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Estate Planning Questions to Ask Your Accountant

Estate Planning Questions

When you hear the phrase “estate planning” you likely think of death, taxes and a will. These are important parts of estate planning but they’re not the full picture. 

What is estate planning?

Estate planning involves setting up a plan that establishes who will eventually receive your assets and makes known how you want your affairs to be handled in the event you are unable to handle them on your own. Estate planning is about people; who they love and how they wish to provide for them. It’s not only about death but also about preparing for the possibility of becoming dependent through age, disability or injury. 

What is the role of your accountant in estate planning?

Intricate knowledge of taxes allows your accountant to keep you informed regarding the tax implications of your estate plan. They ensure that your plan minimizes taxes and maximizes the portion of your estate that can be passed on to your beneficiaries. Your accountant works together with your lawyer to help:

  • Clearly define your estate planning goals.
  • Organize and create your estate planning team (experts on law, finance, and taxes).
  • Evaluate and recommend estate planning options.
  • Prepare, organize and review your estate planning documents including current wills, trusts, health care and power of attorney.
  • Decrease the problems and expenses associated with probate.
  • Lessen taxes at the time of death.
  • Arrange for management of your estate in the event you are incapacitated.
  • Draft a working plan for conserving and effectively managing your estate after death.
  • Transfer the assets of your estate to heirs the way you want.
  • Organize fair and adequate liquidation of estate to cover taxes and other expenses.
  • Amend your plan as needed.

Your accountant is as helpful as your lawyer when planning your will, discussing accounts, debts, and assets, determining bequeathals, deciding who you’d like to have as executor of your estate/joint bank accounts and who you’d prefer as Power of Attorney for your affairs if you become incapacitated. Both professionals guide you in making the best decisions for you and those you leave behind.

Who needs estate planning?

If you wish your estate distributed according to your wishes as opposed to statutory guidelines, you need an estate plan. If you have assets that are susceptible to high taxes, estate planning is beneficial. If you own a business, estate planning is essential. If you want planned distributions of benefits for your descendants, estate planning is helpful. If any of your heirs need financial assistance upon your passing, estate planning is for you.

Questions to ask your accountant regarding your estate planning:

  • Can you help with probate? Your accountant will have a thorough understanding of your assets and tax liabilities enabling him to deal with the probate process quickly. Much of the work involved in probate is familiar to an accountant.
  • Can you handle my accounts when I pass? An accountant can manage a deceased’s accounts while the estate is being settled. This ensures heirs that money is being managed and spent properly. 
  • Who will prepare my final tax return? Accountants can handle final income tax returns, as well as the estate tax return. They understand what taxes need to be paid at the provincial and federal levels, exemptions that exist for particular circumstances and how to help your estate save money.
  • Can you help my beneficiaries? A CPA is able to help heirs with their individual tax filing (at provincial and federal levels) avoiding costly government fines and reducing family discord. 
  • Can you help with the tax obligations of the estate? Estates have many tax obligations especially if your estate has several assets. Your accountant can handle these tax matters, help calculate the value of your estate and determine the impact of the tax laws. An account makes sure you fulfill your tax obligations, avoiding the risk of costly fees and penalties. 

Dealing with the loss of a loved one is hard. Simplify your heirs’ situation with estate planning so that they need not undergo a stressful ordeal. When it comes to the financial intricacies of your business and its future, consult a team of financial professionals who can offer a specialized set of expertise. Your accountant can help you prevent fines, fees and penalties. They can ensure all aspects of estate accounting are complete and accurate. Protect your legacy for your loved ones. Take charge of your financial endowments. Talk to your accountant today. 

Need help ensuring that the money and assets you’ve worked hard to build aren’t destroyed after you’re gone? Want help with business estate planning? Contact Cook and Company Chartered Professional Accountants. Our expert staff will help you navigate the complex maze of estate planning with ease. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook and Company use their experience and expertise to help your business. Contact us for a complimentary consultation.

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What’s the Difference Between an Auditor and a Tax Accountant?

Auditor and Tax Accountant

Accountants and auditors work with financial statements and ensure they are accurate, up-to-date, and in compliance with various regulatory standards. They require similar skill sets but subtle differences exist in their duties. Organizations and businesses often enlist the services of both tax accountants and auditors when preparing and submitting financial statements. What is the difference between a tax accountant and an auditor? 

Tax Accountant:

Tax accountants specialize in helping businesses and individuals plan for, minimize and file taxes. Accountants influence business practices, cash flow management and how businesses report their earnings to the government. Accounting requires a person who is detail-oriented and focused. Small mistakes can cost millions, particularly for large companies dealing with massive sums of money. An accountant can be a dedicated employee of a company or work for a third party hired by businesses to manage their books and prepare their taxes. An accountant:

  • prepares financial statements (balance sheet, income statement, statement of cash flows, statement of owner equity)
  • undertakes bookkeeping 
  • tracks expenses and revenues 
  • forecasts future profits and cash flows
  • evaluates and addresses tax liability
  • answers complex business tax questions
  • provides corporate tax advice 
  • does tax preparation
  • assists with change in the structure or nature of your company

Auditor:

Auditors ensure that accountants’ work is correct and follows the law. They work with organizations after they’ve made decisions regarding business practices, cash flow management and how to report their earnings to the government. They examine the financial statements prepared by accountants and ensure they represent the company’s financial position accurately. Auditors search for errors or problems. They require the ability to pay attention to detail, but also need strong investigative skills. While auditors sometimes uncover intentional wrongdoing (subterfuge, fraud, misstatements, tax evasion), they typically find unintentional mistakes. Like accountants, an auditor can work internally for a specific company or for a third party, such as a public accounting firm. Many auditors are employed by government and regulatory bodies. Auditors:

  • collate, check and analyze spreadsheet data
  • examine company accounts and financial control systems
  • gauge levels of financial risk within organizations
  • check that financial reports and records are accurate and reliable
  • ensure that assets are protected
  • identify if and where processes are not working as they should and advise on changes needed
  • prepare reports, commentaries and financial statements
  • liaise with managerial staff and present findings and recommendations
  • ensure procedures, policies, legislation and regulations are correctly followed and complied with
  • undertake a review of wages

The key difference between tax accountants and auditors is that tax accountants specialize in helping businesses and individuals plan for, minimize and file taxes while auditors ensure that accountants’ work is correct and following the law. Your business likely needs the services of both a CPA and an auditor.  

As one of Calgary’s most respected business tax and accounting professionals, the Cook & Company team is proud to empower the success of businesses both local and abroad. To learn more about our tax planning and audit & assurance services, give us a call at (403) 398-2486 today or fill out the request for meeting form.

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Corporate Tax Planning Tips for Canadian Small Businesses

Corporate Tax Planning Tips

There are many legal strategies for reducing income taxes in Canada. Part of running a successful business is knowing these strategies and utilizing them. The following are some of the top strategies to lower your taxes and keep more money in your business.

Collect receipts: As the CRA does not accept credit card statements as proof of expenses, in order to take advantage of tax deductions available you must collect receipts for all business-related activities (accounting fees, business advertising and promotional expenses, business licenses and memberships, use of home expenses, interest and bank charges, insurance premiums, meals and entertainment, office expenses, rent, repairs and maintenance, tools and equipment, vehicle expenses, parking fees). Record and file them appropriately. You can keep physical receipts or digital copies.

Consider use-of-home deductions: You can claim business-use-of-home expenses if your home is your principal place of business or you use a workspace in your home solely to earn your business income and use it regularly to meet with clients, customers or patients. Home-based businesses can deduct a portion of many home-related expenses (heat, electricity, home maintenance, cleaning materials, home insurance, portions of property tax, mortgage interest, capital cost allowance). The percentage you can claim is determined by the size of your office in relation to the total size of the home. You cannot claim business-use-of-home expenses if you are also conducting business elsewhere or because you sometimes work on business matters at home.

Claim non-capital losses: If your expenses exceed business income in any year, use this loss to decrease your income tax bill. The loss can be carried back three years or carried forward up to 20 years. Your Chartered Professional Accountant can help you decide if it makes sense to use the non-capital loss in the current tax year, carry the non-capital loss back to recover income tax you’ve already paid or carry it forward to offset a larger tax bill.

Strategize your capital cost allowance: Instead of deducting the cost of the depreciable property you’ve acquired in your business in a particular year, deduct this cost over a period of years through a capital cost allowance claim. You can use as much or as little of this claim in any year and carry any unused portion forward to help offset a larger income tax bill in the future. Also, consider buying and selling your assets at the right time. Buy new assets before the end of your fiscal year and sell old assets after the current fiscal year.

Manage RRSP and TFSA contributions: Registered Retirement Savings Plans and Tax-Free Savings Accounts are excellent income tax deductions for small-business owners. Since some or all of your allowable RRSP contribution can be carried forward into subsequent years, you’re better off saving RRSP contributions for years in which you expect a high income. If you’ve maxed out your RRSP contributions and need a tax-free place to put cash or investments, the TFSA is a good choice. TFSAs allow you to shelter savings and investment income from taxes. Income and capital appreciation from stocks, bonds, or other interest-bearing instruments are tax-free inside a TFSA. Your Chartered Professional Accountant can help you maximize savings using RRSPs and TFSAs.

Incorporate your business: Incorporating your business lets you take advantage of small business tax deductions. The income of qualifying Canadian corporations is taxed at a reduced rate. Incorporating your business as a tax strategy will only be effective if your business has grown enough for incorporation to be worthwhile. You can also take advantage of certain tax benefits that are not available to unincorporated businesses (income tax splitting, capital gains exemptions) when you sell the business. Talk to your CPA to determine whether incorporation is right for you. 

Increase your charitable donations: Donations made to registered Canadian charities earn you tax credits. Consider giving more to the registered charities of your choice. Be aware that non-Registered Canadian charities, American charities and political parties do not count as charitable income tax deductions.

Split your income: This strategy takes advantage of the marginal tax rate disparities. The higher your income, the higher the marginal tax rate. Transferring a portion of your income to a family member (spouse, child) reduces the marginal rate on your income. Keep your claims reasonable, properly invoice for work performed and complete all the paperwork as you would when hiring any employee or contractor. As the rules for income splitting are complex, consult your CPA.

Balance your dividend salary mix: You’re entitled to withdraw cash from your corporation as a dividend or a salary. Ask your CPA to help determine what mix will maximize your earnings. The mix you decide upon is determined by current circumstances as well as future predictions. 

Hire a CPA: Most small businesses prefer to have a certified professional accountant complete their Canadian income tax returns. This saves time and effort, provides assurance of accuracy and increases your chances of efficient tax planning.

While not all corporate tax-saving strategies work for every small business, some strategies have proven useful for many companies. With planning, you can reduce your taxable income and keep more money working for your company. Consult a Chartered Professional Accountant to ensure that you save the maximum amount possible.

Not sure what tax deductions your company qualifies for? Need help with tax planning strategies? Contact Cook and Company Chartered Professional Accountants. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, we use our experience and expertise to assist you. Contact us for a complimentary consultation.

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Strategies to Overcome a Cash Flow Crisis

Overcome a Cash Flow Crisis

Even thriving, profitable businesses can have cash flow problems if payables (amounts due to vendors or suppliers) are due before receivables arrive (money due to a firm for goods or services delivered or used). In fact, 29% of businesses fail because they run out of cash. During a cash flow shortage, a business may not have enough money to cover payroll or other operating expenses. It’s imperative that businesses have a strategy or plan in place to overcome a cash flow crisis.

Strategies for avoiding and/or overcoming a cash flow crisis:

There are a number of strategies and approaches that can help companies correct and or avoid cash flow difficulties.

  • Lease: When leasing (supplies, equipment, real estate) you pay in small increments helping to improve cash flow. Also, lease payments are a business expense and can be written off on your taxes. 
  • Offer discounts for early payment: Create an incentive for customers to pay their bills ahead of time by offering an early payment discount. This is a win for you and your customers.  
  • Obtain short-term loans for working capital: Short-term loans are borrowings undertaken for a short period to meet immediate monetary requirements. They support a temporary business capital problem. Though they have a higher interest rate, they’re easy to get approved and are less expensive than most long-term options.
  • Use a business line of credit: A line of credit is an arrangement between a bank and a customer that establishes a preset borrowing limit that can be drawn on repeatedly. Borrowers pay interest on the outstanding balance and not on the entire credit line. Interest rates are often more favourable.
  • Try business credit cards: Credit cards provide smaller limits than short-term loans and lines of credit but are easy to obtain and sometimes offer reward options on purchases. Use them for small purchases and operational needs.
  • Conduct customer credit checks: Before signing up a new customer, conduct a credit check. If the client’s credit is poor, assume you won’t be receiving payment on time. If you decide to opt for the sale, set a high-interest rate on overdue payments.
  • Form a buying coop: Many suppliers give discounts to firms who buy in bulk. Find like-minded companies willing to pool cash in order to lower prices with suppliers. 
  • Improve inventory: Goods you buy that aren’t moving at the same pace as your other products hurt your cash flow. Reduce them or get rid of them.
  • Invoice immediately: Automate your invoicing system to reduce the number of errors and improve the speed of invoicing. Provide easy-to-read invoices with clearly stated terms.
  • Use electronic payments: This allows you to pay a bill on the actual due date, increasing the time before cash flows out of your business.
  • Negotiate better terms: Maintain friendly, regular communication with suppliers so you can negotiate better terms. Offer early payment for a discount or negotiate extended payment options.
  • Increase pricing: Experiment with pricing to find the perfect number; the limit of what customers are willing to pay for your products and/or services.
  • Ask new customers for a deposit or partial payment up-front, rather than billing the entire amount due in a single invoice after services have been rendered or products have been delivered.
  • Focus on past due accounts: Identify past due clients and make phone calls. Ask for partial payments.
  • Make payment convenient by offering additional methods (credit card, electronic, mobile).
  • Raise investor capital: Bring in new business partners by selling equity.
  • Reduce expenses: Prioritize company expenses. Eliminate unnecessary expenses and only spend on the costs that keep you operational and generate revenue. Shop around to see if there are cheaper options available for phones, internet, and third-party information technology.
  • Sell non-essential assets: Although this is a temporary fix, it’s a quick and effective way to raise some cash when you’re in a bind.
  • Pre-sell products or services: Encourage sales sooner by pre-selling. It’s a way for consumers to plan ahead. 
  • Finance purchase orders: If you’re a manufacturing or merchandising company and you require a significant amount of cash to fulfill your orders, financing purchase orders may be helpful. The financing company pays the vendor so you can acquire the merchandise/inventory you need to fulfill the order. This allows you to take large orders that you don’t yet have the cash to fill.
  • Turn down, shift or postpone work to manage the volume of business for consistency over time. Offer good clients a discount for postponing their work, order or service. This will not be a viable strategy for companies with strong seasonal business (retailers, accountants, etc.).
  • Invoice factoring involves selling your invoices (an asset) to a factoring company. Instead of waiting 15, 30 or 60 days for your money, your business gets payment upfront.
  • Hire an accountant: A chartered professional accountant will have the knowledge and experience to offer you creative solutions to your cash flow problems. 

Working capital is the fuel that powers small businesses. Managing cash flow is critical to running a profitable long-term business. Constantly look for new ways to improve cash flow management in your company.

Looking for ways to examine and improve your cash flow? Contact Cook and Company Chartered Professional Accountants. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook and Company use their experience and expertise to help your business. Contact us for a complimentary consultation.

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Tax Implications of Shareholder Loans

Tax implications of Shareholder Loan

The Canadian Income Tax Act contains numerous provisions relating to the tax treatment of shareholder loans, many of which are designed to prevent their abuse by shareholders. But, what is a shareholder’s loan, how are they used and what are their tax implications? 

What is a shareholder’s loan?

Your shareholder loan account is made up of all capital that you contribute to the corporation and all purchases made on behalf of the corporation (using personal funds or personal credit cards) netted against cash withdrawals and personal expenses paid by the company on your behalf.

  • Owner cash withdrawal: An owner withdrawing money from a corporation is the most basic shareholder loan. If the withdrawal is not designated as a dividend or a salary, it creates a loan from the corporation to the shareholder. Accountants call this a “due from shareholder” transaction because the loan amount is due from the shareholder to the company.
  • Purchase of a personal item with company funds: Another version of an owner withdrawal is when a shareholder purchases a personal (non-business) item using company funds. The purchase would be recorded as a loan from the company to the shareholder and the funds need to be repaid.
  • Owner cash contribution: Sometimes a shareholder of a company deposits personal funds into the company to cover expenses. Essentially the shareholder has loaned the company cash and the company needs to pay it back. An accountant would call this a “due to shareholder” transaction because the amount loaned to the company is now due back to the shareholder.
  • Pay for business expenses with personal funds: Another common version of an owner contribution is when company expenses are paid with personal funds (usually a credit card) of the shareholder. The purchase is recorded as a loan to the company. The shareholder expects to be reimbursed for this legitimate expense.

What are the benefits of a shareholder loan?

One of the benefits of a shareholder loan is the ability to withdraw funds from the corporation without triggering a tax liability. If a shareholder loan is repaid within one year from the end of the taxation year of the corporation (the taxation year in which the loan was made) it will not be included in the income of the borrower. This creates planning opportunities but it also creates opportunities and incentives for shareholders to abuse the rules. Therefore, the Income Tax Act will, by default, include the principal loan amount of any shareholder loan into the taxpayer’s income. It’s imperative that your loan meets certain conditions to avoid costly or unintended tax consequences. 

Understanding shareholder loan conditions:

The following are common scenarios regarding shareholder loans and the conditions required: 

  • The shareholder loan was made to you or your spouse to buy a home to inhabit, you received the loan in your capacity as an employee of the corporation and bona fide arrangements are met. As an employee of the corporation, you must be actively involved in the operations and not merely a passive shareholder. A bona fide arrangement requires that the loan repayment terms and the interest rate charged is reasonable and would reflect terms similar to a contract entered into between two parties in normal business practice. 
  • The shareholder loan was made to you to acquire a motor vehicle to be used for the business’s operations. You received the loan in your capacity as an employee of the corporation and bona fide arrangements are met. The loan cannot be part of a series of loans and repayments and the loan must include interest charged at the prescribed rate.
  • The shareholder loan was repaid within one year after the taxation year-end in which the loan was made. For instance, assuming the corporation has a calendar year-end, a loan issued February 28, 2020, would have to be repaid by December 31, 2021. There are no tax liability issues under these circumstances.

Shareholder loan tax implications:

Ensuring that you are not penalized by the Canada Revenue Agency (CRA) for improperly withdrawing a Shareholder Loan is critical within your personal and corporate income tax planning. Understanding the tax planning opportunities is also important.

  • Any loan to a shareholder that does not meet the conditions is included in the shareholder’s income and no expense is allowed to be deducted by the corporation, resulting in double taxation.  
  • Any subsequent repayment of the loan may be deducted from income in the year it is repaid.  
  • In certain circumstances, this rule creates tax planning opportunities.  For instance, if a $10,000 shareholder loan was made to your adult child studying full-time there would be no tax liability as the $10,000 income inclusion would be sheltered by the basic personal tax credit. Upon commencing work and repaying the loan, your child would deduct $10,000 from income in a higher tax bracket.  If their marginal tax rate at that time is 30% that would create a tax savings of $3,000. Ultimately, the corporation is in the same cash position after the loan is repaid but your child is $3,000 richer.  

In the worst-case scenario, the CRA can have the full amount of the loan plus interest added to the shareholders’ income for the year of the loan and not allow a deduction at the corporate level.  Planning for repayment within two corporate fiscal year ends is a reliable course of action to mitigate any worry of penalization from the CRA. Having an experienced accounting team in place to not only plan but to monitor and execute is pivotal when a corporation has transactional deposits and withdrawals out of the corporation.

How to avoid shareholder loan tax problems:

There are a few straightforward ways to avoid taxation problems. These include:

  • Repaying the loan: If the shareholder repays the loan permanently within one year, he won’t have to pay tax personally on those funds.
  • Taking the cash as a salary or wage: If the owner wants to earn money from his company and avoid double taxation, he could take the funds as a salary or wage. The salary would act as a tax deduction for the company and the owner would include it in his employment income. This avoids double taxation.
  • Taking the cash as a dividend: Avoid double taxation by taking the money as a dividend. A dividend would be declared and the owner would transfer the cash into his personal account. Dividends are taxed at lower rates than employment income so double taxation is avoided. If you issue dividends, you will need to issue T5 and prepare corporate documents called dividend resolutions. 

Shareholder loans are a useful way to manage short-term personal cash needs. They allow shareholders flexibility in how and when cash is withdrawn from a company. If you need a short-term loan for less than a year, a shareholder loan could be an easy way to obtain the funds. The loan needs to be repaid within the year to avoid having to include the amount in your personal income. If repayment isn’t possible, a dividend could be issued and you would pay personal tax on the amount at a reduced rate. The rules relating to shareholder loans can be very complex. To successfully navigate subsection 15(2) of the Income Tax Act and its many exceptions, proper planning is essential. Talk to a Chartered Professional Accountant. They can help you successfully navigate the intricacies of shareholder loans.

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Do You Need an Accountant for Your Small Business?

Accountant for Small Business

Are you in the planning stage of a business venture? Do you own and operate a recently started business? Are you planning a business expansion? When should you hire an accountant to help? The following is some information that can help with the decision of when to hire an accountant. 

What are the duties of an accountant?

An accountant’s duties vary from company to company, but typically they are responsible for:

  • Data management: An accountant is responsible for ensuring a business’ financial data is stored, updated and managed appropriately. They make sure proper procedures are used for data entry and accounting software is up to date, secure and regularly backed up.
  • Financial analysis and consultation: Accountants act as a resource when a business is making financial decisions. They provide tips on spending, discuss options for credit and tax deductions and help interpret financial jargon. They help troubleshoot the day-to-day management of finances in a company. 
  • Financial reports: Accountants supply documents that provide deep insight into a business’s performance (income statements, balance sheets, cash flow statements, profit and loss statement, accounts receivable aging, revenue by customer, accounts payable aging, statement of retained earnings, general ledgers, etc.). A business and its investors make decisions based on the reports their accountant provides. 
  • Regulatory compliance: There are many rules and regulations that affect businesses. An accountant ensures that your income and expense reporting follows applicable provincial and federal laws. 

When do you need an accountant?

An accountant can save you time, money and headaches. There are several key times when an accountant can make a significant difference for a business. 

  • When starting your business: A chartered accountant can assist you in writing your business plan, help you acquire funding, aid you in leasing a space and provide you with direction and goals. They can advise you on the best structure for your business (Sole Proprietorship, Partnership, Corporation), help you get the appropriate licenses (GST number, business license) and assist you in setting up business accounting software. 
  • For compliance and tax issues: An accountant makes sure you are in appliance with applicable tax laws, helps with complex payroll issues and assists with reporting requirements. 
  • When being audited: A chartered accountant provides advice to work within the auditing process. They can recommend accounting software that incorporates an audit trail, easing the transactions needed during an audit.
  • When applying for a loan: An accountant improves your chances of receiving a business loan. They can present facts and figures that back up your application for funding. They can advise you regarding the best type of loan and whether the terms, conditions and interest rates offered are favourable for your company. 
  • When expanding: A chartered accountant can help you handle growth transitions (hiring, larger office space, increased product/service line) and look after details (payroll, tax management, property tax, utility payments) allowing you to focus on company growth. They can analyze cash flow, inventory and pricing to provide insight into how to grow your business successfully. They can even help determine the best time to introduce new products and/or services. 
  • Before taking on a franchise: Franchise contracts vary widely. An accountant can help determine whether the fees and percentages charged will allow for a reasonable income. They assist in providing sufficient information for making the decision regarding franchising. 
  • Before buying a business: Consult an accountant before buying an existing business. They can look into the company’s accounts and determine whether the purchase is a financially sound decision.
  • Before you sell your business: A chartered professional accountant can put your company’s financial records in order and produce statements of accounts that you can show to prospective buyers. They create charts and tables to clearly show your company’s position. They can also structure your financial affairs so that you get the most from selling your business.
  • Every step of the way: The truth is, a chartered professional accountant can help your business at every stage of its development. They can make life easier for you so you can concentrate on operating your business. 

A chartered professional accountant can interpret your financial data in order to help you make better business decisions, assist you with business start-up, aid with tax and compliance issues, be of service during auditing, help you expand and/or buy a franchise, aid in acquiring a loan and help out at various stages during the growth of your business. Every business benefits from working with an accountant! 

Need help with the financial complexities of your business? Want advice regarding your business’ situation? Contact Cook and Company Accountants. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, we use our experience and expertise to assist you. Contact us to request a meeting.

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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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All About Deductible Business Expenses in Canada

Deductible Business Expenses

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

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

 

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

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

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