Tax Tips



Many business fail because of the owner's emphasis on the top line rather than the bottom line. Costs rage out of control in the quest for the sale, and too often the yearend comes, sales are great, but there is no money in the bank!! They have literally "sold themselves out of business". This is where having a good set of financial records is essential, and having a good advisor will help to keep things in perspective. The work of a good accountant will help you to run your business, not just report on it at the yearend.


Think of the small business owner who decided that she just didn't like dealing with both a corporate bank account and her personal account, so, without the advice of a professional accountant, she just operated out of her personal account. And it looked like a great move until the cra assessed all revenue as personal, leaving her to pay tax on everything personally, rather than at the low corporate rate. Then add on the interest and penalties for late and incorrect filing, and you realize a trip to a professional accountant may have been a good idea.


Too often small business owners seem to forget about the administrative side of running a business, and before they know it they have no business to run. A client of mine was told his job was disappearing but if he incorporated he could be hired back at a better rate. Without seeking advice he went down to the local registry, paid his $200 and had himself a corporation –real cheap. But without any knowledge of the reporting requirements of an alberta corporation he went 4 years without filing a corporate tax return. By the time he came to me, and we got him caught up, penalties and interest alone were killing him. By using the voluntary disclosure provisions of the act, we at least saved him the penalties – but what was the overall cost of acting for himself?


As in the previous example, not filing on time can cost a client dearly. Whether due to not knowing the rules or just not getting it done, late filing is expensive. Corporations are required to file their t2 tax returns within 6 months of the yearend. However, the balance due is to be paid within 3 months. Proprietors have until june 15 to file, but the amount owing is due by april 30th, the same as all other personal filers. Instalment interest and arrears interest also add to the overall tax burden. Keep in mind that government interest compounds daily and is non-deductible, so this makes it expensive financing indeed.


One side of this issue is the client who paid a lawyer over $1,500 to incorporate a company, before he saw that the venture really had no hope of making income. Had he come to me before hand we could have done the analysis on the proposal and determined this before he entered the agreement. Even if he had wanted to go ahead with the venture, we could have made him aware of the option to do it without incorporating – something he spent the money on because he was not aware of the option of a proprietorship. By the time we talked, the best strategy available was to just dissolve the company – with costs for a yearend, tax return and dissolution. Again, more money in is pockets if he had come to me first – and without having wasted a whole lot of time and effort.
The flip side is the business which, for liability or financial reasons, should be incorporated. Sometimes the inherent risk of the business drives the need to incorporate, to separate the liability of the business from that of the individual. In many circumstances a proprietor would be better off financially to incorporate and take advantage of the tax planning opportunities available to him – low corporate tax rates, tax deferral and dividend sprinkling.
Another point to consider here is incorporation in the right jurisdiction. For most businesses an alberta corporation is all they need. Federal incorporation can however have an advantage in terms of name protection across canada, if you eventually want to expand to a national market.


Regardless of the legal form a business takes, making and keeping money is all about timing – knowing when to reinvest or not, when to get in and when to get out. You've got a great idea, but sometimes the timing isn't right or its time has come and gone. Sometimes the business owner is just too close to the business to make the right decisions. And sometimes its just time to retire. A good advisor will help you to recognize the proper timing.
Nobody knows your business better than you...but you may not have the most objective point of view.


I'll start by saying that i am a big proponent of doing some bookkeeping for yourself – 1) to get a better feel for the finances of your business and 2) to get a healthy respect for what a good bookkeeper is worth to your business. Having said that, think of the small business owner who decides to do his own bookkeeping because he knows it takes say 20 hours a month to do his bookkeeping. He just can't see how he can afford to pay us $40/hr or $800 per month. When he finally gets frustrated enough, he brings his books to us and finds out that our professional bookkeepers do the same work in say, 5 hrs per month, or $200. When we point out that he can free up 20 hrs a month for $200, and get it done right!! - it's a pretty easy decision to hand that work to us and use the extra time to put in his own billable time @ $50 or $100 per hour – or better yet, take his wife and kids out for a couple evenings.


You can go almost anywhere and get cheap bookkeeping, but in the long run does that really save you money? Consider:

· The client whose corporation received a big tax refund. The bookkeeper, not by mistake, but as a matter of bookkeeping policy, put it to "miscellaneous income" – and ended up paying tax on his tax. The client didn't even know this had happened until I discovered the issue and dealt with the government on correcting the situation. His initial fee was low, but he also had to pay me and lose interest on his money while the CRA held it.
- Or the bookkeeper whose practice when recording meals and entertainment costs was to charge ½ to expense and the other ½ against the shareholder's loan. This policy was developed because of the 50% deductibility of meals & entertainment for tax purposes. On the surface it looks ok to most. However, it means that the shareholder's loan is being eroded and he will eventually have to take more money out of the company as dividends or salary, rather than a tax-free withdrawal from the s/h loan. The simple, and correct, solution that we introduced was to charge the whole amount to expense for accounting purposes and just add back 50% on sched 1 of the corp tax return. Perfectly acceptable!!


The 3 most common designations in Canada are CA, CGA and CMA. In each case, a combination of schooling and practical experience is required to obtain the designation. For CA's and CMA's a university degree is required in order to enter the program. I believe at this time there is no such requirement in the CGA program. The CA's and CGA's are trained with a focus on external reporting – looking at a client from the outside. Because this is their focus, they tend to make up the largest part of the public accounting industry. Training for cma's places a larger emphasis on management reporting – looking at the operations of businesses and providing their expertise from inside the company. Interestingly enough, it is because of this focus, combined with extensive training in financial accounting and tax, that I believe my CMA designation and experience puts me in a great position to benefit the small business owner.
To make the waters even murkier, consider that there are no regulations as to who can hang out a shingle and call themselves accountants in Canada. There are other accounting designations and, maybe worse, there are plenty of others with no designation at all, calling themselves accountants. So its buyer beware out there!


Just as important as finding an accountant with the right education and experience for you is finding an advisor that you feel comfortable working with. Regardless of designation, the letters behind someone's name mean nothing if you can't, or don't want to work with that person. Do they have experience in working with small business owners, dealing with them at the level they want to deal? (small firm personal vs big firm resources – is your advisor willing to seek other help in providing the best solution for you?) – (avoid the fapi situation – explain)
More importantly, i believe, is the question "can and will they do this within the levels of your risk tolerance?" With all the judgment calls in applying accounting and tax rules, are you comfortable with the strategies they lay out for you. Because, remember, you are the one signing your tax returns and if an error is made - CRA holds you responsponsible - not the person/business who filed your return!
In the end, what you really want to know "is this person adding value to my business". Can they provide me with the knowledge and services I need? Is the legal form of my business the correct one (sole-proprietor vs incorporation). Does he/she have the knowledge to help me write off everything i am entitled to? An office in the home? Tax free vehicle allowances? Can I split income between myself and my spouse and my children – legally? Do I leave money in the company or take it out? (same pair of pants – different pockets)

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