To ensure that Canadian businesses are following the tax laws, the CRA undertakes business audits. Though hearing your company will be audited may make you sweat, if you’re prepared, an audit need not engender fear. The best way to deal with an audit request is to understand the process and to provide the information to the auditor in a timely manner.
What is a tax audit: A tax audit is a detailed examination of a business’ books and records by the Canadian Revenue Agency (CRA) to confirm whether that business is fulfilling its tax obligations (income tax, deductions, employee benefits, payroll remittances, GST/HST), following tax laws and receiving the benefits and refunds they are entitled to. It’s conducted after the business has received a notice of assessment and is intended to check that their records support their tax return. Audits are meant to ensure that the Canadian tax is fair for all and maintain confidence in the integrity of Canada’s tax system.
What are the most common issues that prompt a business audit?
The CRA will consider an audit if they discover:
- Multiple or repeated errors on your tax returns
- Major changes in income or expenses
- Repeated losses
- Expenses not in line with others in your industry
- Under-reported earnings
- Overly large charitable donations
- Unsubstantiated home office deductions
- Discrepancies between GST returns and Tax returns
- Shareholder loans that should be considered income
- Missing information
- Audit of a related party
- A lifestyle incongruent with your declared income
- Real estate transactions
- Vehicle expenses
- Informant tips
What is the procedure for a business audit?
A CRA auditor contacts a business by mail or phone and sets a date, time and location for the audit. A review may be held at your place of business, your representative’s/accountant’s office or at a CRA office. You’ll receive the agent’s contact information and be informed of the scope of the audit. You’ll be asked to provide supporting documents for the review. The auditor may make copies of your records and/or borrow some of your documents. The agent will discuss with you any questions that arise during the audit and address your concerns.
What documents are required for a business audit?
The documents requested may include:
- Business records (ledgers, journals, invoices, receipts, contracts, rental records, bank statements)
- Personal records (bank statements, mortgage documents, credit card statements)
- Records of other individuals related to the business (spouse, family members, corporations, partnerships, trusts)
- Records from your accountant that relate to the books, records and tax returns of your business
How can a business prepare for an audit?
There are a number of steps your business can take to retain readiness for an audit and/or to prepare once an audit notice is received.
- Keep accurate, detailed records: Well-kept records (business records, personal records, accountant’s records, records of individuals related to the business, minutes of meetings, organizational documents, transfers and deposits for bank/investment/credit card accounts) ease the process of an audit. Review your documents several times and work with an experienced business accountant. Be thorough. Accurate, detailed records are your best tool for surviving audit procedures.
- Consider automated solutions: Expense-tracking apps serve as a record of transactions in case of an audit. Choose one that easily syncs with your accounting software. It saves time and makes for easy management.
- Aim for consistency: The CRA values overall consistency in business tax returns. Your company’s return must be consistent with those of others in your industry. Abnormal income, compared to your peers and competitors, may cause additional scrutiny. Discrepancies between sales and the total reported on line 101 of your GST/HST return may also result in an audit.
- Know the red flags: Become informed regarding the details that make a business prone to audit requests. Speak with your accountant about these indicators and how to navigate them.
- Keep abreast of accounting standards: Accounting standards constantly change. Familiarize yourself with accounting developments that may affect your organization and the way you track data and/or operate.
- Reconcile all accounts: If your business receives a notice of audit, pay all bills, remit employee expense claims and collect all invoices. Resolve administrative issues. This enables accurate projections and analysis during an audit.
- Identify significant changes such as current projects, recent investments, new revenue streams, recent grants/government support received, changes in control systems and/or new processes introduced. This helps you prepare for the review.
- Divide responsibilities: Break down the tasks required for audit preparation and assign them to competent employees. Set appropriate deadlines for the completion of the assignments. This makes the audit process manageable.
- Ask questions: Once an audit notice is received, create clarity by asking the auditor for details regarding requirements. Be clear on when documentation is required. Transparency between your business and the auditor makes audit preparation and completion faster and easier.
- Seek the help of a professional: If your business receives an audit notice, contact your CPA and arrange representation during the audit. Request assistance preparing the documents required.
- Create ease for the auditor: Set up a quiet, comfortable workspace for the auditor and have all documents organized. Make it easy for the auditor to move quickly through your materials.
- Know your rights: If you disagree with the CRA’s assessment, contact the auditor, explain your concerns and provide documents to support your position. If you’re not able to resolve the disagreement, you have the right to appeal. Your CPA can help with this process.
Filing taxes for a business is a complicated procedure. A Chartered Professional Accountant will ensure your tax return is complete and accurate, reduce the chances of your file being chosen for an audit and ensure you’re rewarded the deductions you’re entitled to. Should your business receive an audit notice, your CPA will support you through the process, ensuring it transpires as smoothly and quickly as possible.
For all your tax needs contact Cook and Company Accountants. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook and Company use their experience and expertise to make tax time a breeze. We will assist in dealing with the CRA in the event of an audit. Contact us for a complimentary consultation.
Now, more than ever, small business owners need to make wise decisions to help grow their companies. The pandemic has created the toughest challenge businesses may ever face. From employee training to marketing, every aspect of a business needs attention. Companies need to adapt to withstand economic pressure and constantly changing needs. The following are multiple strategies for growing your company during the pandemic.
- Make a plan: Come up with a plan of action, one that you can execute. A clear strategy is the best way to grow a small business at any time and even more necessary now.
- Pay attention to your customers: Consumers are the lifeblood of a business and the pandemic has made it even more essential that you maintain core patrons. You need a clear picture of the type of customer that uses/buys your product/services, what motivates their decisions and how their behaviour is evolving with the pandemic. Let your customers know you value their feedback. Provide multiple opportunities for them to communicate with you. Use this feedback to develop products and services that are suitable to the current demands of the market. Ensure your customer service is exceptional. Address problems and answer questions quickly.
- Maximize social media and online presence: The pandemic has us spending more time online; working remotely, taking virtual classes, participating in business meetings, hosting family gatherings and making household purchases. Make sure your company is easy to find online, your website is simple to navigate and your social media is generating interest. Monitor social media channels for mentions of your brand, your product and your competitors. Read comments, answer messages and build your social brand. Find out what customers are saying about you, gain insight into their behaviour, identify keywords and trends that appeal to your target market. Use this information to improve your customer service and provide what your users want.
- Manage your costs: Pay close attention to the costs associated with running your business and getting your products/services to customers. Analyze your balance sheet, profit and loss account and cash flow statements to keep business expenses under control. Lower these costs where you are able. Liquidate low-earning products and/or eliminate low-performing services.
- Invest in employees and company culture: In uncertain times, you need qualified and dedicated employees. A smart, diverse team is a company’s greatest asset and one that deserves protection. Adapt employee work duties to accommodate shifting needs. Provide the resources employees need to do their work remotely. Allow flexible work schedules so that working parents and those with increased home stresses can better manage their work-life balance. If you’re hiring, choose experienced professionals who can work with minimal help and supervision.
- Be open to funding: The pandemic has adversely affected the global and local economy. The government has developed programs to cushion small businesses against these pressures. Consider accessing this funding to boost your working capital, respond to the crisis, refinance debt, and finance growth. Available assistance may ensure your company’s survival and growth.
- Undertake strategic marketing: The pandemic has had a huge impact on household incomes and consumer spending. A solid marketing plan is essential. Use marketing technology to actively measure and track results. Determine which posts are performing, which products and services are selling and how your customers are responding. Pay attention to bounce rates, page visits, average time on site, and how your audience is arriving at your website. Use this information to drive your decision-making. Offer greater convenience by delivering products to your customers. Consider hiring an agency/consultant with marketing expertise in your industry to help boost your profile and drive up customer interaction across your social media platforms.
Make the changes needed to ride out the storm. Keep goals and measurable results in mind and implement your plan systematically and consistently. Find initiatives that address your company’s specific needs. Keep searching for growth opportunities. Be creative and your company may do more than survive. It may thrive!
Need advice to help grow your company during the pandemic? Contact Cook and Company Chartered Professional Accountants. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook and Company uses their experience and expertise to help your business. Contact us for a complimentary consultation.
Selling a business is a complex process. It’s time-consuming, stressful and can seem overwhelming. If you want the sale of your small business to be a smooth transition, there are some things you need to consider. The following are some tips for preparing your business for sale.
- Determine the value of your business: The value of a business is determined by cash flow, earnings (before interest/taxes/depreciation/amortization), industry trends, market demand and location. The asking price of your business needs to be comparable to the industry median in order to attract suitable buyers and open negotiations. It’s important to get a business assessment from an accredited business appraiser as a third-party valuation adds credibility to your asking price.
- Hire legal experts: There are many legal documents required when selling a small business including an asset purchase agreement, the legal contract for the sale, a letter of intent and documents proving ownership of patents/trademarks and other intellectual property. Hire the necessary financial, legal, tax and business advising professionals to ensure the process goes as smoothly as possible. This guarantees that you are fully protected with a strong contract. Choose experts that specialize in dealing with businesses for sale.
- Engage a business broker: While a lawyer structures the deal, a business broker helps you find a buyer. They will give you market visibility, contact potential buyers on your behalf, submit paperwork correctly, secure a favourable price, and fulfill any licensing and permitting requirements. Keep regular contact with them to discuss sale expectations, contracts, advertising, and other concerns. Brokers charge a commission of 5 to 10% of the sale price.
- Prepare your paperwork: Potential buyers will want to see a profit and loss statement for the last 3 years, a current balance sheet, a cash flow statement, business tax returns for the last 3 years, a copy of the lease, any insurance policies, an executive summary of the business, supplier and distributor contracts, an equipment listing, your policy and procedures manual and employment agreements. Ensure a smooth process by taking the time to get these documents organized. Your professional chartered accountant can assist you with this task.
- Pre-qualify your buyers: Many deals fall through because sellers enter transactions with buyers who are unable to secure financing. Ask your buyer what kind and size of business they desire, how soon they wish to purchase, how long they’ve been looking for a business, what business experience they have, how this experience will help run your business and what type of financing they have in place. Have the potential buyer provide a letter from their financial institution or accountant that shows they have the funds required to purchase your business.
- Tidy up loose ends: Make good on all payments, late payments, defaults and promises. Have your professional chartered accountant audit your financial statements. Review crucial employment contracts. Have an intellectual property attorney review all of your business contracts.
Selling a small business is exciting! It also requires careful planning. Follow these tips to set yourself up for success, increase your chances of finding the right buyer, boost the sale price of your business and create a smooth transaction.
Need help preparing documents for the sale of your business? Need advice regarding the sale? Contact Cook and Company Chartered Professional Accountants. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook and Company uses their experience and expertise to help you. Contact us for a complimentary consultation.
After your passing and before your assets are distributed to your beneficiaries, outstanding debts are settled within your estate including income taxes, probate fees and possibly capital gains tax (on investments, real estate, trusts, etc.). Your legal representative will file a “Date of Death” or “Terminal” tax return resulting in possible taxes being payable from the estate as it is settled. Any assets not automatically rolling over to the surviving spouse/partner will be subject to a “deemed disposition” at fair market value possibly resulting in a potential capital gain or loss on the deemed sale. Careful tax planning, conducted ahead of time, can help you avoid a substantial tax hit to your estate and help you preserve more value to be distributed amongst your surviving heirs.
What can you do to minimize the taxes and other mitigations of your estate?
There are ways to protect your estate from current and future liabilities such as trust planning and estate freezes. These procedures work best when done in conjunction with other strategies.
- Estate Freeze: A typical estate freeze allows you to exchange your common shares of your business for preference shares and have the company issue new common shares to a family trust or to your children and possibly yourself. The value of the preferred shares issued in the exchange will be “frozen” at the value ascribed to them at the date of exchange with all future appreciation and growth in value accruing in favour of the newly issued common shares; thus, capping or limiting any future tax liability on the disposition of the preferred shares.
- Trusts are a particularly useful tool for mitigating tax because they create a unique legal relationship that maintains ownership of an asset on behalf of the beneficiary. A trust can assist a surviving spouse avoid an adverse marginal tax rate they might otherwise be exposed to while also allowing for a continued and orderly splitting of income amongst family members. Assets, like a family cottage, etc., can also be placed into trusts possibly deferring taxes for the next generation.
- Charitable Donations spread your legacy, create a lasting social impact and are a powerful tool for lowering estate tax. The capital gains taxes can be substantially reduced and possibly eliminated altogether. When assets, having appreciated in value, are donated to charitable causes.
- Transfer Property to Your Spouse: One of the easiest and most straight forward ways to defer taxes on death is to have your property rollover automatically to your surviving spouse. The surviving spouse would simply slip into the shoes of the deceased spouse in regard to the assets’ ownership and carrying costs, etc. thereby deferring any gain on disposition until the death of the surviving spouse.
- Buying Assets in Your Child’s Name: A simple and legal route to reduce estate taxes is to buy the article (artwork/property/jewelry, antiques, etc.) in your child’s name. They own the article and any appreciation in the value already belongs to them.
Significant tax losses on your estate are an important concern. Pass on the rewards of your efforts to the next generation. If you want to maximize the wealth of your estate and minimize the tax burden, contact a CPA. They can help reduce and defer the tax on your estate.
Interested in reducing and/or deferring the tax burden on your estate? Contact Cook and Company Chartered Professional Accountants. Whether you operate a sole proprietorship or a conglomerate with multiple subsidiaries, Cook and Company uses their experience and expertise to help you. Contact us for a complimentary consultation.
Tax season is upon us! It’s time to gather your receipts and organize your documents in preparation for filing your business tax return. Canada Revenue Agency offers a number of tax deductions to small business owners. Are you aware of all of them? Following are some deductions you will want to keep in mind as you file your taxes this year.
Operating Expenses are expenses incurred during your company’s day-to-day activities or normal business operations. Some are deductible at 100% while you may only claim a portion of others.
- 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 bulding 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.
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.
These are just some of the many deductions available to small businesses in Canada! Allowable tax deductions are constantly changing. If you aren’t 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.
Running a viable business means being prepared for innumerable obstacles. Even the most experienced entrepreneurs can run into problems that take a toll on their profitability, and many of these problems are related to accounting. Stay sharp by considering these key examples.
Cash Flow Issues
The cash flow of your business is represented by calculating the difference between available funds at the beginning (opening balance) and end (closing balance) of a particular period of time. It’s an important part of determining whether or not you can cover the expenses you incur as a company. 82% of failed businesses experience their failure because of cash flow problems. These can be prevented with thorough and organized bookkeeping, effective credit control that minimizes bad debts, accurate cash flow forecasting, and more. You may be well acquainted with cash flow as a concept, but an experienced CPA can help you truly master it.
Not all expenses involved in the operation of a business can be predicted with total certainty. Economic downturn, equipment breakdown, lawsuits, drastic changes in customer demand or preference, new tax and business regulations, and natural disasters are just a few examples of how unpredictable circumstances can introduce a sudden strain on company finances. It’s therefore wise to have emergency funds in place, be fully aware and up-to-date with regards to legal and tax issues affecting your business, and pursue extensive risk management practices. These and other efforts are best carried out with the help of a skilled corporate accountant.
A number of tax-related problems can go undetected and lead to unforeseen complications and penalties for the business. Businesses may under-pay what they owe, fail to comply with GST/HST law, misclassify their business or employees, or lack organization and thoroughness in their bookkeeping and recordkeeping practices. By the time they come to realize the degree of these issues (or the issues are discovered by the CRA), business owners will be faced with costly fines, not to mention additional stress on the operations of the company. With the right professional accountants by your side, you can avoid countless unnecessary tax obstacles.
Problem-solving skills are a core part of operating any kind of company, but when it comes to accounting problems, you don’t have to do it alone. Whether you’re a small business or a large corporation, call (403) 768-4377 and our team of chartered accountants will be ready to help.