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Should I Pay Myself a Salary or Dividends?

Should I Pay Myself a Salary or Dividends? - Cook and Co - Accountants in Calgary - Featured Image

If your business is set up as a corporation, you can choose to pay yourself a salary, receive dividends or a mix of both. It makes sense to choose the method that best accommodates your financial situation, but which practice is most beneficial for your business? There are many factors to consider and each payment method has advantages and disadvantages.

 

Salary: a fixed regular payment, made on a monthly or biweekly basis by an employer to an employee.

 

Advantages:

  • provides a legally recognizable personal income
  • allows you to contribute to retirement funds (CPP & RRSPs & TFSAs)
  • is tax-deductible for your corporation
  • fewer surprise taxes
  • easier to apply for bank loans and mortgages and often a better rate
  • entitles you to a Canada employment credit
  • can reduce exposure to corporate income tax

Disadvantages:

  • must set up a payroll account
  • pay twice into retirement funds, as the employer and the employee
  • a salary is 100% taxed, which could increase your tax burden
  • you won’t be able to carry back a business loss in future years when profits vary

 

Dividends: a sum of money paid regularly by a company to its shareholders out of its profits or reserves.

 

Advantages:

  • are taxed at a lower rate than a salary
  • can be declared at any time allowing optimization of your tax situation
  • save money, no CPP payments
  • simple process and little paperwork
  • don’t require payroll account
  • less chance of payroll penalties
  • do not require the shareholder to be an employee of the business

Disadvantages:

  • reduces the amount of CPP you are entitled to receive when you retire
  • you are not able to contribute to an RRSP
  • prevents you from claiming personal income tax deductions, such as childcare costs

 

Mix of both:

  • a business salary and some dividends are sometimes paid to ensure a corporation doesn’t earn over $500,000, the small business limit in Canada after which the tax rate increases
  • deciding to receive a salary and some dividends is based on income level, cash flow needs, projected annual earnings, the importance of personal cash for investments/tax deductions and/or the business owners age

As a business owner/manager, you can pay yourself a salary, dividends, or a mix of both. Whichever method you choose will depend on your personal and business needs and is best made with professional advice from your accountant.

Not sure whether a salary or dividends are best for your corporation, contact Cook and Company 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.

References:

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What to expect if your Business is Audited by the Canadian Revenue Agency

What to expect if your Business is Audited by the Canadian Revenue Agency - Cook & Co - Accountants in Calgary - Featured Image

A tax audit is a detailed examination of a business’ books and records by the Canadian Revenue Agency (CRA). It’s conducted after you’ve received a notice of assessment and is intended to check that your records support your tax return. Audits are meant to ensure that the Canadian tax system is fair for all.

How does the CRA choose a file for audit?

From 2017 to 2019 an average of 5,900 audits of small businesses and 1,800 audits of medium-sized businesses were undertaken each year. These files are chosen for audit based on a risk assessment; factors such as frequency of errors on tax returns, indication of non-compliance with tax obligations and comparison to similar files. If your file is identified as high risk, a CRA officer will review information from a variety of sources to determine whether they should go forward with an audit.

What are the most common issues that prompt an audit?

For small and medium sized businesses the CRA may consider an audit if they discover:

  •   Multiple or repeated errors on your tax returns
  •   Major changes in income or expenses
  •   Repeated losses
  •   Expenses not in line with others in your industry
  •   Under-reported earnings
  •   Over large charitable donations
  •   Unsubstantiated home office deductions
  •   Discrepancies between GST returns and Tax returns
  •   Shareholder loans that should be considered income
  •   Missing information
  •   Audit of a related party
  •   A lifestyle incongruent with your declared income
  •   Real estate transactions
  •   Vehicle expenses
  •   Informant tips

What is the procedure for an audit?

A CRA auditor will contact you by mail or phone and set a date, time and location for the audit. A review may be held at your place of business, your representative’s/accountant’s office or at a CRA office. You’ll receive the agent’s contact information and be informed of the scope of the audit. You’ll be asked to provide supporting documents for the review. The auditor may make copies of your records and/or borrow some of your documents. The agent will discuss with you any questions that arise during the audit and address your concerns.

What documents are required for an audit?

The documents requested may include:

  • Business records (ledgers, journals, invoices, receipts, contracts, rental records, bank statements)
  • Personal records (bank statements, mortgage documents, credit card statements)
  • Records of other individuals related to the business (spouse, family members, corporations,    partnerships, trusts)
  • Records from your accountant that relate to the books, records and tax returns of your business

What happens when the audit is complete?

  • The auditor will prepare a schedule of proposed adjustments to your tax assessment including detailed calculations and explanations
  •   The agent will hear and discuss your explanations before closing the audit
  •   You’ll receive a letter explaining the results of the audit
  •   If changes are made, you’ll receive an amended notice of assessment

What do I do if I disagree with the results of the audit?

If you disagree with the reassessment, contact the auditor, explain your concerns and provide documents to support your position. If you are not able to resolve the disagreement, you have the right to appeal.

Filing taxes for a small or medium sized business is a complicated procedure. A CPA will ensure your tax return is complete and accurate, reduce the chances of your file being chosen for an audit and ensure you’re rewarded the deductions you’re entitled.

For all your tax needs contact Cook and Company Accountants. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook and Company uses their experience and expertise to make tax time a breeze. We will assist in dealing with the CRA in the event of an audit. Contact us for a complimentary consultation.

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What to Consider when Scaling Your Business

What to Consider when Scaling Your Business - Cook & Co - Accountants in Calgary - Featured Image

Scaling a business refers to setting the stage to facilitate and support growth in your company. It involves planning, acquiring funding, ensuring sufficient staffing, improving processes and utilizing technology in order to manage an increase in sales/work/output without compromising performance or losing revenue. It’s about capacity and capability. So, what do you need to consider when scaling your business?

 

  • Plan and Evaluate: Are you ready for growth? Do you have the staff and systems to handle an increase in sales? What processes can you handle internally? Which should you outsource? Do you need new technology, more equipment, larger facilities? Take stock of where your business is now. Generate a detailed sales growth forecast; a month by month prediction of the level of sales you will achieve, a break down of projected sales (by product, market, and geographic region), the number of new customers required, orders you wish to generate. Anticipate where expenses will rise. Consider what you will focus on, what you will change and what steps are involved.  If possible, involve staff in your vision and planning. If they are invested they will work harder and remain longer.

 

  • Acquire funding: Find the funds to fuel your growth. Evaluate all possibilities; a kickstarter, crowdfunding, monthly subscription model, a partner, investors, debt financing, a business loan, equity financing, a line of credit.

 

  • Utilize technology: Examine the possibility of using technology to streamline operations,  reducing time and labour while boosting volume. Evaluate software (CRM, marketing automation, sales management, inventory, manufacturing, accounting, payroll, HR, shipping, training) and hardware (servers, computers, printers, telephone equipment). Decide whether to invest in internal IT support or outsource.

 

  • Find and hire the right people: Having the right team with the right skills is crucial for coping with the challenges of scaling your business. Determine how many employees you need for customer service, manufacturing, inventory, management, accounting/payroll and delivery of products. Can you use contractors or part time employees? How will you onboard/train new hires? Who will recruit and hire? Do you have a strategic interview process in place? Offer benefits to attract top candidates.

 

  • Simplify processes: Complexity requires more meetings, more explanations, more communication, more training and more people. It slows down a business and inhibits growth. Constantly look for ways to simplify strategies and operations.

 

  • Collect and use hard data: Collect data regarding your customers and prospects; how they move through your sales funnel, how long it takes to convert, what causes them to leave/stay, how they engage with your business, what their trigger/pain points are, their complaints/issues with your product/company, what they love about your product/company. Use this information to inform your marketing campaigns.

 

When you’re ready to scale your business, aim for a slow, steady, strategic rise. Plan thoroughly, hire quality staff, keep your costs low, pay attention to your data, simplify when possible, make wise use of technology and obtain sufficient financing. Think big. Then take small individual steps to make your vision come true.

 

Thinking of scaling your business? Let Cook & Company help. We’re a Chartered Professional Accounting firm that’s helped countless businesses achieve financial success. We offer a different approach to accounting and tax advice, personalized one-on-one service, creative financial solutions and unique strategies to handle everything from income tax planning to financial statement audits and financial planning. Contact us today to find out how we can help your business. Call 403-768-4383

 

References:

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Why It’s Important to Keep Personal and Business Finances Separate

It’s tempting to mix personal and business finances, but it’s not always a good idea. There are many benefits to creating a clear boundary between your company’s fiscal matters and your personal income and expenses.

Reduce Liability: Without a clear distinction between personal and business finances, creditors can claim your personal assets to satisfy a business debt. If you utilize personal credit cards and personal loans for your business and your company has financial trouble, there will be consequences to your personal credit score.

Establish a Professional Image: Even if your business is part time and you work from your home, having a separate business account helps establish your business identity, shows your commitment to your company and enables clients to take you seriously.

Simplify Accounting: Keeping personal and business finances distinct will simplify the accounting process, saving time and money. You can access information on your company income and expenses quickly and easily without the need to untangle it from personal expenditures. The tax filing process is streamlined and you get better visibility regarding your business cash flow. Financial statements can be quickly produced for an outside party such as a bank or potential business partner.

Help with Taxes: Keeping personal and business finances separate helps when claiming tax deductions for business-related expenses (i.e. travel, supplies, office expenditures, etc.). A well-documented division protects you from potential penalties in the event of an audit.

Establish Business Credit: A business needs a credit profile to secure business loans and/or establish vendor lines of credit. Mixing personal and business assets makes it challenging to establish a business credit profile.

Protect Your Business and Yourself: Treating your business as a separate entity reduces the possibility of using it for personal expenses, protecting the solvency of your company. If you encounter personal financial difficulties, your business has the potential to sustain you. It also safeguards your personal finances ensuring you have something to fall back on in the event of a business collapse.

Reduce your personal liability, enhance your professionalism, simplify accounting and tax preparation, and protect yourself and your business by establishing a clear financial division between your business and personal finances. Get assistance from a CPA or other professional to help you with this process.

Need help and/or advice on keeping personal and business finances separate? Want to be prepared for the possibility of an audit? The entrepreneurial accounting team at Cook and Company Accountants is eager to help you and your business. We provide the knowledge and resources your company needs. Contact us for a complimentary consultation.

 

References: 

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Is your Company GST and HST Compliant?

The most common type of audit undertaken by the CRA (Canadian Revenue Agency) for small and medium sized businesses is the GST/HST audit. Failure to file, late filing and failure to accurately report GST/HST information can result in a penalty. Interest of 6% (compounded daily and levied quarterly) is charged for late payment, insufficient payment and any outstanding balance of GST/HST. It’s important that you, as a business owner, know your responsibilities regarding remittance of these taxes.

The Goods and Services Tax (GST) is a federal tax added to commercial sales. It’s levied on supplies of goods and services purchased in Canada. The Harmonized Sales Tax (HST) is a combination of Provincial Sales Tax and GST. All businesses engaged in commercial activity in Canada are required to collect GST or HST on their taxable sales and remit this to the CRA. The only exemption is for small businesses that have taxable sales of less than $30,000 in the last four quarters (https://www.futurpreneur.ca/en/2019/how-to-ensure-your-business-compliance-with-the-canadian-revenue-agency/).

Input Tax Credits (ITCs) can be claimed by a business to recover the GST/HST paid for property or services acquired in the course of their commercial activities. You can claim ITC credits for rent, advertising expenses, equipment rentals, office expenses, accounting fees, motor vehicle expenses, travel, and some capital expenses such as property, machinery, vehicles, furniture and appliances (https://www.thebalancesmb.com/what-are-input-tax-credits-2948163). Goods and services purchased for personal use or enjoyment do not qualify as Input Tax Credits.

The GST/HST requirements are complex. The rules governing what is taxable, what is not, what is exempt and for which benefits you can claim an ITC are involved and intricate. It is easy to make a mistake in calculation and filing of your GST/HST. Use the services of a CPA to ensure that you meet your GST/HST obligations and remain in good standing with the CRA. Chartered Professional Accountants have the knowledge, skill and expertise to help you file your claim correctly and in a timely manner.

For all your tax needs contact Cook and Company Accountants. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook and Company use their experience and expertise to make tax filing a breeze. Contact us for a complimentary consultation.

References:

https://www.thebalancesmb.com/what-are-input-tax-credits-2948163

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Create and Use an Employee Expense Account

An expense account is a financial allowance offered to employees to cover business expenses. Employees pay for business related goods and services with the understanding that they will be reimbursed. This makes it easier for personnel who travel and/or entertain clients to conduct business that helps your company grow. It is in your company’s best interest to establish a clear expense policy, share it with your employees and then regulate it often and fairly.

Write an Expense Account Policy

Take the time to write a complete and comprehensive expense account policy.

 

  • Use clear and precise language to avoid misinterpretation or confusion.
  • Divide the policy into sections for easy and quick reference.
  • Itemize carefully what is allowed and what is not allowed.
  • Include details regarding expected rates, limits, what requires preauthorization, when receipts are needed.
  • Use examples to increase clarity.
  • Take into account all possibilities; accommodation, travel, mileage, food, alcohol, entertainment, business purchases, subscriptions, donations, computer hardware, software, equipment, etc.

 

Once the policy is complete, make it available to employees and management. Consider a hard copy and a copy online. Make time for questions and feedback. Continually review and refine the policy.

Develop an expense report and reimbursement process

A strong expense report procedure will speed the process of reimbursement and reduce expense leakage.

  • Create an expense report template which requires all pertinent information; date of purchase, category (i.e. accommodation, food), amount, point of purchase and preauthorization (if required).
  • Consider separate templates for each department customized to their needs.
  • Generate a separate mileage template for travel.
  • Reimburse purchases and expenses quickly checking them against the policy.
  • Set expense deadlines and compensate staff on their payday.
  • Manage employee expense accounts online to save time and paperwork.

Document your expense report process and include it with the expense account policy. Field questions and assist employees in learning to navigate the process with ease.

If your company’s personnel spend money for work purposes, establish a comprehensive expense policy, create templates, monitor the claims process and adjust as needed. A clear expense process creates trust and respect.

Cook and Company Accountants offer specialized skills in business accounting and asset management, provide expertise in tax planning strategies and can assist you in retaining the value of your company’s estate. Our team of chartered professional accountants are dedicated, knowledgeable and experienced and will provide a personal touch. Contact us for a complimentary consultation.

References:

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How to Minimize the Tax Burden on Your Business Estate

Estate planning for a business owner is complicated as it needs to address intricate personal and business relationships, complex tax issues and business succession. Planning can help you reduce your tax liability, minimize the difficulties faced by your executors and maximize the wealth passed to your heirs. Follow these guidelines to help you minimize the tax burden on your business estate.

  • Start early: Don’t wait for a crisis (illness/death) before consulting with your CPA regarding estate planning.
  • Incorporate your company in order to take advantage of a lower tax rate.
  • Minimize capital gains tax by taking advantage of exemptions.
  • Consider an estate freeze: a strategy in which a business owner transfers assets to their beneficiaries, without triggering tax consequences.
  • Contemplate an early inheritance/gift for your children/grandchildren, providing them with tax-free monies.
  • Consider establishing a trust: a legal arrangement that will help you take advantage of certain tax-planning opportunities/asset protection by transferring shares to family members without losing control.
  • Give loans to family members; interest-free funds to help pay down a mortgage, cover tuition, buy a car or fund a vacation with arrangements for the loan to be forgiven at the time of your death.
  • Set up bequests/donations:  Gifting monies to a charity in your will can shave thousands of dollars off the tax bill for your estate.
  • Purchase life insurance to provide your heirs with a tax-free income for paying taxes on capital gains and other liabilities.
  • Pay dividends to your spouse: As long as your spouse’s income is less than yours, dividends will reduce your family’s overall tax burden.
  • Invest in RRSPs and /or RRIFs to provide immediate access to cash upon your death, helping fund any tax liabilities.

Consult your chartered professional accountant for help in planning your business estate. They will have the credentials, knowledge and experience to help you reduce tax liability and maximize a successful business transfer.

Cook & Company offer specialized skills in business accounting and asset management, provide expertise in tax planning strategies and can assist you in retaining the value of your company’s estate. Our team of chartered professional accountants are dedicated, knowledgeable and experienced and will provide a personal touch. Contact us for a complimentary consultation.

References:

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It’s Never Too Early to Start Preparing for Tax Season

Tax season is a stressful time for most business owners. Preparing to file your business taxes can involve a deep dive for information and a whirlwind of paperwork. A survey by the National Small Business Association discovered that one third of small business owners spend more than 80 hours preparing for federal taxes. Reduce the pressure of tax season by planning ahead, getting organized, developing helpful habits and starting early. Following are tips for reducing the confusion, worry and mayhem of tax season.

 

  • Use accounting software to track income and expenses. Software makes daily data input easy saving time and providing accurate, up-to-date information. Consider using expense categories (i.e. office supplies, restaurant expenses, gasoline, etc.) to improve tracking information.
  • Go paperless by creating electronic copies of all financial documents. Scan receipts or ask for PDF receipts. Download bills from vendors, bank statements and credit card statements. This makes it quick and easy to locate information.
  • Be aware of tax deadlines and mark them on your calendar. Set a reminder of when you need to begin final preparation.
  • Reconcile your bank accounts monthly. Compare each transaction in your bank account to your business records. If errors are detected, deal with them immediately.
  • Take advantage of deductions by carefully recording charitable contributions, staff bonuses, holiday party costs, depreciation of business equipment (vehicles, computers, machinery) capital cost allowance, RRSPs, travel-related expenses and scientific research and experimental development costs. Use the Canadian Business Expense Index to determine what expenses qualify.
  • Seek the help of an experienced CPA and provide them with all necessary information. A CPA will have the knowledge, experience and skill to deal with your tax challenges. They will understand the latest tax reforms, tax preparation and filing procedures and will inform you of what records to keep, how long to keep them and how best to record you business’s transactions. A CPA can answer all your tax questions.

 

Tax time can be simple. Start with good accounting software and use it consistently through the year. Keep clear records of eligible deductions. Reconcile your bank accounts. Employ a CPA and don’t be afraid to ask questions. With good records and professional help, filing your taxes can be an easy and efficient process.

For all your tax needs, contact Cook & Company. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook and Company use their experience and expertise to make tax time a breeze. Contact us for a consultation.

References:

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When should you get your Accountant involved in End of Life Planning?

End of life planning for a business owner can be a complex and involved process. You need to address family and company needs, consider business and personal assets, navigate complicated tax issues and ensure business succession. Comprehensive estate planning will ease the strain on your family, provide for their needs, reduce tax liability of the business and heirs, preserve the value of the company, ensure liquidity to cover business related costs, and include a plan for succession.

When should you start estate planning for your business?

Ideally, estate planning should begin when your business venture is launched. The evaluation, planning and implementation process that surrounds the starting of a business is a natural beginning point for planning your estate. However, it is never too late to begin end of life planning. The key is simply to begin. Understand that it’s an on-going process that will likely evolve as your needs and your business change.

When should you get your Chartered Professional Accountant involved in end of life planning?

When it comes to the financial intricacies of your business and its future, your Chartered Professional Accountant offers extensive expertise including skills in business accounting and asset management. Your CPA will review your life insurance adequacy, address shareholder agreements, investigate your will and consider estate freezes. Your accountant will help determine the best course of action for your business and your family and should be involved from the initial steps of estate planning.

If you are ready to create an estate plan that will protect the value of your business and ensure your heirs are cared for, get professional advice and assistance from Cook & Company. They will put their experience and expertise to work for you. Contact us today to find out how we can help your business. Call (403) 768-4383 or contact us at [email protected] for a complimentary consultation.

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The Advantages of Hiring a Chartered Professional Accountant

Chartered Professional Accountants (CPAs) are financial advisors who help individuals, businesses, and other organizations plan and reach their financial goals. There are many benefits to hiring these highly educated and experienced individuals.

  • To relieve your work load: Delegating your company’s financial affairs to a CPA will give you
  • more time to focus on other aspects of your business. A CPA can help file tax returns, generate financial reports, establish a budget, ensure GST and HST compliance, provide auditing services, assess risk management, share expert advice and assist with financial, estate and succession planning.
  • To save you money: By using the services of a CPA you will receive assistance with your financial needs without the expense of a salary, office resources, and benefits required for a full-time internal corporate accountant.
  • To put you in control: The financial reports and advice provided by a CPA will give you the information you need to successfully chart the direction of your company.
  • To give you access to expertise: When you hire a CPA you get access to specialized skills, knowledge of finance and experience in corporate finances, tax law, and tax planning.

A CPA has the financial proficiency, strategic vision, and commitment to help your organization succeed. Look for a Chartered Professional Accountant to ensure you are getting the very best advice and service. It is a decision you will not regret.

Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook & Company will put their experience and expertise to work for you. We offer a distinctive approach to accounting and tax advice, with personalized one-on-one service, creative financial solutions and unique strategies to handle everything from income tax planning to financial statement audits and financial planning. Contact us today to find out how we can help your business. Call (403) 768-4383 or contact us at [email protected] for a complimentary consultation.

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