipts for all business-related activities including accounting fees, business advertising and promotional expenses, business licenses and memberships, use of home expenses, interest and bank charges, insurance premiums, meals and entertainment, office expenses, rent, repairs and maintenance, tools and equipment, vehicle expenses, and parking fees. Record and file them appropriately. You can keep physical receipts or digital copies.
- Keep business and personal banking separate: Open a dedicated bank account for your business, preferably one with online access as this makes it easier to make payments and do bank reconciliations. If you need business money for personal expenses, do a regular transfer to your personal account. This will make bookkeeping much easier. Don’t use your personal credit card for work purchases or your business card for personal purchases.
- Get organized: Place your tax return and tax documents in a safe place where you’ll be able to quickly and easily find them. Separate any documents you receive that might have tax implications into at least four different categories including income items, deductions, business changes and others. Organize documents into each file accordingly. Better yet, digitize. It’s stressful keeping receipts, forms and other necessary paperwork organized and easily available. There are cloud-based platforms you can use to take pictures of receipts and categorize the expense.
- Hire a CPA: Most small businesses prefer to have a Chartered Professional Accountant complete their Canadian income tax returns. This saves time and effort, provides assurance of accuracy and increases your chances of efficient tax planning.
As a business owner, you have a lot to think about such as daily operations, growth strategies, building/maintaining your customer base, hiring/retaining quality employees, etc. Use these tips to help make your business taxes and tax filing easier next tax season. It’ll be one less thing to worry about!
Not sure what tax deductions your company qualifies for? Need help with tax planning strategies? Contact Cook and Company Chartered Professional Accountants. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, we use our experience and expertise to assist you. Contact us for a complimentary consultation.
Historically, inflation has plunged countries into long periods of instability and politicians have won elections on promises to combat it. Inflation is currently at a high not felt for decades. Canada’s annual inflation rate rose to 8.1% in June of 2022, the highest since January 1983. Businesses are paying more to find and retain talent. Supply costs are escalating. Companies are feeling squeezed as the costs of goods and services continue to rise. Inflation is expected to remain elevated until 2024. It’s necessary for businesses to take decisive action to strengthen their growth plans and deal with the pressures of an inflationary period. The following are strategies to plan for and deal with the impact of inflation on your business.
What is inflation?
Inflation is the rate of increase in prices over a given period of time. It represents how much more expensive a relevant set of goods and/or services has become. It can be translated as the decline of purchasing power over time and is expressed as a percentage. Essentially, inflation means that a unit of currency effectively buys less than it did in prior periods. When inflation rises, consumer spending declines as people can’t afford to buy as much as previously.
How does inflation affect a business?
Inflation means that a company’s cash reserves are worth less. Labour expenses rise. Consumers buy less of a business’s goods and/or services. The value of some assets (real estate, steel, lumber) increases. Supply chain issues often occur, affecting scheduling, pricing and estimation. The shifting nature of the economy during an inflationary period is unnerving for many business owners. The answer? Be prepared!
How can a business plan for and address inflation?
Normal economic cycles include four stages: expansion, peak, contraction, and trough. As a business owner, it’s wise to have contingency plans for navigating each stage. A company’s plan for a period of inflation should include metrics to measure success and actionable steps to take. The following are tips for dealing with inflationary pressure as a business.
- Be aware of real income: Track net income against the rate of inflation (real income). As the rate of inflation increases, profit decreases, reducing value and equity.
- Adjust the length of contracts: Lock in pricing for materials and/or expenses with a long-term contract. This protects your budget and guarantees revenue for your supplier.
- Time your purchases: Make large purchases before the price rises, particularly for equipment, land or other assets. This allows you to borrow cash when it is worth more and pay off your debt with money that is worth less.
- Optimize pricing: Create value for your product/service through marketing and an improved customer experience. This will allow you to raise your prices with less difficulty. Tie your price increase to the PPI (producer price index) or the CPI (consumer price index). Consider targeting less price-sensitive customers.
- Understand your cash flow: Cash flow and working capital are essential parts of a plan to deal with inflation. Do a financial modelling exercise to map out your situation. Look at ways to improve cash flow:
- extending payments to vendors
- tightening up invoicing and collection policies
- divesting underperforming divisions or assets
- prioritizing your resources in areas that are performing well
- Reduce your tax burden: Talk to your accountant about ways to reduce your tax burden. Take advantage of losses.
- Review your debt and capital needs: Assess your ability to meet current debt obligations. Reach out to lenders if you’re considering expansion, the purchase of new technology and/or refinancing existing debt.
- Consider your strategies for growth: What worked in the past may not work now. Reevaluate and refresh your strategies.
- Assess your technology: Do you have access to real-time data regarding your business? If not, it may be time to upgrade your technology. Consider a cloud accounting system, an enterprise resource planning system (ERP), a warehouse management system (MHS) and/or a customer relationship management system (CRM). The information provided can guide your decision-making.
- Simplify operations: Look for ways to streamline complicated processes, run leaner, reduce cost and increase profitability.
- Prioritize high-profit margin products: Many companies give priority based on the date of the order regardless of profit margin. Tell customers purchasing low-profit items/services that delivery will be slow. Ship goods/deliver services that are most profitable first.
- Differentiate between strategic and nonstrategic cost cutting: Selectively trim costs to improve the return on operating expenses. Boost growth through greater investment in the strategic capabilities needed to achieve differential results. Deploy scarce resources to reinvigorate strategy and maximize shareholder value.
- Eliminate work: Scrutinize what activities are performed and how those activities are performed. Eliminate unnecessary work and automate when possible.
- Keep morale high and prevent attrition: Losing key employees results in lost productivity and requires time and effort to find and train a replacement. To avoid this, openly communicate with employees. Be aware and accommodating of personal needs.
Inflationary pressures and supply chain issues are real and complicated. It’s important to develop a plan that addresses the rapidly evolving situation. Utilize the wisdom and leadership available to your business by talking to your accountant. They have the knowledge and experience to help you weather current circumstances.
Does your business need help weathering current inflationary conditions? Contact Cook and Company Chartered Professional Accountants. We can provide you with powerful financial planning solutions. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook and Company use their experience and expertise to help your business. Contact us for a complimentary consultation.
You probably know of others who have set up a trust(s) to protect their assets. Maybe you’ve heard mention of trusts on a TV special regarding inheritance and finances. Ever wondered what a trust is? Inquisitive as to how a trust might benefit you, your family and your business? The following is information regarding trusts and how they can protect assets.
What is a trust?
A trust is a legal entity that allows you to transfer the legal title of an asset(s) to a person while assigning the benefit of the asset to another. The creator or original owner of the asset is called the grantor. The person who manages the trust is known as the trustee (often an attorney or accountant). The person who receives the benefits is known as the beneficiary. Depending upon the type of trust, the grantor can retain the right to make some or all decisions regarding the trust. A well-designed trust helps save time, paperwork and other challenges when settling an estate. It can reduce the amount of estate taxes beneficiaries have to pay when they inherit assets.
Categories of trusts:
Trusts are either revocable or irrevocable and may take effect during your lifetime or after death.
Revocable trusts are most common and can be changed or revoked at any time. They instruct the trustee on how to distribute your assets to beneficiaries while you’re alive, after death or if you become incapable of doing so. Income from trust-held assets is taxable at Canadian trust tax rates.
Irrevocable trusts are set in stone the minute the agreement is signed. Only in rare circumstances may changes be made. Irrevocable trusts remove the benefactor’s taxable estate assets, meaning they are not subject to estate tax upon death. The benefactor is also relieved of tax responsibility for any income generated by the assets. The trust is protected from creditors and legal judgment.
What are the advantages of a trust?
There are a variety of benefits to the establishment of a trust. You can:
- Control assets and provide security for both the grantor and the beneficiaries.
- Provide for beneficiaries who are minors or require expert assistance managing money.
- Minimize the effects of the estate or income taxes.
- Provide expert management of estates.
- Minimize probate expenses.
- Minimize the time to accomplish probate.
- Maintain privacy.
- Protect real estate holdings and/or a business.
What are the disadvantages of a trust?
There are a few issues to be aware of when considering the establishment of a trust(s).
- Cost: An estate attorney usually does the paperwork involved in setting up a trust and transferring your assets into the trust.
- Time: You’ll need to spend time dealing with paperwork. You may need to have uncomfortable conversations about who gets what.
- May not be necessary: Some people can indeed save on estate taxes with certain trusts, but most estates aren’t subject to estate taxes in the first place.
Reasons to set up a trust:
There are a number of reasons that you may seek to establish a trust(s).
- You want to leave assets to minors or young adults
- You have children from a previous marriage
- You want a professional to manage your assets when you’re gone
- You have a disabled or special-needs child
- You want to support your spouse in the case of his/her incapacity
- You want to save taxes
If you’re seeking to ensure that your finances are well managed as you pass your assets on, a trust is useful. A trust helps make sure that your assets are directed toward the people and causes that are important to you.
Need help understanding the benefits of a trust? Want assistance setting up a trust? Contact Cook and Company Chartered Professional Accountants. We are based out of Calgary, Alberta, serving clients across Canada and the United States. We provide high-quality tax, assurance and succession planning services for a wide variety of privately-owned and managed companies. Contact us for a complimentary consultation.
When you hear the phrase “estate planning” you likely think of death, taxes and a will. These are important parts of estate planning but they’re not the full picture.
What is estate planning?
Estate planning involves setting up a plan that establishes who will eventually receive your assets and makes known how you want your affairs to be handled in the event you are unable to handle them on your own. Estate planning is about people; who they love and how they wish to provide for them. It’s not only about death but also about preparing for the possibility of becoming dependent through age, disability or injury.
What is the role of your accountant in estate planning?
Intricate knowledge of taxes allows your accountant to keep you informed regarding the tax implications of your estate plan. They ensure that your plan minimizes taxes and maximizes the portion of your estate that can be passed on to your beneficiaries. Your accountant works together with your lawyer to help:
- Clearly define your estate planning goals.
- Organize and create your estate planning team (experts on law, finance, and taxes).
- Evaluate and recommend estate planning options.
- Prepare, organize and review your estate planning documents including current wills, trusts, health care and power of attorney.
- Decrease the problems and expenses associated with probate.
- Lessen taxes at the time of death.
- Arrange for management of your estate in the event you are incapacitated.
- Draft a working plan for conserving and effectively managing your estate after death.
- Transfer the assets of your estate to heirs the way you want.
- Organize fair and adequate liquidation of estate to cover taxes and other expenses.
- Amend your plan as needed.
Your accountant is as helpful as your lawyer when planning your will, discussing accounts, debts, and assets, determining bequeathals, deciding who you’d like to have as executor of your estate/joint bank accounts and who you’d prefer as Power of Attorney for your affairs if you become incapacitated. Both professionals guide you in making the best decisions for you and those you leave behind.
Who needs estate planning?
If you wish your estate distributed according to your wishes as opposed to statutory guidelines, you need an estate plan. If you have assets that are susceptible to high taxes, estate planning is beneficial. If you own a business, estate planning is essential. If you want planned distributions of benefits for your descendants, estate planning is helpful. If any of your heirs need financial assistance upon your passing, estate planning is for you.
Questions to ask your accountant regarding your estate planning:
- Can you help with probate? Your accountant will have a thorough understanding of your assets and tax liabilities enabling him to deal with the probate process quickly. Much of the work involved in probate is familiar to an accountant.
- Can you handle my accounts when I pass? An accountant can manage a deceased’s accounts while the estate is being settled. This ensures heirs that money is being managed and spent properly.
- Who will prepare my final tax return? Accountants can handle final income tax returns, as well as the estate tax return. They understand what taxes need to be paid at the provincial and federal levels, exemptions that exist for particular circumstances and how to help your estate save money.
- Can you help my beneficiaries? A CPA is able to help heirs with their individual tax filing (at provincial and federal levels) avoiding costly government fines and reducing family discord.
- Can you help with the tax obligations of the estate? Estates have many tax obligations especially if your estate has several assets. Your accountant can handle these tax matters, help calculate the value of your estate and determine the impact of the tax laws. An account makes sure you fulfill your tax obligations, avoiding the risk of costly fees and penalties.
Dealing with the loss of a loved one is hard. Simplify your heirs’ situation with estate planning so that they need not undergo a stressful ordeal. When it comes to the financial intricacies of your business and its future, consult a team of financial professionals who can offer a specialized set of expertise. Your accountant can help you prevent fines, fees and penalties. They can ensure all aspects of estate accounting are complete and accurate. Protect your legacy for your loved ones. Take charge of your financial endowments. Talk to your accountant today.
Need help ensuring that the money and assets you’ve worked hard to build aren’t destroyed after you’re gone? Want help with business estate planning? Contact Cook and Company Chartered Professional Accountants. Our expert staff will help you navigate the complex maze of estate planning with ease. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook and Company use their experience and expertise to help your business. Contact us for a complimentary consultation.
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.
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.
Are you in the planning stage of a business venture? Do you own and operate a recently started business? Are you planning a business expansion? When should you hire an accountant to help? The following is some information that can help with the decision of when to hire an accountant.
What are the duties of an accountant?
An accountant’s duties vary from company to company, but typically they are responsible for:
- Data management: An accountant is responsible for ensuring a business’ financial data is stored, updated and managed appropriately. They make sure proper procedures are used for data entry and accounting software is up to date, secure and regularly backed up.
- Financial analysis and consultation: Accountants act as a resource when a business is making financial decisions. They provide tips on spending, discuss options for credit and tax deductions and help interpret financial jargon. They help troubleshoot the day-to-day management of finances in a company.
- Financial reports: Accountants supply documents that provide deep insight into a business’s performance (income statements, balance sheets, cash flow statements, profit and loss statement, accounts receivable aging, revenue by customer, accounts payable aging, statement of retained earnings, general ledgers, etc.). A business and its investors make decisions based on the reports their accountant provides.
- Regulatory compliance: There are many rules and regulations that affect businesses. An accountant ensures that your income and expense reporting follows applicable provincial and federal laws.
When do you need an accountant?
An accountant can save you time, money and headaches. There are several key times when an accountant can make a significant difference for a business.
- When starting your business: A chartered accountant can assist you in writing your business plan, help you acquire funding, aid you in leasing a space and provide you with direction and goals. They can advise you on the best structure for your business (Sole Proprietorship, Partnership, Corporation), help you get the appropriate licenses (GST number, business license) and assist you in setting up business accounting software.
- For compliance and tax issues: An accountant makes sure you are in appliance with applicable tax laws, helps with complex payroll issues and assists with reporting requirements.
- When being audited: A chartered accountant provides advice to work within the auditing process. They can recommend accounting software that incorporates an audit trail, easing the transactions needed during an audit.
- When applying for a loan: An accountant improves your chances of receiving a business loan. They can present facts and figures that back up your application for funding. They can advise you regarding the best type of loan and whether the terms, conditions and interest rates offered are favourable for your company.
- When expanding: A chartered accountant can help you handle growth transitions (hiring, larger office space, increased product/service line) and look after details (payroll, tax management, property tax, utility payments) allowing you to focus on company growth. They can analyze cash flow, inventory and pricing to provide insight into how to grow your business successfully. They can even help determine the best time to introduce new products and/or services.
- Before taking on a franchise: Franchise contracts vary widely. An accountant can help determine whether the fees and percentages charged will allow for a reasonable income. They assist in providing sufficient information for making the decision regarding franchising.
- Before buying a business: Consult an accountant before buying an existing business. They can look into the company’s accounts and determine whether the purchase is a financially sound decision.
- Before you sell your business: A chartered professional accountant can put your company’s financial records in order and produce statements of accounts that you can show to prospective buyers. They create charts and tables to clearly show your company’s position. They can also structure your financial affairs so that you get the most from selling your business.
- Every step of the way: The truth is, a chartered professional accountant can help your business at every stage of its development. They can make life easier for you so you can concentrate on operating your business.
A chartered professional accountant can interpret your financial data in order to help you make better business decisions, assist you with business start-up, aid with tax and compliance issues, be of service during auditing, help you expand and/or buy a franchise, aid in acquiring a loan and help out at various stages during the growth of your business. Every business benefits from working with an accountant!
Need help with the financial complexities of your business? Want advice regarding your business’ situation? Contact Cook and Company Accountants. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, we use our experience and expertise to assist you. Contact us to request a meeting.