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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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Why Should a Business Undertake Financial Planning?

Business Financial Planning

A financial plan affects day-to-day fiscal decision-making, defining the future of a business and shaping a company’s journey. A detailed financial plan brings a company’s objectives into focus and helps in developing viable strategies.

What is financial planning for a business?

Financial planning is the task of determining how your business will finance its strategic goals and objectives. The plan is a document that describes the activities, resources, equipment and materials needed to achieve these objectives. It sets time frames for your goals and strategies for achieving them. It helps you be in control of your company’s income, expenses and investments and is essential to building a successful business. A good plan includes an assessment of the business environment, company goals, resources needed to reach these goals, team and resource budgets and risks that might be faced. It ensures a company is equipped in advance to deal with changing circumstances at both personal and business levels. 

Why create a financial plan for your business? 

  • To manage your risk and respond quickly to financial issues: A business must plan for a lot of risks (death or disability of central figures, illness, property ownership loss, lawsuits, interruption of business, lower than expected revenue, high overheads, etc.). By regularly reviewing risks and planning a response, a company is prepared to tackle issues quickly, before they become hard to manage. 
  • To provide a road map for growth: It’s easy to focus on daily issues and neglect long-term planning. A financial plan helps a company focus on the future by providing clear goals for company growth and performance.  It helps you analyze your current situation and project where you want the business to be in the future.
  • To help you develop a good tax strategy: Financial planning is helpful when it comes time to submit your tax return or if you sell the company.
  • To identify sales trends: A financial plan that includes quantifiable targets and sales records helps determine which individual products and which initiatives are most lucrative, making it possible to adjust your marketing strategy appropriately.
  • To prioritize expenditures: A financial plan sets clear expectations for cash flow and helps a business owner to consider spending priorities. 
  • To identify necessary cost reductions: A financial plan helps you refer to past spending and identify unnecessary or over-inflated costs so you can adjust accordingly. 
  • To create transparency with staff and investors by sharing key figures (revenue, costs, profitability, etc.).
  • To show progress: A financial plan is helpful in showing increased revenues, cash flow growth and overall profit in quantifiable data, encouraging business owners.

Every financial decision your business makes has a significant impact on the overall strength of your company. Financial planning helps you be better equipped to make decisions. Corporate financial planning demands a strong understanding of commerce and how companies operate fiscally. It also calls for attention and care for the immediate financial needs and specificities of your enterprise. 

Need help with financial 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, 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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Mutual Funds vs. Exchange Traded Funds

Mutual Funds and Exchange-Traded Funds

You may have heard about mutual funds and exchange-traded funds (ETFs). How do you decide which best fits your investment needs? Both offer many benefits for your portfolio and they have a lot in common, but mutual funds and ETFs have some key differences. The following are the similarities and differences and how to determine which of the two instruments is best for you.

What is a Mutual Fund? 

A mutual fund is an investment vehicle that pools money from investors to buy a basket of stocks, bonds, and other securities. This allows you to invest in different companies or bonds at the same time so as to diversify your investments and reduce your risk. Investors buy shares of a mutual fund directly from the company issuing shares or through a broker who purchases shares for investors. Since you buy and hold shares of a mutual fund with the fund company, you cannot move the assets to another financial institution without selling. Mutual funds typically have minimum initial purchase requirements and can be purchased only after the market is closed when their net asset value (NAV) is calculated and set. These funds are generally actively managed by professional money managers so they try to beat their benchmark and may charge high expenses and/or sales commissions. 

Advantages of Investing in Mutual Funds:

  • able to react quickly to changing market conditions (flexibility)
  • a single mutual fund may contain dozens or even hundreds of separate stocks or issuers (diversification)
  • mutual funds can be bought and sold once every trading day (liquidity)
  • a manager is involved in the funds’ investment selection and management, offering investment advice and providing a simpler, more hands-off experience
  • can easily set up automatic investments in fixed amounts

Disadvantages of Investing in Mutual Funds:

  • are expensive and often perform only as well as passive automated investments
  • management fees tend to be high, eating into your returns.
  • may have built-in “loads,” which are essentially sales commissions
  • advice is often an additional cost
  • the vast majority of actively managed mutual funds fail to outperform benchmarks
  • many active mutual funds fail to outperform the market yet you still pay for “active” management
  • traded only once per day at the closing NAV price
  • most mutual funds are not guaranteed
  • the level of risk in a mutual fund depends on what it invests in

 

What is an Exchange-Traded Fund (ETF)?

An exchange-traded fund (ETF) is an investment vehicle that pools money from investors and uses the funds to buy a basket of stocks, bonds, and other securities. You can buy and sell shares of an ETF just like you would buy shares of a stock from a stock exchange. There are various types of ETFs available to investors that can be used for income generation, speculation, price increases and to hedge or offset risk in an investor’s portfolio.

  • Bond ETFs include government bonds, corporate bonds and local or municipal bonds
  • Industry ETFs track a particular industry, such as technology, banking or the oil and gas sector
  • Commodity ETFs invest in commodities, including crude oil or gold
  • Currency ETFs invest in foreign currencies, such as the Euro or the Canadian dollar
  • Inverse ETFs attempt to earn gains from stock declines by shorting stocks (selling a stock, expecting a decline in value and repurchasing it at a lower price)

Advantages of ETFs:

  • access to many stocks across various industries
  • low expense ratios and fewer broker commissions
  • risk management through diversification
  • ETFs exist that focus on targeted industries
  • no investment minimums
  • no fees or sales charges
  • can trade on an exchange throughout the trading day
  • you control the managing of your investments
  • usually generate fewer capital gain distributions overall which makes them somewhat more tax-efficient than mutual funds.

Disadvantages of ETFs:

  • actively-managed ETFs have higher fees
  • single industry focus ETFs limit diversification
  • may contribute to market instability
  • many ETFs are based on unproven models

 

Which is right for you?

Understanding the differences between ETFs and mutual funds can help you decide which is best for you and your business.

Use ETFs if:

  • Tax efficiency is important: If you’re investing in a taxable brokerage account, having more control over capital gains distributions may be important.
  • You’re an active trader: ETFs allow you to set limit orders, stop-limit orders or use margin in your investing strategies as they trade just like stocks. 
  • You want to gain low-cost exposure to a specific market without researching individual companies: A lot of ETF options benchmark niche market indexes.
  • You may change brokers in the future. ETFs are easily transferred between brokers. 

Use Mutual Funds if:

  • You value the potential to outperform the market through active management.
  • You’re investing in less-efficient parts of the market. Actively managed funds have the best potential to outperform in these areas.
  • Comparable ETFs are thinly traded.

 

If you’re not sure whether a mutual fund or ETF is best for you, consider consulting your Chartered Professional Accountant. They understand these products and can offer advice that meets your specific needs. 

 

Need help deciding whether ETFs or mutual funds are right for you? 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.

 

 

References:

 

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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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What is a Capital Asset?

Capital Asset

A capital asset is an item a business owns for investment purposes; an investment that is anticipated to generate some kind of value over a specified period of time.  It’s owned for its role in contributing to the business’s ability to generate profit. When you sell it, you earn a capital gain or a capital loss, depending on the price. Gains are taxed at a special rate and losses can be used to reduce the amount that is taxed.

Capital assets have the following characteristics:

  • The asset has an expected useful life of greater than one year.
  • The acquisition cost of the asset exceeds some predetermined company minimum amount, known as a capitalization limit.
  • The asset is not anticipated to be sold as part of normal business operations.
  • The asset is not easily convertible to cash.
  • The asset is recorded on the balance sheet and expensed over its useful life through a process called depreciation.
  • The asset is expensed over the course of its useful life helping to match the cost of the asset with the revenue it generated over the same time period

Kinds of capital assets:

There are two main categories of capital business assets.

  • Tangible capital assets are physical and have a finite monetary value. They include cash, inventory, vehicles, equipment, buildings and investments. 
  • Intangible capital assets do not exist in physical form and include things such as accounts receivable, prepaid expenses, patents, copyright, franchises, trademarks, trade names and goodwill. An intangible asset is difficult to evaluate.

Is there a set cost at which an item becomes a capital asset?

There is no fixed cost at which an item becomes a capital asset rather than a consumable item. It depends on the size of your business. A computer might be a capital asset in a very small business but would be a consumable item in a large company. However, items like batteries, cables and memory sticks are always consumables. If you’re not sure whether an item is a capital asset, speak to your accountant.

Depreciation of capital assets:

A capital asset’s value is spread across the time it takes to be used in your business (it’s useful life). A proportion of the asset’s value is shown as a day-to-day running cost for each year it’s useful. This is referred to as depreciation for a tangible asset or amortization for an intangible asset. The cost must be written off over more than one year. At the end of each year, you subtract all depreciation claimed to date from the cost of the asset, to arrive at the asset’s book value, equal to its market value. At the end of the asset’s useful life for the business, any non-depreciated portion represents the salvage value for which the asset could be sold or scrapped. Accountants use a variety of conventions to approximate and standardize the depreciation process.

Ideally, your business assets will store and increase wealth, increase income and/or reduce expenses. Selling an asset results in a capital gain or capital loss. If you need more information and or understanding regarding your company’s capital assets, talk to your accountant. They have the knowledge, experience and skills to help you with your business needs. 

Need information regarding capital assets and your company? 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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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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