Posted on

Managing Taxes as a Sole Proprietor

There are countless sole proprietorships operating all across Canada and the United States. While being your own boss offers many professional, logistical, and tax-related conveniences, it also comes with a number of important responsibilities. We’re here to help you stay prepared.

Defining Sole Proprietorship

Some professionals who are considering a pivot towards working independently may be unsure as to what exactly the CRA or the IRS consider to be a sole proprietorship. Whatever your circumstances, it’s an important definition to understand. In short, if you are the only owner of an unincorporated business, whether or not you have employees, you’re operating a sole proprietorship. Because this is by definition not a corporation, it is not its own legal entity and you are personally responsible for its debts. In the US, if you’re the sole owner of an LLC, you are only technically a sole proprietor if you do not choose to treat your LLC as a corporation.

Advantages and Freedoms

In addition to a high degree of professional independence and autonomy, there are plenty of tax planning benefits of being a sole proprietor to be aware of. One of the most important examples is the range of deductions and credits that may be available to you. Depending on a number of stipulations and eligibility factors, sole proprietors are able to deduct the cost of certain living expenses, health insurance premiums, internet and supplies, transportation, and countless other expenditures. The capital cost allowance deduction, which we’ve touched upon in this article, is also particularly relevant and beneficial to sole proprietorships.

Obligations and Responsibilities

As a sole proprietor, your personal income and business income are not separate in the way that they would be if you were employed by someone else. This means that you’ll be paying taxes both as an employer and an employee, such as the full 9.9% contribution to CPP in Canada or the self-employment tax for social security and Medicare in the US. You also may be subject to a more scrutiny when it comes to auditing, as the CRA and IRS often see sole proprietorships as being particularly conducive to conflation between business and personal spending. Always keep thorough and well-organized records of your expenses.

Are you a self-employed Canadian looking for an experienced chartered accountant for your business? Cook & Company can offer you the expertise of a big firm with a level of personalized service and dedication that you can’t get elsewhere. Call (403) 398-2486 for a free consultation!

Posted on

Business Succession: How to Minimize Your Tax Burden

Whether it’s due to retirement or death, the succession of a business is a challenging process. One of the major elements of succession that will be on your mind is your potential tax burden, not to mention that of your children or other future owners. Here are a few key tips to consider.

Understand Capital Gains Tax

The act of gifting, bequeathing, or selling your shares (a “deemed disposition”) will usually be subject to capital gains tax based on the appreciation or depreciation of their fair market value. The lifetime capital gains exemption is designed to allow qualifying businesses to reduce their capital gains tax burden. An estate freeze, meanwhile, allows business owners to exchange their common shares for fixed-value preferred shares and issue new common shares to their successors without being subject to capital gains tax. The applicability and details of these and other strategies will vary depending on your business and its circumstances.

Utilize Life Insurance

Another useful tax strategy among many business owners planning for succession is to leverage the advantages of a good life insurance plan. This is, of course, only applicable in the event that your business is passed down due to your death. Tax expenses can cut significantly into the value of your company shares as a disposed asset, but if you’ve taken out a strong and well-structured life insurance plan, its proceeds can significantly offset the tax burden of business succession for your family. The policy itself can be owned either by you or by the company itself, which is another decision that an accountant can help you with.

Think Ahead

It is of the utmost importance to remember that succession planning is not an event, it’s a process. An effective succession plan will take quite a bit of time to fully form, so the more you plan ahead, the better. Consider your circumstances. Are you intending to retire from the business soon? Do you have a plan in place in case of your death or sudden health problems? There are countless ways to maximize the tax-efficiency for your business now that will enhance the benefits of succession strategies later. This, in addition to ongoing changes in tax law, is why it’s so critical to explore the options available to you. Don’t wait too long to speak with a CPA.

When you’ve worked hard to build a business, it’s only right that you have the tools you need to ensure its longevity within and beyond your lifetime. It’s our objective at Cook & Company to help you accomplish this and more. Call us at (403) 398-2486 for a complimentary consultation!

Posted on

Is It Time for Your Business to Work with an Accountant?

Many business owners have a good grasp on managing the finances of their company. That being said, there are countless reasons why you will need the help of a CPA specializing in accounting and tax planning for businesses. Let’s take a quick look at a few key examples.

Business Structure & Planning

There’s no aspect of a company’s structure that does not in some way require tax planning and accounting strategy. Even if you’ve been operating your company for many years, it’s wise to seek advice from a CPA on a routine basis. However, it’s especially important when undergoing significant developments. Are you in the early stages of founding your company or a subsidiary? Do you need to prepare detailed reports for investors? Are you changing legal status, such as from a partnership to a corporation? Speaking with a CPA specializing in entrepreneurial accounting and tax planning is essential to keeping your operations in good order.

Tax Law Changes

A major part of any CPA’s job is to be as informed as possible as to ongoing developments in tax policy. When you build a strong relationship with a business tax accountant, they will be able to optimize your tax planning strategies accordingly. Just like any type of legislation, tax law is subject to change, and the last thing that any business owner wants is to be left out of the loop. This can lead to missed opportunities for tax savings, issues with compliance, and other unpleasant consequences. The Department of Finance’s recent tax law changes pertaining to entrepreneurs, which we’ve discussed here and here, are perfect examples.

Audits & Compliance

The advent of an audit can create stress for any business owner, and the same can be said for potential mistakes in GST and HST compliance. When it comes to audits, it’s important to remember that companies are selected based on a complex set of factors. While it’s not possible to usefully predict the likelihood that you will be audited, you can plan for it and navigate it most effectively by working closely with an experienced business accountant. They can also help you to ensure that you are aboveboard when it comes to GST and HST compliance. This is your best bet for avoiding penalties and fines.

Cook & Company is Calgary’s finest team of corporate and entrepreneurial tax accountants. If you’re a hard-working business owner hoping to minimize the strain of tax expenses on your company, we can help. Contact us at [email protected] or 403.398.2486 to schedule a free consultation today.

Posted on

Making Business Taxes Work for You

Keeping business taxes in order while maximizing the viability of your company is one of the most important challenges of the business world. As you know, a key part of maintaining this balance is simply knowing what deductions to take advantage of. Here are a few to think about.

Capital Cost Allowance

If your business acquires and uses a piece of property, the CRA may allow you to claim a capital cost allowance and recalculate your taxable income. This can help you contend with the expenses involved in maintaining that property, including legal, accounting, and maintenance fees. It may be furniture, buildings, equipment, or other eligible items, often known as depreciable capital assets. How it’s calculated depends on the type of property and several other factors. It’s important to note that deductions are calculated annually in the long term. You cannot claim the deduction all at once for the tax year in which the property was purchased.

SR&ED Tax Incentives

Through the SR&ED Tax Incentive Program, corporations have access to federal and provincial tax benefits that are designed to encourage scientific research and experimental development in Canada. These incentives allows a corporation to claim both tax deductions based on expenditures on SR&ED and investment tax credits, which can reduce the amount of Part I taxes owed. In order to qualify, the corporation must fall under various categories of basic scientific research, applied research, experimental development, and other types of work as designated by the program. Be aware that certain provincial considerations may apply.

Employee Gifts

Employers can claim tax deductions on certain gifts given to employees. Not only this, but the eligible gift will not be considered taxable income for the recipient. It must, of course, fall under the CRA’s criteria to qualify. For instance, the value of the gift must not exceed $500 in fair market value, although there is no limit to the number of qualifying deductible gifts that the employee can receive per year. Be aware that cash bonuses, performance-related awards, or anything easily converted into cash are not deductible. Gifted stocks are also not deductible, but within a corporation these will only be taxed when they are sold.

Navigating corporate taxes doesn’t have to be overwhelming or nerve-racking. You also don’t have to work with an unaffordable firm to get results. Our team offers the expertise of a big firm with the personal touch of a small one. Call 403.398.2486 to get the value you deserve today!

Posted on

Revisions to the New Income Sprinkling Rules

For many Canadian businesses owners, income sprinkling has been an important topic in recent news regarding tax law. Our previous article on the recent tax changes briefly mentioned the revisions to rules regarding income sprinkling, but this week we’d like to give you a closer look.

Initial Changes

As mentioned in our recent article, income sprinkling is a method used by business owners to distribute company dividends or income to family members in a way that secures a lower personal tax rate. This practice is already regulated by the Tax on Split Income (TSOI), often referred to as “kiddie tax”, which applies the highest marginal tax rate of 33% to split income gained by family members under 18. The changes proposed in July of 2017 aimed to extend the scope of the TSOI to family members aged 18 to 24, also requiring assessment of their contribution of labour or capital to determine the legitimacy of the earned income.

The Revisions

In response to mounting concerns, the Department of Finance has made several revisions to the proposed changes that simplify their contents, offer exemptions, and loosen criteria for reasonable involvement in the business. Family members over 24, for instance, may be exempt if they own at least 10% of the corporation. Income received by the spouses of certain shareholders above 64 may also be exempt. The Department has also modified proposed restrictions to the Lifetime Capital Gains Exemption that could have applied the income sprinkling taxes to capital gains earned by family members after the death of the shareholder.

What It Means for You

It’s key to note that the new revisions have been drafted to accommodate the circumstances and concerns of certain small businesses and their related families. For owners of high-income businesses and corporations, however, the new income sprinkling rules will have a particularly pronounced effect. In addition to this, certain aspects of the new rules retain a complicated nature that may be disorienting for some high-earning business owners. It’s as important as ever to consult with your corporate accountant to find the best adjustments for you. An extensive CIBC pamphlet on the revisions can be found here.

Remember that the new tax changes are proposed to go into effect for taxation years starting after 2018. Have you teamed up with the right corporate CPA to maximize the strength of your company? Don’t hesitate to get in touch with Cook & Company by calling 403.398.2486 today.

Posted on

Is It Time to Incorporate?

The journey of starting and running a business involves a number of landmark moments, many of which may come with new tax considerations. One of the most important is incorporation. How do you know when it’s time to make it happen and what does it mean for your taxes?

What Does Incorporation Mean?

If you’re considering incorporation, you probably know that it establishes your company as its own distinct legal entity with ownership split between shareholders. However, it means quite a bit more than this. Most notably, it reduces the personal liability of shareholders for the debts and other obligations of the company, with certain exceptions. You’re generally only obliged by what you’ve invested in the form of shares. It’s important to note, however, that shareholders of small corporations will be held liable for bank loans in the early stages of funding. Furthermore, personal liability for issues such as negligence or fraud are still retained.

Knowing When It’s Time

The first question to ask yourself is, “Where is my company now and where do I want it to go?” In other words, it’s important to assess the current size and projected aspirations of your proprietorship or partnership. Is it large enough that you don’t want to risk personally losing your assets through heightened liability? Do you have enough financial legroom to bear the costs of the incorporation process? Do you want to take the next step in raising more capital for your company, building relationships internationally, and passing the company down to your heirs? Answering yes to these means you have a strong indication that it’s time.

Thinking About Your Taxes

Incorporation will change the tax considerations of your business significantly. For instance, with the small business deduction, a CCPC pays a lower federal tax rate on the first $500,000 of active income each year. These and other upsides significantly lower personal tax burden. Overall, incorporation requires considerable setup and administrative costs, a more complicated structure, and more administrative work, but if you’re earning significantly more from your business than you need to live, the tax benefits can really pay off when you have a good corporate accountant to help you secure them.

If you’re about to incorporate, you’ll need an accountant who has both big-league corporate tax experience and the ability to work on a personalized level. This is what our team has provided to Canadian businesses for years. To set up a complimentary consultation, send us an email today!

Posted on

Understanding the Proposed Tax Changes for Entrepreneurs

In July of 2017, Finance Minister Bill Morneau put forth a handful of proposed changes to corporate tax rules. These had far-reaching implications for any business with CCPC status. They’ve developed significantly since their initial introduction, so here’s what you should know.

Income Sprinkling

Income sprinkling — or income splitting — is a tax planning strategy that allows family members of corporation owners to earn income through the company at a lower marginal tax rate. The proposals aim to limit this strategy by only permitting the lower tax rate for family members who make demonstrable labour contributions to the company. These changes have since been simplified and amended, including exemptions for spouses or other family members under very specific criteria. However, for many larger private corporations, the limitations are still considerable, so you may want to consult with an accountant to navigate this change.

Corporate Capital Gains

Many CCPC owners have elected to save on tax expenses by converting after-tax earnings of the company into capital gains rather than receiving them as shareholder dividends. This is because the former is typically taxed at a lower rate than the latter. The changes proposed last year were designed to modify the existing rules and curtail this strategy. However, after responses from many business owners concerning unintended consequences, such as double-taxation on shares acquired between siblings or through intergenerational transfer of businesses after death, the Department of Finance has decided not to pursue these changes.

Passive Investment Income

Another affected practice is the earning of passive income with investments made through the company. Investing with surplus revenue from the corporation avoids paying personal tax on those investments until they are withdrawn later. Last year the Department of Finance proposed measures to tax this passive investment income at the top personal tax rate. Once again, revisions to this have been made more recently, such as a $50,000 annual threshold. However, larger corporations will still need to re-strategize if they have previously used this method to build savings cushions for economic downturns, retirement, or other purposes.

The security and success of your business rests significantly on how well you navigate a wide range of tax issues. The new tax policy changes will go into effect starting with the 2018 tax year, and we’re here to help every step of the way. Call (403) 456-0072 for a free consultation!