Can Your Business Plan for Inflation?

Business Plan for Inflation

Historically, inflation has plunged countries into long periods of instability and politicians have won elections on promises to combat it. Inflation is currently at a high not felt for decades. Canada’s annual inflation rate rose to 8.1% in June of 2022, the highest since January 1983. Businesses are paying more to find and retain talent. Supply costs are escalating. Companies are feeling squeezed as the costs of goods and services continue to rise. Inflation is expected to remain elevated until 2024. It’s necessary for businesses to take decisive action to strengthen their growth plans and deal with the pressures of an inflationary period. The following are strategies to plan for and deal with the impact of inflation on your business. 

What is inflation?

Inflation is the rate of increase in prices over a given period of time. It represents how much more expensive a relevant set of goods and/or services has become. It can be translated as the decline of purchasing power over time and is expressed as a percentage. Essentially, inflation means that a unit of currency effectively buys less than it did in prior periods. When inflation rises, consumer spending declines as people can’t afford to buy as much as previously. 

How does inflation affect a business?

Inflation means that a company’s cash reserves are worth less. Labour expenses rise. Consumers buy less of a business’s goods and/or services. The value of some assets (real estate, steel, lumber) increases. Supply chain issues often occur, affecting scheduling, pricing and estimation. The shifting nature of the economy during an inflationary period is unnerving for many business owners. The answer? Be prepared!

How can a business plan for and address inflation?

Normal economic cycles include four stages: expansion, peak, contraction, and trough. As a business owner, it’s wise to have contingency plans for navigating each stage. A company’s plan for a period of inflation should include metrics to measure success and actionable steps to take. The following are tips for dealing with inflationary pressure as a business.

  • Be aware of real income: Track net income against the rate of inflation (real income). As the rate of inflation increases, profit decreases, reducing value and equity. 
  • Adjust the length of contracts: Lock in pricing for materials and/or expenses with a long-term contract. This protects your budget and guarantees revenue for your supplier. 
  • Time your purchases: Make large purchases before the price rises, particularly for equipment, land or other assets. This allows you to borrow cash when it is worth more and pay off your debt with money that is worth less. 
  • Optimize pricing: Create value for your product/service through marketing and an improved customer experience. This will allow you to raise your prices with less difficulty. Tie your price increase to the PPI (producer price index) or the CPI (consumer price index). Consider targeting less price-sensitive customers. 
  • Understand your cash flow: Cash flow and working capital are essential parts of a plan to deal with inflation. Do a financial modelling exercise to map out your situation. Look at ways to improve cash flow:
    • extending payments to vendors
    • tightening up invoicing and collection policies
    • divesting underperforming divisions or assets
    • prioritizing your resources in areas that are performing well
  • Reduce your tax burden: Talk to your accountant about ways to reduce your tax burden. Take advantage of losses. 
  • Review your debt and capital needs:  Assess your ability to meet current debt obligations. Reach out to lenders if you’re considering expansion, the purchase of new technology and/or refinancing existing debt.
  • Consider your strategies for growth: What worked in the past may not work now. Reevaluate and refresh your strategies.
  • Assess your technology: Do you have access to real-time data regarding your business? If not, it may be time to upgrade your technology. Consider a cloud accounting system, an enterprise resource planning system (ERP), a warehouse management system (MHS) and/or a customer relationship management system (CRM). The information provided can guide your decision-making. 
  • Simplify operations: Look for ways to streamline complicated processes, run leaner, reduce cost and increase profitability. 
  • Prioritize high-profit margin products: Many companies give priority based on the date of the order regardless of profit margin. Tell customers purchasing low-profit items/services that delivery will be slow. Ship goods/deliver services that are most profitable first. 
  • Differentiate between strategic and nonstrategic cost cutting: Selectively trim costs to improve the return on operating expenses. Boost growth through greater investment in the strategic capabilities needed to achieve differential results. Deploy scarce resources to reinvigorate strategy and maximize shareholder value.
  • Eliminate work: Scrutinize what activities are performed and how those activities are performed.  Eliminate unnecessary work and automate when possible.
  • Keep morale high and prevent attrition: Losing key employees results in lost productivity and requires time and effort to find and train a replacement. To avoid this, openly communicate with employees. Be aware and accommodating of personal needs. 

Inflationary pressures and supply chain issues are real and complicated. It’s important to develop a plan that addresses the rapidly evolving situation. Utilize the wisdom and leadership available to your business by talking to your accountant. They have the knowledge and experience to help you weather current circumstances. 

Does your business need help weathering current inflationary conditions? Contact Cook and Company Chartered Professional Accountants. We can provide you with powerful financial planning solutions. 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.

The Best Strategies for Small Business Accounting

Strategies for Small Business Accounting

The process of bookkeeping may seem complicated and daunting. Yet, it’s crucial that your small business has accurate books. Detailed financial records reduce problems; unpleasant financial surprises, forgotten paperwork, missed goals, large bills from your accountant, and payroll and tax challenges. Accurate and efficient bookkeeping helps a business 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 strategies for effective small business accounting. 

  • 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.
  • Develop a budget: Begin by coming up with revenue projections and a list of anticipated expenditures. Compare this budget to actual expenses and revenue. Adjust the budget as needed.
  • Keep an eye on high-cost expenses: Labour and inventory costs are the largest expenses for most small businesses. To reduce labour expenses, consider outsourcing  work to contractors that bill at an hourly rate. They may not need 40 hours/week to complete your work and they don’t require benefits. Time-tracking software makes it easier to understand how much certain tasks cost your business, enabling you to find ways to control expenses. Track inventory carrying costs, inventory turnover ratio, amount lost to obsolete inventory and other key metrics.
  • Plan for major investments. 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. Track expenses and revenue to help identify the best time for large investments. Business credit cards help establish a credit history giving you a better chance at qualifying for financing (lines of credit, loans) and they often offer perks such as business or travel rewards.
  • 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 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.
  • Ensure inventory data is accurate. To prepare financial statements you need accurate inventory data. Track physical inventory either manually, by counting items on a regular basis, or by pairing counts with an inventory management system that automatically adjusts the numbers as sales happen (via integration with your point-of-sale system). Inventory management software makes it much easier to track inventory and the information will be more accurate.
  • 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).

Don’t let accounting be the downfall of your small business. Try these bookkeeping tips to help you improve your business, spend less time on finances, focus on growing your company and enhance your customer relationships. When it’s time, get professional bookkeepers and/or accountants involved. 

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.

Common Problems with Business Succession Planning

Business Succession Planning

Operating and growing a business is engaging and demanding. Business owners often become consumed with the day-to-day operations of their company, leaving little time and energy for planning for the future. Eventually, companies change hands; through retirement, transferring of ownership or death. Succession planning is a way to prepare for the future, making transitions smoother and maximizing financial rewards for business owner(s) and/or their heirs.  

What is succession planning?

Succession planning is the process of identifying the critical positions within an organization and developing action plans for individuals to assume these positions. It’s a business strategy used to pass leadership to an employee or group of employees. Succession planning ensures the continuity of a company’s success in the future.

Why do you need a succession plan?

Planning for the future of a company has many and varied benefits. Succession planning:

    • prepares the way for the change of leadership in a company. The right leaders make a difference in the success of an organization. Succession planning ensures the stability of a company and prepares it for growth and change by planning who will lead the organization in the future. 
    • helps a company survive unforeseen events such as death, illness, personal problems, abrupt resignation, arrest, etc. It puts a strategy in place for filling important leadership roles.
    • encourages company owners to think long term. Rather than focusing only on weekly meetings and quarterly earnings, succession planning forces you to think about your company’s future. 
    • motivates communication. Talking about the future promotes communication between departments and/or employees, improving how everyone works together on a daily basis. 
    • saves money. Being unprepared for a sudden vacancy risks incurring significant costs to lure qualified people to your position, on short notice. A documented succession plan saves the costs of hiring outside people for key leadership roles.
    • keeps staff motivated. Succession planning sends a positive message to staff as they are considered for future leadership positions. It increases confidence in a company and motivates the best efforts of employees. 

Common problems with business succession planning:

There are a number of issues and problems to be wary of when planning for the succession of your business. 

    • Lack of Strategy: Make sure you identify your company goals and priorities and that your succession plan lends itself to achieving these. Your plan needs to be a cohesive, overall strategy. 
    • Ambiguity: An effective succession plan provides clear, well-defined guidance for a smooth transition. It identifies key positions and how they will be filled. If it is to be functional, it must be detailed.
    • Procrastination: Many business owners find it difficult to find the time and energy to create a succession plan. Thinking about their mortality, disability and/or future sale of their company seems impossible. Get the process started by bringing in outside help to coordinate the complicated factors associated with preparation for the future. Let the experts (accountant, lawyer, banker, advisor, etc.) help formulate the plan. 
    • Choosing successors by gut rather than data: When choosing successors for key positions in your company, consider performance scores, number and quality of projects completed, engagement survey scores and supervisory/leadership experience. Be careful of making succession decisions solely based on your attitudes and beliefs. These are formed by experience and the experience of any individual is limited. 
    • Making assumptions about your talent: Make a point of understanding the skills, talents and goals of those in your organization. Empower employees to chart their own career development within your business, giving them a sense of control over their careers. Steer clear of assuming you know what they want and whether they’re interested in taking over a leadership role in the future.
    • Forgetting company morale: Discussion of succession can have a negative impact on morale, lead to fear regarding the future of the company and create jealousy and competitiveness. Be straightforward about the process of planning for the future of the company. Encourage discussion and collaboration. Allow employees to air concerns and give them time to get on board with the plan. Make the process simple and open.  
    • Ignoring retention of candidates: It’s important to retain those you are training to lead one day. To fend off head hunters and motivate future leaders to stay with your company, offer development opportunities, training incentives and mentoring. Be clear about why and for what role you have selected them.
    • Considering only executive positions: If you are advancing an internal candidate to an executive position, you will need a competent employee to fill the vacancy you produce. Create a comprehensive strategy to fill executive and middle management positions. This helps avoid issues, making your plan stronger. 
    • Thinking succession planning is complete: Because companies are constantly changing (new products/services, new employees, new markets, additional layers of leadership), the succession plan you have in place will need to be reviewed and tweaked periodically. 
    • Failing to support succession planning with technology: Succession planning software (SAP, Succession Wizard, Cornerstone OnDemand, Plum, UltiPro, TalentGuard, etc.) supports a company by providing insight into the capabilities of employees and their succession potential. It empowers HR to identify skilled employees and accelerate their development and enables them to evaluate, monitor, engage and develop existing talent. 
    • Not maintaining a current, accurate business valuation: Though the succession plan is a means of readying for the future, be prepared to make sudden and challenging choices by keeping a current, accurate valuation of your business. This serves as a benchmark, giving you control and secure data on which to base decisions.

Succession planning is critical to ensuring access to a talent pool for future vacancies. It makes tackling future changes and challenges easier. Align your plan with your goals. Revisit it periodically and adjust as needed. Utilize software to provide data for decision-making and let the experts help ease the process. If you haven’t already formulated one, get started on your succession plan today.   

Need help creating a succession plan for your business? Want to avoid the common challenges of succession planning? Contact Cook and Company Chartered Professional Accountants. Our expert staff will help you navigate the complex maze of succession planning, with ease. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook and Company uses their experience and expertise to help your business. Contact us for a complimentary consultation.

Tips for Effectively Managing Business Debt

Managing Business Debt

Debt is a necessary part of running a business, allowing a company to purchase inventory, invest in equipment and finance growth. If not handled carefully, debt can cause serious problems. It’s important to develop methods for debt management so that a company’s credit rating may be preserved and operations sustained. The following are strategies and tactics for effectively managing business debt. 

  • Take inventory of your debt: List the money owed and to whom (business loans, lines of credit, business credit cards, outstanding amounts due to vendors). Include the total amount owed, interest rate and monthly payments. This information will help with the prioritization of payments.
  • Create a plan: Develop a budget and a plan for repayment. Decide which debts to pay first and which pose less of an immediate threat. Decide whether you wish to use the avalanche strategy (paying off your debts, starting with the loan with the highest interest rate) or the debt snowball strategy (paying off the smallest of all your loans as quickly as possible) to settle your outstanding balances. 
  • Improve cash flow management: Improving cash flow requires measurement and forecasting, improving the management of payables and receivables and being prepared for shortfalls.
    • Cut unnecessary spending: Review all costs (inventory, shipping, purchasing, rent, utilities, payroll, equipment, etc.). Look for costs that can be reduced or cut. Explore the possibility of alternative buying strategies. Negotiate with current suppliers in order to cut costs and/or find new suppliers with better pricing. Rewrite your budget.
    • Increase your earnings: Fine-tune your invoice collection, using collection strategies for a more predictable cash flow. Promote your business (social media, community events, etc.) to increase income. Bundle products to reduce selling price and improve sales volume. Provide employee training to enhance sales performance. Find ways to retain customers and attract new ones.
  • Renegotiate, refinance and/or consolidate debt: Reach out to your creditors to negotiate more favourable terms. Try refinancing as it often results in lower payment terms and interest rates. Consolidating multiple debts reduces the number of creditors to pay and payments you make, often allowing you management of debt through a single monthly payment. 
  • Plan for the long term: Establish an emergency business account. Put aside a portion of business profits each month as a reserve against the ups and downs of business. 
  • Get professional help: There’s no need to confront your small business debt alone. Consider working with your CPA. They are available to answer questions and have knowledge, experience and skill with debt management. 

Managing debt is a necessary and important aspect of operating a business. It’s fundamental to business success. Debt management allows a business to manage cash flow and capital for growth. Tackling debt may seem tricky and stressful but, using these tips, you can make headway. Though these strategies aren’t solutions, they provide opportunities for relief of the risk that comes with debt. Remember that your accountant is on your side and is an essential source of help and support in debt management for your business.

Need help with debt management strategies? Contact Cook and Company Chartered Professional Accountants. Our expert staff will help you navigate the complex maze of debt management, with ease. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook and Company uses their experience and expertise to help your business. Contact us for a complimentary consultation.

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.

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.

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.

Employee vs. Independent Contractor: Tax Differences

Employee and Independent Contractor Taxes

For employees that receive a salary, taxes are fairly straightforward for both employee and employer. The employer deducts the appropriate amount of tax, employment insurance and pension contributions from each paycheque. The employee fills out a standard tax form at tax time. When you’re an independent contractor, taxes are more complicated and so are the required tax forms. The deductions for self-employed contractors are unique as are their contributions for Employment Insurance and the Canadian and provincial pension plan.

Who qualifies as self-employed or independent contractor?

According to the Canada Revenue Agency, a self-employed individual:

  • usually works independently 
  • does not have anyone overseeing activities
  • is free to work when and for whom they choose 
  • may provide their services to different payers at the same time
  • can accept or refuse work from the payer 
  • has a limited relationship with the payer (not ongoing), often restricted to a specific job
  • does not personally have to carry out the work for which they’ve been hired, can hire another party to complete all or part of the work 
  • typically uses their own tools, space and equipment  
  • generally takes on a measure of financial risk and can incur losses 
  • often has fixed operating costs relating to operating a workspace or hiring helpers/assistants 
  • has a working relationship with the payer that does not present a degree of continuity, loyalty, security, subordination, or integration, all of which are generally associated with an employer-employee relationship 
  • is responsible for paying provincial and/or federal sales taxes and may claim certain deductions as business expenses 
  • is not entitled to benefit plans

Who qualifies as an employee?

According to the Canada Revenue Agency, an employee:

  • works for one client or company (payer)
  • the payer has direct and effective control of how and when work is carried out
  • tools and equipment are usually provided by the payer, who is responsible for repair, maintenance and insurance costs and retains the right to use the tools and equipment provided 
  • does the work they have been assigned and cannot decide to hire helpers or assistants without the express consent of the payer 
  • is generally reimbursed for any expense incurred in completing their work 
  • is not usually responsible for any operating expenses nor financially liable if they do not fulfill the obligations of their contract 
  • relationship with an employer is continuous and not limited to a specific task
  • is entitled to benefit plans such as registered pension plans, group accident, health and dental insurance plans 

Tax benefits of hiring an independent contractor:

  • save on labour costs
  • no need to pay benefits (disability, accident, life insurance, health and dental insurance)
  • not necessary to pay the employer portion of the Canadian pension plan, healthcare, workers compensation and employment insurance
  • less paperwork and responsibility
  • more flexibility to meet the ups and downs of business,
  • better manage cash flow
  • no paid training

Tax benefits for independent contractors:

  • larger take-home pay
  • can pay your significant other and/or kids and 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
  • more write-offs you can claim:
    • Operating expenses (rental of 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. 

Tax disadvantages of being an independent contractor: 

  • have to pay both the employer and employee amounts for Canada Pension Plan and Employment Insurance
  • large tax bill because taxes aren’t withheld at the source
  • required to complete Form T2125 (Statement of Business or Professional Activities)
  • must follow complex rules regarding tax deductions
  • must be familiar with all of the tax rules
  • must budget and set aside money for taxes owed 
  • required to charge your clients GST

The largest tax advantage for an independent contractor is the potential for tax deductions that aren’t available to employees. A self-employed person can generally deduct all reasonable business expenses. However, an independent contractor must properly estimate and remit income taxes on a regularly scheduled basis as dictated by the Canada Revenue Agency. The biggest tax advantage when hiring an independent contractor is the savings on the cost of labour and benefits as well as reduced paperwork. Individuals and companies need to weigh the tax benefits and disadvantages of hiring/becoming independent contractors. 

Need help with the tax complexities of being an independent contractor? Want advice regarding the advantages/disadvantages of hiring a self-employed contractor? 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.