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All About Deductible Business Expenses in Canada

Deductible Business Expenses

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

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

 

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

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

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

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KPIs for Small Businesses

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In order to ensure your company is consistently progressing, it’s important to quantify your business’ performance with hard data. Key performance indicators (KPIs) help you assess your business’ results and build strategies for achieving your goals.

 

What are KPIs?

Key performance indicators (KPIs) are a set of quantifiable measurements used to gauge a company’s overall long-term performance. They demonstrate how effectively a company is achieving key business objectives and help determine a company’s strategic, financial, and operational programs. KPIs can be financial, including cash flow forecasts, gross profit margins, revenue growth rates and relative market shares. They can also be anecdotal, measuring foot traffic in a store, employee retention, repeat customers and quality of customer experience. KPIs help keep a small business on track.

 

Criteria for KPIs:

The goals of each firm are unique. Therefore your company must craft their own KPIs. However, all KPIs should meet the following criteria:

  • Actionable: Your KPIs should concretely and objectively show you the improvements that you need to make to help your business.
  • Accurate: The best KPIs are well-defined, quantifiable measurements that are easy to calculate and interpret.
  • Timely: Using old data won’t give you a measure of what’s going on currently. It‘s only useful if you use it as a comparison tool for current data.
  • Impact the bottom line: Whether your goal is to improve net profit margins or customer satisfaction and retention, an improvement in your KPIs should result in progress toward your goal.

How to choose the right KPIs for your small business:

There is no definitive list of KPIs that all businesses should track. What you measure depends upon your industry, stage of business growth and company goals. However, there are some things you should consider when choosing your KPIs.

  • Your business objectives: Good KPIs help you measure what’s important to your business. What are your company’s goals related to your customers or clients, your employees, your operations and your marketing? Choosing KPIs based on your business objectives makes them more valuable.
  • Your business stage: A new company might focus on customer acquisition cost and user activation rate. Established companies may focus on employee retention to help them grow the business. Focus on KPIs that are most relevant to your stage of business.
  • Lagging and leading indicators:  A leading indicator is forward-looking and can influence results. A lagging indicator is backward-looking and will tell you what results have happened. For example, customer satisfaction is a leading indicator while profit is a lagging indicator. Both are necessary barometers of how your business is and will perform.

KPIs most every business should track:

There are a few key performance indicators that are advantageous for almost every business to track. Though they are not the only KPIs that your company should track, they’re a good place to start.

  • Sales revenue refers to the income from all customer purchases and is the first KPI most companies evaluate to gauge success and market demand.
  • Cash flow forecast: Flow in and out helps business owners assess whether their sales and margins are appropriate and estimate payment timing and likely costs. It also helps in tax preparation, new purchases, or identifying any cash surpluses. This is one of the most critical KPIs for small companies to track.
  • Net profit and net profit margin: Net profit equals your revenue minus expenses. Keeping track of this KPI lets you know whether your business earns more than it spends. Your net profit margin is used to measure how profitable your business is and is a stronger indicator of your company’s financial health.
  • Gross profit margin is an analytical metric expressed as a company’s net sales minus the cost of goods sold. It shows the amount of profit made before deducting selling, general, and administrative costs. The benefit of tracking this KPI over time is that you can easily quantify how much money you’re keeping against the amount paid out to suppliers.
  • Monthly recurring revenue (MMR): If your firms’ focus is on retaining customers and preventing churn, then this KPI is important. You’ll want to measure new MRR (new customers), expansion MRR (customer who upgraded their plan) and churn MRR (revenue lost from customers cancelling before their expected average customer lifespan).
  • Customer acquisition cost is a measure of how much you have to spend to get one new customer. This KPI helps to determine how costly, and ultimately how profitable, growth is for your company.

 

Tracking KPIs is vital to the health of your business. The most successful businesses use KPIs to help them measure outcomes. Picking the right KPIs and utilizing tools to monitor them can help you make informed decisions to grow your business. Small business owners should incorporate key performance indicators in their business strategy to help evaluate progress and set goals. Keep your company on track with KPIs!

 

Need advice and help to grow your company through the use of key performance indicators? Contact Cook and Company Chartered Professional Accountants. 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.

 

 

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Fraud Tips for Business Owners

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All businesses are susceptible to fraud, though small and mid-sized businesses are the most common victims. These companies are targeted as they often have few preventative policies in place. Though it’s impossible to be fully protected, there are proactive steps that you can take to minimize exposure to fraud risks.

 

Types of fraud: Fraud comes in many forms from both inside and outside a business.

  • Internal Fraud: Employee theft is a common source of fraud (lost inventory, unethical accounting, theft of financial assets, fake expenses, overinflated commissions).
  • External Fraud: Customer fraud (counterfeit bills, bad cheques, stolen credit cards, fraudulent requests for refunds/returns), third-party contractor fraud (overbilling, fee schemes, failure to deliver) and computer fraud (hacking, information theft, data mining) are the most common types of external fraud.

 

Ways to reduce fraud: There are many policies and practices that can help to reduce the possibility of fraud in your business.

    • Create a fraud policy that covers topics such as what actions constitute fraud, how to report suspected fraud, who is responsible for investigating fraud, and confidentiality. Clearly outline your expectations related to employee conduct and the consequences for violating these policies.
    • Provide education for all employees (security awareness, fraud policy understanding). Make sure they are aware of the need to create secure passwords, that they change passwords often and to keep passwords safe. Inform them of the importance of phishing awareness and remind staff about the dangers of clicking on unexpected links and attachments.
    • Limit file access: Give employees access to only those files that are necessary to do their job. Require more than one person to complete key tasks (approving payments, writing cheques, managing petty cash, processing client receivables, approving overtime claims, recording in the accounting system).
    • Protect bank accounts and credit cards: Create separate bank and credit card accounts for your personal life and business. Check security systems your bank uses for online banking to be sure automatic logout is available. Ensure that your credit card provider has suitable fraud protections in place, such as automatic alerts if an employee spends over a certain amount. Limit how and with whom you share confidential banking information.
    • Keep detailed and accurate records: Accurate, detailed record-keeping (accounting records, inventory controls) helps shield your business from fraudulent activities.
    • Go paperless: Going digital reduces access to information, enables fraud preventive accounting controls, permits authorization limitations and creates an easy to trace audit trail.
    • Fine-tune payroll procedures: Ensure that payroll processes require HR and your payroll company to confirm deposit accounts with employees. Pay using direct deposit or open a separate business account to minimize circulation of your company’s bank account information. Use regular audits to keep check for falsified hours, inflated commissions, and other irregularities.
    • Use secure payment methods: Switch to direct deposit or fund transfers. Encrypt payment transactions and partner with a secure payment processor. Consider a cheque imaging solution (scanning or picture taking) making it possible for you to deposit money automatically.
    • Audit high-risk areas often: A daily check of accounts and statements is a great way to protect against fraud or accounting errors. Routinely audit areas of your business that deal in cash, refunds, product returns, inventory management and accounting functions.
  • Establish a thorough hiring process: Check each new hire’s references and previous employers. Do a criminal check, especially for those employees who handle cash, manage payments and have access to bank account information. Use a reputable service that specializes in pre-employment screening.
  • Keep your point-of-sale secure: Make sure all your POS devices are digitally secure. Install passwords and change them regularly. Choose systems that come with end-to-end encryption. Don’t connect your POS to external networks. At the end of each day, account for every POS device and secure devices in a location that only select employees can access.
  • Know who you’re dealing with: Record basic information about the businesses/clients you deal with (address, name, two phone numbers, references). Check who the owners are and how long they have been in business. Search the company’s name online with the term “scam” or “complaint.” Before engaging with suppliers, ask for recommendations from other business owners in your community.
  • Invest in insurance to help with the recovery of some or all of your losses in the event of fraud. Consult with an insurance specialist for help evaluating possible risks and determining what kind of insurance will best suit your business.
  • Get expert advice: You don’t have to figure it all out by yourself! Talk to a small business advisor and/or a commercial banking consultant about products and services to help prevent fraud.
  • Enable whistleblowing: Create a system that enables employees to anonymously report tips essential to dealing with fraud.
  • Update all devices to the latest security software, web browsers, and operating systems. Use antivirus software, anti-malware and firewalls.
  • Create a mobile device action plan to encrypt data. Make sure each employee has a separate user account, so you can trace activity if there’s a problem.
  • Back up critical business data and store the information in the cloud.
  • Secure Wi-Fi networks with Service Set Identifier (SSID) and password protection.

 

It’s easy to put off fraud prevention until an issue arises. Be proactive! By taking a few simple steps to put a fraud prevention plan into action, you’ll protect your business, establish a culture of zero-tolerance for fraud and help mitigate unforeseen threats in the future.

 

 

References:

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Preparing a Business Plan

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In order to secure the money your business needs from a bank, you’ll have to prepare a business plan. It’s a factual description of your business and its projections. This document describes your plan for your company showing its structure, products, services, marketing strategy, budget and financial projections. It’s an informational document intended to showcase your company’s operations, goals and potential. Make sure it includes the following:

 

  • Executive summary: This section briefly summarizes the entire business plan. It describes the company, your product/service, the industry, your competitive advantage and the prevailing economic climate.
  • Description of the company: This segment of the document fully describes the history, current operations, strategy, mission statement, principals, strategic partners and corporate structure of your company.
  • Management team experience: This is your chance to showcase the skills, experience and qualifications of yourself (owner), any co-owners and each member of your management team. Include an organizational chart and salary forecasts. If you have a board of directors, list them along with relevant experience.
  • Key financial data: Report the fiscal strength of your company. Provide financial statements and forecasts for the next 2 to 3 years and include historical results for the past three to five years. This portion of the plan should include income statements, cash flow statements, capital expenditure budgets, balance sheets, profit and loss statements, sales forecasts and relevant financial metrics for your industry. Provide monthly, quarterly and yearly projections.
  • Market analysis: Provide a competitive analysis of your market identifying existing gaps that your business intends to fill. Include an industry overview, information on your target market, planned marketing strategies, your knowledge of relevant regulations and your past compliance with them.
  • Production plan: Describe your company’s product/service in detail. Itemize the product line with the current and planned pricing structure. Include the estimated life-cycle of the product/service and a description of any trademarks/patents/intellectual property rights you own.
  • Supporting documents: Append principal’s resumes, tax returns, real estate documents, processing flowchart, letters of intent from buyers of your product/service, marketing materials, training certificates, research supporting your forecasts, clients testimonials and media reports.

Tips:

  • Use simple language, avoiding technical terms and acronyms.
  • Your proposal should be clear, well-structured and easy to read.
  • Don’t hesitate to sell yourself!
  • Demonstrate that you have contingency plans.
  • Consider working with a professional to help you to lay out the document.

 

Preparing a clear, well-documented business plan is crucial for getting the money your business needs. Create a detailed, precise, informational document that presents your business in the best possible light. Demonstrate your willingness to make a success of your business. If you need help creating your plan, talk to your chartered accountant. They will have the knowledge, experience and skills to help you create a professional business plan.

 

Need help preparing a business plan? Contact Cook and Company Chartered Professional Accountants. 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.

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What Financial Statements Does my Business Need?

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Financial statements are a set of documents showing a company’s current financial status. They communicate what your business owns and what it owes at a fixed point in time and provide details about your assets, liabilities and equity. There are three statements that all businesses require for tax, financing and investing purposes.

 

Balance sheet:

The balance sheet is a snapshot of a company’s performance at a given time. It identifies the company’s assets (inventory, equipment, vehicles, furniture, property, cash), liabilities (short term debts, long term loans, accounts payable) and equity (what would be left if assets were sold and debts paid). The balance sheet is an indication of the health of a business and helps business owners make decisions regarding how much inventory to order, if assets should be sold and whether a cash infusion is called for. Lenders use a company’s balance sheet to evaluate collateral and risk.  

 

Income statement:

The income statement, also known as a profit and loss statement, summarizes a company’s revenue and expenses for a given period of time. This report shows the company’s bottom line. The income statement consists of four sections; revenues (net sales), cost of goods sold (inventory, freight, labour, indirect expenses), expenses (wages, advertising, depreciation, payroll taxes, office expenses, utilities) and other income (assets sold, interests on loans/investments). The income statement is the document you show to potential lenders/investors and is necessary during tax season. It indicates the profitability of a business’ current operations and guides management in how to expand or cut operations for greater profits.

 

Cash flow statement:

The cash flow statement reports the cash and cash equivalents that flow into and out of a company in a given time period. It measures how much cash a company has on hand. Your income statement shows your company’s bottom line while the cash flow statement shows how your business earns cash and where it goes. The information in this report is used to project how much revenue can be expected in the future, estimate upcoming expenses and make judgments re revenue gaps that may result in non-payment of business liabilities and debts. There are three activities documented in a cash flow statement; operations (accounts receivable, accounts payable, wages, merchandise expenses), investments (equipment and merchandise purchased, purchase of an asset, loans made to vendors, payments related to a merger or acquisition)  and financing (bank loans, shareholder monies, personal investments, dividend payments, loan repayments, sale of company stocks). This report informs management of how much cash is available to pay expenses and invest in the business. Large discrepancies between the cash flow statement and the income statement help identify problems in a business’s operations.

Financial statements are written records that convey a company’s activities and financial performance. The balance sheet provides an overview of assets, liabilities, and stockholders’ equity. The income statement focuses on a company’s revenues and expenses. The cash flow statement measures how a company generates cash to pay its debt obligations, fund its operating expenses, and fund investments. These three main financial statements are interrelated and help you make smart financial, investment and management decisions. All businesses should prepare these reports on a regular basis. Talk to your chartered accountant. They will have the knowledge, expertise and experience to provide you with the financial statements you require. 

Need help with your company’s financial statements? Contact Cook and Company Chartered Professional Accountants. 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.

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Why do I Need a Financial Statement for my Business?

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Financial statements are records that communicate the activities and the financial performance of a business. They generally include a balance sheet, an income statement and a cash flow statement. They indicate:

  • How much money is made
  • How much money is spent
  • What the company owns
  • What the company owes
  • The net value of the business
  • Where the money came from and where it went
  • The amount of money kept in the company

Companies generally hire an accountant to prepare their financial statements then use the reports as a management tool to affect positive change within their organization. There are several reasons why a business needs financial statements:

  • For performance measurement: Financial statements provide a gauge of performance that helps you review the success of your business and communicate your past, present, and future prospects to stakeholders. It allows you to assess management’s stewardship of the company, the viability of the business and is a starting point in forecasting future performance.
  • For loan applications/investors: Many lenders will not consider a loan application without up to date financial reports. The information in a financial statement forms the foundation of a bank’s decision whether to fund a venture or a company. A business can use financial statements to persuade an investor to buy into the company, or to attract a venture partner who can put money into a new project.
  • For the CRA: In order to file corporate tax returns, Canadian corporations are required to produce financial statements. To avoid penalties, a company needs to have financial statements prepared on a yearly basis.
  • For regulating cash flow: Financial statements help a business anticipate borrowing needs. Reviewing your statements can reveal trends your business can use in its cash flow strategies.
  • For decision making: Financial statements provide decision-makers within a company with the up-to-date information necessary to make effective choices. Financial reports are used to provide shareholders, partners and/or potential investors with key business metrics.

 

Start your business off with the correct financial statements and a maintenance plan for keeping them in order. These reports will assist you when measuring the value of your company,  applying for a loan, attracting investors and/or selling your business. They are a powerful diagnostic tool you can use to evaluate your firm’s strengths and weaknesses, helping you chart the way forward. Talk to your accountant about the statements that your business needs. They will have the knowledge, experience and expertise to help you with your financial statements.

Need help with your company’s financial statements? Contact Cook and Company Chartered Professional Accountants. 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.

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Should I Incorporate my Business?

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When you incorporate a business, you create a distinct legal entity separate from its owners and/or shareholders. This entity has the same rights as a person. It can own property, obtain loans, enter into contracts, sue, be sued and be found guilty of a crime. You can incorporate either federally or provincially. Which you choose depends on whether you intend to do business in more than one province. Though there are a multitude of advantages to small business incorporation, it is not the right path for every company. Carefully examine the pros and cons of incorporation before deciding.

 

PROS:

  • Limited liability: Incorporating provides a layer of security against personal liability. You’re not responsible for the corporation’s financial obligations, personal assets cannot be taken to pay business debts and you do not answer to company lawsuits.
  • Lower tax rate: Corporations are taxed separately from their owners/shareholders. This is an advantage as corporate tax rates are typically lower than the tax rates for individuals.
  • Tax deferral: Instead of taking a salary, you can choose to leave income in the business, taking it out when your personal tax rate is lower.
  • Continuous existence: Corporations continue to exist unless they wind-up, amalgamate, or give up their charter. An incorporated business continues to exist even if the ownership changes making the selling of the business easier.
  • Better Access to Financing: Corporations are often able to raise money and grow more easily because they can issue bonds/shares to investors and borrow money at lower rates.
  • Income Splitting: The owner of an incorporated company can hire their spouse and children, a significant tax advantage. The company deducts the amount it pays them as an expense, while family members pay tax at their personal income tax rate.
  • Business name protection: When you incorporate your business provincially, the business name you choose is reserved for you. If you incorporate federally, you have the right to use your business name throughout the country. Without incorporation, anyone can start a business with the same or a similar name.

CONS:

  • Costs of incorporation: The process of incorporation requires completion of legal paperwork and the associated costs. Ongoing costs include annual legal filing fees and professional accountant fees (filing an annual corporate tax return, notices of any changes and articles of amendment).
  • Multiple tax returns: Owners of corporations must file personal income tax returns and an additional tax return for the company.
  • Increased administrative requirements: The owner of an incorporated business needs to maintain a minute book containing corporate bylaws and minutes of corporate meetings. They must also maintain up to date records of business activities.
  • More complexity: An incorporated business has individuals who act on its behalf (shareholders, owners, directors, CEO, CFO, president, etc.). The company requires a paper trail of activities of these individuals to ensure all by-laws are followed.
  • Reduced tax flexibility: When revenues are high, there are many tax advantages to being incorporated. When a company experiences losses, incorporation can be a disadvantage. Losses can only be carried forward or back to reduce the company’s income from other years, not in the year the losses are incurred.

When it comes to small business incorporation in Canada, it’s wise to consider every angle before making your decision. Talk to your accountants. They will provide you with advice and information to help you decide whether incorporation will be a benefit for your company.

Considering incorporation? Contact Cook and Company. 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.

 

 

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