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What You Should Know About Commission Income in Canada

Commission Income Canada

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

What is commission income? 

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

Who qualifies as a commission employee?

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

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

Examples of commission jobs/positions:

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

What employers of commission employees need to know:

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

What expenses can a commission employee claim?

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

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

How are claims supported?

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

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

Need help with the tax complexities associated with commission employees? Contact Cook and Company Accountants. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, we use our experience and expertise to assist you, making tax time a breeze. Contact us to request a meeting.

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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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Why Should I See my Accountant in January?

Accountant in January

It’s only January. There’s lots of time before you need to think about tax deductions and filing business taxes. Or, is there? Contacting your certified professional accountant in January is wise. It gives you time to consider and discuss all possible deductions. It gives your accountant time to maximize your deductions and minimize your taxes. Tax laws change constantly. Your accountant will stay abreast of changes and, if given adequate time, may find new tax credits you’re eligible to claim. The health of your business could depend upon it! Contacting your accountant in January has many advantages:

  • Reduce stress: Last-minute tax preparations reduce potential tax planning and create unnecessary stress. Tax minimization requires careful preparation, planning and time. Do your business and yourself a favour and contact your accountant in January. Save yourself from stress and headaches by tackling the problem in advance.
  • Keep your accountant informed: Your accountant can help mitigate losses and solidify successes. To provide these services, they need all the facts. Contact your CPA in January and let them know about any changes in your business (new product line, second location, switching of banks, equipment purchases, etc.) so that they can help plan for the future of your business. 
  • Manage cash flow: Cash flow problems can spiral out of control. Manage your cash flow problems by talking to your accountants. They can help you maintain a healthy cash flow all year. 
  • Keep a handle on growth: An professional accountant has experience handling both revenue growth and capacity growth. They can tell you if you need more customers or if you are unprepared to handle more clients. They can assist your business with financial advice and planning.
  • Stay ahead of changes: Changes to regulations and tax codes are constantly occurring. To stay competitive and receive all possible benefits, you need the help of your accountant. They will ensure compliance with all tax changes.
  • Handle transitions: Changes in your life (inheritance, marriage, divorce, new partners/investors) have accounting and tax implications. Your CPA can help you handle these transitions effectively.
  • Ease budgeting for tax payments: Filing your tax return early gives you information on what you owe the government and an opportunity to plan a payment strategy for your tax bill.
  • Ensure all items are included: Contacting your CPA in January gives you plenty of time to find important or misplaced records and receipts. No last-minute unpleasant surprises!
  • Lower accountancy fees: Take advantage of the lower rates afforded by many professionals during off-peak months to save your bank balance and your stress levels.

Gather all of your business’s essential reports and documents in early January, every year. Include your previous year’s return to help pinpoint your past data and compare it to your present information. Contact your CPA and let them help properly prepare your tax return in a timely manner. By making an appointment to see your accountant in January, you can conquer one of your biggest challenges, filing your business tax return accurately and on time. 

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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Options for Financing a Business

Options for Financing Business

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

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

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

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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.

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Bookkeeping Tips for Small and Medium-Sized Businesses

Bookkeeping Tips for Small Businesses

As your business grows, the once simple process of bookkeeping can become complicated and daunting. Yet, it’s vital that you have accurate books. If you don’t keep detailed financial records you can end up with problems; unpleasant financial surprises, an audit, forgotten paperwork, missed goals, large bills from your accountant, payroll and tax challenges. Accurate and efficient bookkeeping can help you make and keep long-term goals, smooth out the ups and downs of seasonal cash flow, improve profits and alleviate troubles with the CRA. The following are some tips to help you improve your bookkeeping skills.

  • Keep business and personal banking separate: Open a dedicated bank account for your business, preferably one with online access as this makes it easier to make payments and do bank reconciliations. If you need business money for personal expenses, do a regular transfer to your personal account. This will make bookkeeping much easier.  Don’t use your personal credit card for work purchases and vice versa.
  • Recognize business vs. personal expenses: You need to know what type of expenses can and can’t be claimed against your profit for the purpose of reducing tax. An expense that is directly related to the operation of the business and towards producing income is tax-deductible. An expense that is for your personal pleasure is not. Mixing personal and business does not mean a full claim for business can be made. If you’re in doubt about whether or not to claim an expense, contact your accountant.
  • Plan for Major Expenses: Consider what expenses will arise in the next one to five years (upgrade of facilities, new office equipment, peaks in staffing costs, emergencies). By planning for major expenses, you can avoid taking money out of the company during good months and finding yourself short in slow months.
  • Utilize bookkeeping software: There are free bookkeeping software packages if you are on a tight budget (Wave, ZipBooks, Akaunting, SlickPie, GnuCash, CloudBooks). If you can afford it, purchase a good quality program that comes with occasional updates (Cashbook, Quickbooks, Xero, Sage, Freshbooks, Zoho). Choose one that is easy to use, customizable, produces charts for quick reference and combines different aspects of reporting from one period to the next. 
  • Organize and store source documents: Quotes, orders, delivery dockets, sales and purchase invoices, credit and debit notes, payment/remittance advice, cheques, receipts, wage records and deposit slips need to be filed and archived for 5 to 7 years. Keeping source documents at your fingertips makes it easier to prevent fraud in your business, improve your accuracy and ease finding transactions when needed.
  • Read and understand monthly reports: Keep your bookkeeping system up to date and produce reports monthly. Learn to read and understand these reports, in particular the income statement and the balance sheet. 
  • Keep on top of sales invoices: Late and/or unpaid bills hurt cash flow.  As soon as a job is complete or a product is delivered, prepare and send out the customer invoices. Put a process in place to track your billing carefully (issuing a second invoice, a phone call reminder, penalties or extra fees). Be organized.
  • Know when to outsource: If you find bookkeeping too difficult or don’t have enough time for it, outsource the task. This can be cost-effective and professional help will ensure accuracy. Professional bookkeepers often give great business advice and assist with many tasks (recommend good software, attend meetings with your banker, explain accounts you find difficult, prepare annual budget and cash flow reports, etc).

These bookkeeping tips can help you improve your business, spend less time on finances, focus on growing your company and enhance your customer relationships. Give them a try!

Need help establishing a good bookkeeping system? Looking for business advice? Contact Cook and Company Chartered Professional Accountants. We are based out of Calgary, Alberta, serving clients across Canada and the United States. We provide high-quality tax, assurance and succession planning services for a wide variety of privately-owned and managed companies. Contact us for a complimentary consultation.

 

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