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Understanding Cash Flow

Understanding Cash Flow

Running a business is hard work, and much of the time you are so focused on making ends meet, and starting to grow your business from the floor upwards, that it can take a huge up most of your time. It’s no wonder in this case that most small business owners feel quite cut off from those around them.

The thing is, if you understand what cash flow is and how to manage it, you can not only take back some of your time, but you can allow your business to grow and flourish without as much effort too.  

Of course, business success requires a little luck, but planning and understanding how everything works is a huge part of the story too. Managing your cash flow is one of those things you need to understand.

What Exactly is Cash Flow? 

Cash flow is the cash which moves into your business every month, and the money which flows out of it too. You will receive cash from sales and services, e.g. from your clients and customers, and then you will need to pay out too, for rent, supplies, salaries, tax, etc. You are in a good situation, called positive cash flow, when you have more money flowing into the business than flowing out.

Of course, on the other hand you have a negative cash flow if you have more money flowing out of your business than into it. During times when you are positive, it’s a good idea to put a little money aside, to cover you when negative times occur, which they will on occasion.

The breakeven point is when a business has the same amount of money coming in, as going out. It’s vital that you know your breakeven point, because it tells you the amount of sales or revenue you need to make in order to cover your expenses. This is the aim for survival, and anything over is a profit.

The Importance of Effective Bookkeeping

 Understand cash flow is about keeping records and ensuring that you know your breakeven point. Not only is effective and accurate bookkeeping vital for your tax and accounts, but it also keeps you ahead of the game, so you know where you are with your finances, and you can flag up any potential issues ahead of time. Being prepared is vital.

There are many ways to keep records, either the manual way, or online. An accountant will do it all for you, but this is going to cost you extra money, and that’s possibly cash you can’t afford at the very start of setting up your business. As your business grows, accountancy services are something you should invest in.  

Online bookkeeping methods and software packages will allow you to keep the accurate and appropriate records you need, while also storing the hard copies of documents which are vital or your taxes too.

By being aware of your cash flow and by keeping accurate records, you can ensure your business’ success, and growth in the future.

Click on the link below to book a meeting.
https://calendly.com/capexcpa/phone-call-with-jag

- Written by: Jag Bath

 

Why your business needs an online Accountant?

Why your business needs an online Accountant?

Whether you run a small business or own a large corporation in Canada, managing business matters on your own is quite a hassle. You have meetings to attend, deadlines to meet, projects to complete, and various other operational duties.

There is no doubt that business owners have many responsibilities to take care of and running a business may sometimes become hectic for you, particularly when it’s about financial operations. Although you may certainly have a bookkeeper or accountant to oversee your books, you probably can’t access your financial records anytime anywhere. 

While the internet has transformed the ways industries do their businesses, technology has also brought abrupt changes within the business sector. With the advent of internet, accountants have begun to utilize different software to maintain their company’s business records.

However, most business people in Canada review their financial records either after 6 months or even after the fiscal year end. They generally just handover the necessary files to their accountant who uses the information for tax filing purposes. This is how most businesses in Canada carry out financial affairs.

It doesn’t have to be this way; reviewing your accounting books often and evaluating the data to design strategies can take your business to remarkable heights. Several cloud-based accounting solutions not only enhance efficiency of your business but also let you access all your business data anywhere at any time.

Increase your Business Efficiency

Unlike typical accounting software, cloud-based accounting software can save your company a lot of money and time. That means you no longer have to go all the way long to your server or computer’s desktop to review your financial records.

An online accountant or cloud-based accounting software can let you maintain your data back-ups, bookkeeping records, and other essential financial data.

Most importantly, having remote access to your financial record 24/7 through the cloud ensures the ability to make well-informed decisions at the right time. However, with typical accounting software, you barely get the chance to evaluate your business data and make decisions based on it.

In addition, you will have access to real-time information with an online accountant; you can make invoices, prepare periodical financial reports, and do much more. Along with increased efficiency and enhanced collaboration, online accountants with software, like Quickbooks Online, Wave Apps, Freshbooks, and Xero, can help make your business stand out in the small business world.

Enhanced Engagement with Online Accountant

When your accountant is the one who manages all financial books and you just view records once or twice a year, you may hardly pay attention to taxes and other financial figures. Since accounting is an imperative part of business, you really have to stay up-to-date about the current financial matters of your company.  Of course, there are myriads of things linked to your financial books.

For instance, if you keep checking your accounting book records with an online accountant, you’re likely to know whether your revenues are monthly basis or your business earns profits periodically. Similarly, you’ll get to know your gross margins and can set your goals accordingly. Furthermore, you can keep an eye on your expenses and your ROI. In addition, you’ll know that how much finance you’re investing for business promotion and whether you’re receiving desired results.

It’s important to mention here that businesses are dynamic; you probably have navigated through vicissitudes in your business journey. So, remember that an online accountant coupled with cloud-based accounting system can assist you effectively.

Geographical Barriers

These days, many business men prefer to have meetings virtually; with an online accountant and cloud-based accounting software you can share the details of your financial records with your delegates or partnering companies. This not only enhances collaboration with your team, but also provides you with ultimate solutions.

Furthermore, you can let an online accountant use your financial information through cloud system so that they can provide you with effective strategies.

Final Thoughts   

Like other businesses, you might have been struggling to achieve your goals and objectives promptly and effectively. However, make sure to integrate a cloud-based accountant into your business to help it grow and stand out in the corporate world.

Click on the link below to book a meeting.
https://calendly.com/capexcpa/phone-call-with-jag

- Written by: Jag Bath

Accounting for Amazon, Ebay, Etsy, Shopify, and Other E-commerce Businesses

Accounting for Amazon, Ebay, Etsy, Shopify, and Other E-commerce Businesses

Accounting Solutions For E-Commerce Businesses

If you run an Amazon Store, a Shopify business, or any other type of e-commerce investment, you will need to keep records and store them in a very organized manner. Accounting for an e-commerce business is no different to accounting for a brick and mortar business, but there are several more choices you can look into.

When it comes to the financial side of a business, there are often several common questions that an e-commerce business has. These include the following: 

•   Should you think about incorporating?
•   Should you charge sales tax?
•   Should you charge provincial sales tax?
•   Should you register for sales tax in the US?

Let’s explore these in turn.

Should You Think About Incorporating?

If you have worries about liability then incorporating is a good option. The reason is because it gives you more protection over your assets (personal) from creditors. In addition, if you’re making good profits, you should also consider incorporating, from a tax point of view. 

If you are going to incorporate, you might not have a clue where you should start. E-commerce businesses are truly global, after all. Put simply, you should incorporate in Canada if you do most of your business from there, i.e. that is your location physically.

Should You Charge Sales Tax? 

This depends on the products you’re selling online, and how much money you’re earning. The golden figure is $30,000 per year, and in that case, yes you will need to register and charge sales tax. You could still decide to do so, if you earn less.

When setting up your platform (Amazon, Shopify, etc), you should ensure that your setup allows you to collect this tax from multiple areas.

Should You Charge Provincial Sales Tax?

This depends on the province you’re in. You should check ahead of time to find out the specific areas which demand this, and which don’t.

Should You Register For Sales Tax in The US?

This is a complicated area, and a personal decision unless you decide to incorporate in the US. If you have an office in the USA, whether you are personally there or not, you’ll need to register. If you don’t, then you need to think about the advantages and disadvantages of whether to register or not. 

E-commerce businesses fall into that grey area much of the time, and the US sales tax side of things, when not physically in the US is one of those areas. If you have a lot of customers from the US, this is something you might want to consider registering for.

Overall, ensuring that you cover the absolute basics when it comes to tax and accounting for your e-commerce business is vital. Just because you don’t have a static office and employees, doesn’t mean that you are exempt from the complicated nature of tax requirements, and it actually means you’re more likely to miss something important, if you don’t do your research.

We hope this post helps you cover all bases and helps you pick a platform which allows you to charge taxes whenever necessary.

Click on the link below to book a meeting.
https://calendly.com/capexcpa/phone-call-with-jag

- Written by: Jag Bath

What is Working Capital?

What is Working Capital?

What is working Capital?

Capital is another word for money. All businesses in order to purchase assets and maintain their operations or to produce goods and services must have capital. In the most basic terms, ‘Capital’ is the money invested in a business to generate income. Instead of simply spending it like cash, capital is a more durable concept and it is used to generate wealth through investment. The term ‘Working Capital’ is a part of total capital used (or more technically capital employed) in the business, but it comprises of short term assets and short term liabilities only. ‘Working Capital’ is often defined as the difference between short-term assets and short-term liabilities. In simple words, working capital denotes a ready amount of fund available for carrying out the day-to-day activities of a business enterprise. Capital is the means of investments of an enterprise with long term consequences, whereas working capital is that part of capital used for short term financing like routine operations or for a term not exceeding one accounting period.

Importance of Working Capital in Your Business

Without working capital, you wouldn’t be able to stay in business. A business uses working capital in its daily operations. Any business should have adequate funds to continue its operations and it should have sufficient funds to satisfy both maturing short-term liabilities and upcoming operational expenses. Working capital is a common measure of a company's liquidity, efficiency, and overall health. It is actually a yardstick that measures whether or not the company has enough assets to turn into cash to pay upcoming expenses or debts. Because it includes cash, inventory, accounts receivable, accounts payable, the portion of debt due within one year, and other short-term accounts. A company's working capital reflects the results of a host of company activities, including inventory management, debt management, revenue collection, and payments to suppliers.

How Working Capital is Calculated

Thus, ‘working capital’ is the difference amount between short-term assets and short-term liabilities. To understand this clearly we must have an idea on what are the ‘short term assets’ and ‘short term liabilities. Assets are a company's resources— a useful or valuable things that the company or person owns and which give some economic benefit to a business. Examples of assets (both long term and short term) include cash, accounts receivable, inventory, prepaid insurance, investments, land, buildings, plant and equipment, and goodwill, etc.

Current assets are short term assets only either in the form of cash or a cash equivalent which can be liquidated immediately or within an accounting period. Examples of current assets are cash in hand and bank, debtors, bills receivable, short-term investments, etc.

Liabilities (both long term and short term) are the obligations or what a business owes to the outsiders. It results from purchasing of goods on credit, bank loan, payable accounts like salary payable, taxes due, etc. Current liabilities are short-term liabilities only of a business which are expected to be settled within 12 months or within an accounting period or a normal operating cycle. Examples of current liabilities are bank overdraft, creditors, bills payable, short term loan, etc.

Working capital is calculated by subtracting current liabilities from current assets. Working capital is the easiest of all the balance sheet calculations to calculate. Here's the formula you'll need:

Working capital = Current assets - Current liabilities

It's that simple. If current assets are greater than current liabilities, the company has a positive working capital, meaning it has extra cash on hand to fund growth projects. It also means the company has a nice safety net in place.

Say, from a company's balance sheet we find that a company has $1000 in the bank, $500 as cash in hand, $5000 as inventory and & $500 receivable from customers. Then its total of current asset is $7000. Now similarly, its balance sheet shows that the company owes $2000 to its suppliers, and it has short term loan amounting $1500. So the total current liability of the company is $3500. Therefore, the Working Capital of the company is $ (7000-- 3500) or $3500.

Why Working Capital Management Matters

If we divide the current assets of a company by its current liabilities, we get a figure which is called ‘Current Ratio’ (or working capital ratio). This ratio attempts to measure the ability of a firm to meet its current obligations. It can be used to make a rough estimate of a company’s financial health. Normally, a ratio much higher than 2 (i.e., current assets double the current liabilities) is a sign that you’re not properly using your funds – either you are carrying too much inventory or not capitalizing on extra cash by investing in growing your business. On the other hand, a Current Ratio below 1 suggests that the company may not be able to meet its obligations in the short run. Each business or industry might have its own ideal current ratio depending upon its practice. Acceptable current ratios vary from industry to industry and are generally considered between 1.5 and 3 for healthy businesses.

Hope this Blog post will help you to understand the importance of working capital and guide you to manage it effectively in your business. However, if you are overburdened with other responsibilities, or need some real professional assistance, we can help demystify and help navigate constant change.

We help our clients looking to get working capital loans to help finance their future growth. Have a question on your growth needs? let’s have a quick chat!

Click on the link below to book a meeting.
https://calendly.com/capexcpa/phone-call-with-jag


Written by: Jag Bath

Best way to buy an investment property?

Best way to buy an investment property?

Best way to buy a investment property?

After spending many sleepless nights and countless hours into a business the small business entrepreneur would ideally have extra cash saved in the corporation. This cash sitting in the corporate bank account is usually better optimized by investing than keeping in the bank. While meeting your financial advisor the business owner might invest in securities such as bonds, mutual funds and other securities. Others might opt to invest in buying real estate. This blog is for those individuals looking to buy a investment property in the most tax efficient way. Real estate deals add many layers of complexity as different decisions result in adverse tax and legal situations.

Personally Purchasing investment property:
If you purchase a investment property personally that means your name goes on the land deed. You will have to keep track of all the profit and loss that results from this rental property and report it on schedule 776 on your personal T1 tax return. This rental income gets included to calculate your ‘taxable income’ and the respective taxes will need to be submitted to the CRA. Please note that the initial funds used to purchase the investment property are funds that have been already taxed on the personal level.

Corporation purchasing investment property :
If you purchase the property through your corporation it’s the company’s name that goes on the land deed. Any rental income is added to the corporation tax return and the respective taxes are reported on the T2 tax return. Please note rental income is considered passive income and does not qualify for the CCPC small business deduction hence this is taxed at a higher rate than the 14% corporate tax rate for active income.

Bank Mortgages:
Purchasing a property under your personal name generally allows for more mortgage options in the market. Assuming you have a good credit score and have the necessary down payment and the required salary to meet the stress test you can walk on in any of the A list banks and walk out with a mortgage note payable.

A corporation that has not met the 2 years in business will have a tough time getting a mortgage. This is because the banks view the recently incorporated business to be risky and the banks usually avoid lending to corporations for investment properties.

Tax Decisions:
The tax decision really comes down to pre tax dollars vs after tax dollars. Generally keeping the money in the corporation is a better strategy than to take the money out to invest. If your holding or operating company has loads of cash and let’s assume the company earns $500k net profit a year and pays the corporate tax rate of 14% [2018 rates] this would leave after corporate tax income in total cash of $430k. Since this money is left in the corporation and not paid out to shareholders this money is considered to be pre-tax money.

If you want to purchase the property personally you would have to take the $430k out by way of salary and dividend and the personal tax bill can go as high as 54% so your tax bill would be $232k in this case. The total personal taxes are so high that it would make a lot of sense to use the corporation to invest pre-tax dollars ($430k) rather than the after tax dollars personally of $232k.

Personal residence exemption:
Generally, when buying your own home it makes sense to buy it personally. This is because of the Personal residence exemption which states that the gain on any profit from the sale of the real estate property is free of any capital gains tax. This tax exemption is in place to allow Canadians to utilize their mobility rights.

If you buy a property for the purposes of renting it out and the property has not been declared as a primary residence than that property will be subject to the capital gains tax on the sale of the property. Although such a rental property will be taxed for capital gains the tax doesn’t kick in until the property is sold.

Corporations in Canada do not get the primary principal residence exemption so if you are planning on buying a second property perhaps a cottage? It might be better to buy it personally.

Legal
A discussion with your lawyer before buying any real estate property is very important. Apart from the tax decisions there are some legal decisions that also need to be made. If a tenant sues they are suing the extra funds in the corporation as well. If a corporation buys a rental property and adds shareholders or plans to add shareholders than the initial rental property is also being sold part of that deal. You are essentially selling a portion of the rental property to the new shareholders.

If you are planning on buying the property personally than you can lower your liability by moving the deed name to your spouse with a hopefully lower liability than you. This will help to mitigate any potential law suits.

What’s my best option?
As you can gauge from the above there isn’t a cookie cut solution. The tax/legal solution depends on your income, corporate structure and future vision. Please reach out to your lawyer/accountant to consult on the best investment solution for you.

Let’s setup a quick call if you have questions: Click on the link below to book a meeting.
https://calendly.com/capexcpa/phone-call-with-jag

-Written by Jag Bath

 

How do I take out $800,000+ from the sale of a business tax free?

How do I take out $800,000+ from the sale of a business tax free?

The question on tax free income is always a recurring question we get in everyday practice. This is one of the most exciting Tax techniques used to provide a shareholder of a corporation access to Personal tax free money. The key here is personal tax savings! So let’s get into this.

Let’s say that John Smith has ran his small business with average revenues of $480,000 a year and he pays himself $100,000 a year. He’s now thinking of exiting the business to retire and enjoy other things in his life. There’s a buyer named Andrew in the market who is willing to pay $1,000,000 for John’s corporation. If John sells the shares of his small corporation to Andrew he will have been deemed to have a Capital Gain on the sale of his shares. Assuming John built the company from scratch and the adjusted cost base was $0 the total gain would be the $1,000,000.

Capital gain is basically the government’s way of taxing income which comes from the sale of assets or shares. In this case John has sold his shares and he will be taxed under the Capital gain tax. The great thing about the Capital gain tax is that it’s 50% tax free so that means that of the $1,000,000 only $500,000 of that cash will be taxable for the capital gain tax and let’s assume that $200,000 will be the capital gain tax amount. Once this tax has been paid by the corporation the rest of the money sitting in the corporation would be $800,000.

Maneuvering the left over money in the corporation to John is a tricky task. One of the best ways to take the money out tax free would be to use the Capital Dividend Account or referred to as the CDA account. This account allows a shareholder to not be double taxed when the funds are transferred to the shareholder personally.

Your accountant will calculate the CDA account for you which is a quite involved exercise. Next this calculation will be confirmed by the CRA for the CDA account. This part particularly takes a long time as the CRA are very slow at confirming balances which is usually 6-8 months time. Once the CRA confirms the total CDA balance, your Accountant would file a form referred to as the T2054 declaring the dividend being paid to be a capital dividend. This step is critical to get right as the penalties are punitive.

Penalties for getting the above wrong is highly punitive in nature. If you over reach on the CDA the CRA will assess 60% of the excessive amount declared to be the penalty. So if you miscalculated by $100,000 than the total penalty will be $60,000. As you can imagine trying this at home is not recommended and you should always reach out to your Trusted Tax advisor to discuss this strategy.

The exciting piece of this entire strategy is that John gets to take the $800,000 of money tax free to his personal bank account by only having to pay the $200,000 in corporate taxes he completely bypasses the personal tax. Now, John can invest his $800,000 in different securities that give him a return of 8 to 10% resulting in a net taxable income of $80,000 to $100,000 which matches the initial money he was taking out of the business in the first place minus all the work involved. 

Remember the goal isn’t how much money you make in your business it’s how much you keep from the tax man. Legally of course!

Click on the link below to book a meeting.
https://calendly.com/capexcpa/phone-call-with-jag

- Written by: Jag Bath

How does the taxes work with Stocks?

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How does the taxes work with Stocks?

Most boot-strapped companies with limited cash funding offer stock options in place of higher salaries. This strategy works out quite well where the company is encouraging the employees to stay long term with the organization with no up front cash outflow. It’s important to understand the complex tax consequences. Unlike, Employment income which is source deducted Stock options are not actually taxed when they are handed out to employees.

In order to explain this let’s consider a small CCPC company Snowman Inc. that just hired their new employee Santa in Jan 2013. The option’s offered to Santa was  to purchase 100 shares at $1 per share in four years. On Santa’s T1 personal tax return for 2013 he would not report the stock options as they have not been exercised yet so it will be a regular tax filing with employment income and any other tax slips. The reason for this is because Santa was offered a Option not a Stock of the company. 

So Santa has been with Snowman Inc. for the four years now and the vesting period is up. This means Santa can exercise his options. Snowman Inc. has been producing great income returns over the past couple of years and as such have been able to secure investments where the valuation of the shares were deemed to be $10/per share. Remember, Santa had the options to exercise at $1 regardless of the price in 4 years when he bought it back in 2013. Now in 2017, Santa can turn around and buy the shares for $1 per share for a total of $100 cash which would generate a benefit of $900. In 2018 the founders announce that GrassCutters Inc. have acquired Snowman Inc. and Santa can cash out on his shares. During the take over preceding the payment per share is deemed to be $100 per share and Santa cashes out on this offer. 

There will be a total of two types of taxes reported. 

Taxable Benefit: 
In the T1 tax return for 2017 Santa exercised his options for the $1 per share which was valued at the time for $10 per share. The difference between the exercise price and the market price is called a taxable benefit. This is because people outside the company do not have access to the same benefits. Snowman Inc will include this part of his T4 and add it as a taxable benefit of $900. Assuming he is in a tax bracket of 30%, Santa will end up paying $300 in tax for the use of his options on the shares for 2017. 

Capital Gains: 
As the company was sold for $100/per share and Santa’s stock options were worth $10/share the difference will result in a capital gain. This is calculated by taking the shares valuation price ($10) minus the exit sales price ($100). The great thing is that Capital Gains are taxed at 50% of the gain so that means 50% of the gain would be exempt from the capital gain tax. Unlike employment income which is taxed at 100%, capital gains are restricted to 50%. This would mean that Santa will end up paying taxes on $100*100 shares = $10,000 *50% restriction = $5000 minus the Adjusted cost base of $100) = $4900. Santa will pay additional taxes on the additional income of $4900 on his next personal tax return with a rate of 30% that would be $1,470. 

Consultation:
There are many complexities with stock options and how to execute on these for your employees. It is advisable that you meet with a Tax advisor to ensure you are tax compliant but also to build the right compensation plan for key executive members. Please remember that the rules for CCPC are different than public companies. Timing is critical when you are planning the sale of stocks and your investment advisor can definitely help with this! 

Click on the link below to book a meeting.
https://calendly.com/capexcpa/phone-call-with-jag

- Written by: Jag Bath

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Top changes from the 2018 budget for Corporations

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Top changes from the 2018 budget for Corporations

It’s been a wild year in the tax world. Another year brings another Tax budget from the government. The 2018 Federal budget was announced on Tuesday Feb 27th and much expected relief to most small business owners. Some of the tax changes that were proposed from July 2017 were not present in the current 2018 budget. This was great news but only after the country wide uproar on the changes. 

Here’s a list of some notable changes in the budget that will be impacting some of our clients: 

Passive Income
What is passive income? it’s basically not active income which means it’s not transactional income. Passive income best described would be something like mutual funds or shares held by the corporation. The change that comes to Canadian Controlled Private Corporations (CCPC) is how the passive income will be taxed. Companies currently earning or projected to earn more than $50,000 of investment income will be affected adversely. It is recommended to speak to your tax advisor/accountant on this. 

A typical CCPC corporation earning active business income is taxed at corporate tax rates which are lower than personal income tax rates. The tax savings generated by leaving the money in the corporation allows the small business owners to invest more after tax dollars into their respective corporations. Any income earned on Passive income is taxed at a higher rate than the corporate rate to make the tax payable similar to those who invest personally. When the corporation pays out a taxable dividend to a shareholder a portion of that “extra” investment tax is refundable in the corporation’s RDTOH - refundable dividend on hand account. Think of this account as a claw back account for the taxes paid. 

Now that we have gone through some of the history the major change is to the small business deduction which is a preferential tax rate charged on the first $500,000 of taxable income. As a go forward a corporation can earn up to $50,000 of passive income without affecting this small business deduction. For every $1 on top of the $50,000 of passive income the small business limit will be reduced by $5. This means if a corporation earned $51,000 in passive income this would reduce the corporation’s small business limit from $500,000 to $495,000. Once the corporation reaches $150,000 in passive income there will be no small business deduction available.

RDTOH - Refundable Dividend Tax On Hand Account
Currently, a dividend refund is available to corporations at roughly 38% of taxable dividends paid to the extent that there is an available balance of RDTOH at the corporation’s year-end. The RDTOH balances are typically increased where a corporation earns passive investment income. Prior to this Budget, a corporation would receive a refund by declaring an eligible dividend which carries better personal tax treatment than ineligible dividends. 

The budget proposes to introduce measures that will generally allow the CCPC to recover the RDTOH only on the payment of the non-eligible dividends before it can obtain a dividend refund from its eligible RDTOH. There is a exception arising on the payment of Part IX of the tax on eligible portfolio dividends. Such RDTOH will be recoverable on the payment of the eligible dividends. 

TOSI - Tax on Split Income (Income Sprinkling changes) 
Prior to the changes TOSI only applied to minors which was taxing certain types of income at the highest marginal tax rates including taxable ineligible dividends. The new rules stipulate that they will apply to any Canadian resident regardless of age. Fun times I know. Many types of income can be targeted by this new change including taxable dividends, interest on debt obligations. This means that taxable ‘dividends’ paid to a spouse will now be taxed at the highest marginal tax rate unless one of the following exclusions apply.

  • TOSI will not apply for payments made to a spouse who is actively involved in the business. This means for the purposes of taxes the individual engaged in the corporation must be on a regular, continuous and substantial basis. This means the TOSI rules will not affect true family owned businesses where everyone is involved. However, the key word here is “regular, continuous and substantial basis”. This interpretation is based on judgement and it is advisable to see your Tax Advisor to discuss on this exclusion further.

    1. TOSI rules will not affect “excluded shares”. To meet this the following conditions must be met

      1. All or substantially all of the corporation’s income cannot be derived from a related business in respect to the individual.

      2. The corporation cannot be a professional corporation. Also a requirement to be a professional corporation.

      3. The corporation must earn less than 90% of its income from services. This one was to discourage Doctors, Lawyers, Accountants and other professionals from splitting between spouse/professional partner.

      4. The individual must own at least 10% of votes and value of the corporation.

Fortunately, TOSI will not impact the arms length sale of QSBC shares that qualify for the lifetime capital gains exemption. 

There have been many other changes that the Budget brings but the above 3 affect majority of our clients who are small business owners. If you feel that some of these rules are not clear we can definitely help. Please reach out and book in a meeting with us to discuss any detailed questions you might have! 

Click on the link below to book a meeting.
https://calendly.com/capexcpa/phone-call-with-jag

- Written by: Jag Bath

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5 Tax deductions for the small business owner

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5 Tax deductions for the small business owner

As a Canadian small business, the focus is so heavily on sales that many business owners don't take advantage of the many write offs that are available to small business owners. Writing off applicable business expenses under your business income can reduce the taxable income which reduces your taxes payable. 

Pro tip - always keep your receipts #Hubdoc and your logbook #mileIQ these are necessities. These solutions are more proactive than reactive in case of a audit. 

1. Vehicle expenses:
Many small business owners always inquire on leasing a car or financing a vehicle for business. Each decision carries it’s own decisioning and will require a consultation. 

  • Calculate your total km’s from the total km log and multiple the first 5000km by $0.55 = $2750 + each additional km add in $0.48. So if you drove a total of 10000KM for the business your total deduction would be $5150 + HST = $5819.50 (Which becomes tax free car allowance).

  • Lease the vehicle which is capped at $800 a month but the total km’s you drive for personal will result in a standby charge which is included as a taxable benefit on your personal income.

2. Meals & Entertainment: 
Taking your clients out for working meetings is a acceptable expense. Please remember that all entertainment related expenses are 50% tax deductible which includes expenses related to sporting events, restaurants, gratuities, entrance fees, rentals etc. 

There are a total of 6 meals and entertainment expenses reserved for when all staff events/parties which is 100% deductible. So that Christmas party you are planning it’s on the house! 

3. Furniture & Equipment: 
If your a small business owner who just opened a business and you brought your own laptop and or other necessary equipment. You can sell your equipment/furniture to your corporation at fair market value and take back a due to shareholder note. This movement of assets into your corporation creates the ownership to be held in your corporation however you always hold possession to the furniture & equipment. 

Additionally you get to take depreciation write off for year’s to come against future income.

4. Operating expenses: 
Expenses attributed to create a smooth sail for your business can be written off. This includes your office rent, office supplies, accounting fees, legal fees, computer software etc. You can deduct the cost of these used directly for the business which helped to earn income.

5. Business Insurance premiums: 
Often in business school they teach that the cost of doing nothing is often higher than doing something. That being said you can write off your entire business insurance expense as a eligible expense for your business. Some of the insurances that you should consider are 

  • General Business liability insurance - basically to protect you from potential lawsuits

  • Business property insurance - in case of destruction or theft of your equipment.

  • Business Interruption insurance - to cover business losses in relation to natural disasters and fire.

As always we offer free 30 mins consultations for other in depth questions you might have. Feel free to book us in for a quick call and setup. 

Click on the link below to book a meeting.
https://calendly.com/capexcpa/phone-call-with-jag

- Written by: Jag Bath

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Top 10 Federal Budget 2017 changes

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Top 10 Federal Budget 2017 changes

On Wednesday March 22nd 2017, our Canadian finance minister Bill Morneau introduced the 2017 budget. Out of the many changes a few were spared including the personal tax rates, corporate tax rates and capital gains rates.

  1. Innovation Credits the Canadian government would like to provide new financing support in the realm of $1.4 Billion for clean technology firms to grow and expand. Over the next coming months the application process for these programs will be finalized and companies can apply.

  2. Tax Planning using corporations is under review by the Canadian government. Corporations were effectively used to avoid or minimize the tax that corporations and shareholders would pay. The main areas of tax planning within a private corporation being targeted is a) Incoming splitting, b) Passive investments and c) conversion of regular income into capital gains.

  3. CCPC Status stands for Canadian controlled private corporation which carries many benefits. Budget 2017 has proposed changes where the status of the CCPC which is entitled to the small business deduction of $500,000 will have to pass additional tests. Although a tax payer may not having voting control (Common shares) of a corporation but they can still have influence over the directors where such a case can be established the small business deduction will have to be shared amongst the corporations.

  4. Stop loss transactions: Before Budget 2017 a taxpayer could enter into two transactions where the first transaction would trigger a loss prior to the tax year and as such reducing the taxes for the current year. The second transaction would trigger a gain preceding the year-end in which the gain would not be taxed for a whole year. If parliament agrees to eliminating this tax technique than all future transactions will be disallowed and taxed under the new measures.

  5. Accrual basis Accounting: As many of you would know there are two methods of accounting being cash and accrual. The primary difference between the two relates to revenue timing. The Accrual method will calculate the tax owing position based on revenue generated and the cash basis accounting method would calculate the tax based on cash collected. The professions being impacted with the new budget will eliminate the choice of choosing between the methods and force Doctors, Engineers, Lawyers and Accountants to use the accrual basis. A letter is expected clarifying this but it will allow for a 2 year transitional period.

  6. Caregiver credit system: Budget 2017 proposes to simply and streamline the caregiver credits. The infirm dependent credit, caregiver credit and family caregiver tax credit will be phased out and replaced with the new Canada caregiver credit. Where the credits will apply to the families that live or don’t live in the same household.

  7. Medical tax credit: Individuals who incur medical intervention to conceive a child will be eligible for the medical tax credits. Prior to the Budget 2017 these expenses were limited to those who would generally be eligible for medical infertility.

  8. Public Tax credit: This tax credit used by many will be phased out as it hasn't encouraged people to use public transit and reduce green house emissions. It's unfortunate as this was one of the few credits that students and commuters would claim.

  9. Ride sharing: Your Uber will be taxed with the GST/HST taxation and have the same rules applied to taxies to be applied to the ride sharing companies. Basically your Uber will cost you more now but be just as safe as taxis due to the added regulations.

  10. Increased funding for CRA: The budget announced that half a billion dollars will be used to fund the CRA over 5 years in an effort to prevent tax evasion and improve tax compliance. It means we will be having many more auditors being hired and policing tax evaders. Ensure you always report everything to the CRA and always keep your receipts as they can go back by 6 years to audit/review your books.

Click on the link below to book a meeting.
https://calendly.com/capexcpa/phone-call-with-jag

- Written by: Jag Bath

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We are your Accountant 2.0

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We are your Accountant 2.0

Change is the only constant in the new age of technology. Technology changes companies and even entire industries might get wiped out. The days of looking at a set of financial statements to see how the business is performing are long gone. Small businesses require more relevant information on their business to help make the decisions of tomorrow.

In the past Accountants have played the role of what we call historians. Accountants would typically speak to the historical financial performance and assume that to be a viable representation of the future growth of a business is inherently flawed. Let's think of a practical example, If Rogers Communication loses 20 million in revenue it wouldn't be such a big deal had they lost 20 million cellphone subscribers. Take that in for a minute basically the market now reacts to new information such as the subscriber base which isn't represented in the traditional financial statements. The understanding here is that focusing on the bigger pictures leads to the bigger results i.e. higher subscriber base will bring in the higher revenue.

As such each business has what are called key productivity indicators. It's important to study these metrics as you can not make something better and bigger if you don’t measure it. Measuring can be a lot of administrative work and can be counter productive unless you use the cloud. The cloud can shape your business and empower you the business owner with just in time information. Imagine having the ability to check how your business is doing above and beyond the business bank account.

Imagine being able to run the Profit and loss, balance sheet and cash flow statements all by yourself or just running simple dashboards to see how you did from this month versus the last month? Being able to do projections and set sales targets with a few clicks of the mouse and done. Setting up targets is critical for growth and understanding why you didn't hit those milestones is what financial information should be used for. Reading past the numbers is what business owners require and need and delivering this in a robust and efficient way is what the new breed of accountants will need to adopt.

The 21st century business owner wants a new breed of accountant who plays as a linebacker while they play the quarterback. The days of seeing your accountant once a year are coming to an end and for accountants being a benched player are slowly drifting away. It's game time and it's a exciting opportunity to help each business grow and flourish.

Embrace the silver lining of the cloud and feel the difference!

Choose Change. Choose Capex.

Click on the link below to book a meeting.
https://calendly.com/capexcpa/phone-call-with-jag

- Written by: Jag Bath

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'Free' Personal Tax Filing

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'Free' Personal Tax Filing

It's that time of the year again and here we are another year staring at our T4 slips and asking that question….Where did all the money go? It's important to have your taxes filed on time and every year because there are some tax breaks that you can qualify for and receive rebates. These rebates won't make it to your mailbox if you don’t do your annual tax filing.

The perfect website to use to file your personal simple income tax returns is www.SimpleTax.ca. It's a friendly, fast and efficient way of having your personal taxes filed this year. Paying someone to do a simple tax return can be money used to invest in your RRSP or TFSA account. #SaveTheChange

In case you owe money to the CRA outstanding tax owing amounts can rack up penalties and interest. In case your curious the penalty is 5% of your 2016 owing amount plus 1% for every month that it's late for a maximum of 12 months. So a pro tax tip is to file your tax return even if you can't pay the total amount so you can avoid the late filing penalty.

If you choose to skip out on your taxes for multiple years you get yourself into deep waters where the penalties get really expensive. The penalty will be lesser of the 10% of the amount you did not file and or 50% of the difference between the understated tax and or related to the amount you failed to report.

False statements on your tax returns is serious and if it carries it's own set of tax troubles. However, the Canada revenue agency understands that mistakes happen and if you catch this mistake before the CRA than you can get away with just a simple slap on the hand! The program is called the voluntary disclosures program.

Key things to remember when filing your personal tax return this year.

  1. Did you report all your T4, T4E, T5 and other tax slips received in the mail?

  2. Remember that Presto and TTC passes are tax deductible not your regular trips. (i.e. the actual cards).

  3. Did you pay any rent for the year? That's tax deductible

  4. Did you take care of your parents and or child? That's also tax deductible.

  5. If you had any tuition or professional fees paid you should claim those expenses.

  6. One of the expenses rarely claimed is medical bills (i.e. prescriptions).

  7. Did you sell your primary residence in 2016? This is a new requirement and needs to be declared

  8. Do you own any foreign property? Please ensure to claim this on the form T1135.

Please use the following resources:
Interest & Penalties
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/ntrst/menu-eng.html

Deductions:
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/menu-eng.html

Tax Software to use:
https://simpletax.ca/

Click on the link below to book a meeting.
https://calendly.com/capexcpa/phone-call-with-jag

- Written by: Jag Bath

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Top 5 things you need to know when buying a Business!

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Top 5 things you need to know when buying a Business!

When buying or selling a business there are essentially two types of sales: an asset sale or share sale. The structure of the deal is important to avoid any unwelcome surprises. 
 
There are 5 main considerations you need to look for: 
 
1. Liability - With a share sale, all the assets and liabilities are translated to the new shareholders of the company. This means that the seller gets to walk away from any liabilities and the buyer would assume all responsibility for such. i.e. Pending tax returns or tax liabilities. As an Asset sale allows the buyer to essentially pick and choose the pieces of the business that are attractive the liabilities generally remain with the seller. 
 
2. Employees - In an asset sale, the non-union employees i.e. regular employees will not be taken by the buyer. More commonly, however, the seller will negotiate extended contracts for the employees so that wrongful dismissal claims from employees can be avoided. In a share sale, the targeted company's employees remain employed with the company as only the ownership of the shares are swapping hands. If the buyer chooses to retain or terminate the employees then the buyer will have to pay the severances accordingly. 
 
3. Complexity - Share sales are less complex than asset sales. An asset sale will require additional documentation of the assets being transferred over at fair market value and non-arm's length. In contrast, under a share sale the assets of the target company will remain within the company and only the shares and any shareholder loans would need to be accounted for. 

4. Taxation - Share sale - The proceeds of a share sale above the seller's adjusted cost base are taxed as Capital gains (50%) to be included as income. However, if certain conditions are met such as the business being a active business then the $824,176 lifetime capital gains exemption( 2016) can be used to avoid the capital gains taxation for qualified small business corporations. The capital gains taxation can be further reduced by using intercompany dividend transfer strategies. 
     
A buyer might prefer to do a share transaction to take advantage of the non-capital tax loss carry forwards (business losses) can be applied against future income. A share purchase also allows the buyer to avoid paying sales and property taxes on purchased assets. These taxes can be significant when combining the sales tax and the property taxes which can be avoided by implementing the right strategies. 

5. Taxation - Asset Sale - A seller will usually want the purchase price to be optimal to minimize the recapture of capital cost allowance previously deducted on depreciating assets. If the price paid for a real estate building was $500,000 the historical price recorded would have been that on the balance sheet. However, the fair market value of such a building in downtown Toronto today could fetch $1.5 million which would be hit with a 50% capital gain tax leading to a hefty tax bill. 
     
A buyer, however, will like to allocate as much of the purchase price as possible to the depreciating property so that they can take advantage of the higher tax depreciation expenses to offset income. The valuation of these transactions will be restricted by the fair market value of the depreciating property. The buyer will be hit with the property transfer tax on real property such as buildings and equipment and the sales tax on equipment or inventory. 
    
As you can imagine the complexities behind making such a business transaction requires a deep understanding of the tax act. It's always a good idea to get a second opinion and to structure the business deal so that it benefits both parties. Get a Capex CPA to help you keep more money in your pocket! 

Click on the link below to book a meeting.
https://calendly.com/capexcpa/phone-call-with-jag

- Written by: Jag Bath

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What is a Capital Gain?

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What is a Capital Gain?

When making financial transactions most investors forget about the "Capital Gains tax". Most financial transactions are subjected to Capital gains taxation when you sell or are considered to have sold capital property. So what are some examples or cases where you are considered to have sold Capital property?

  • You exchange one taxable property for another

  • You sell your property for non-cash i.e. a gift

  • Shares or other securities in your name

  • You settle a debt owed to you

  • You transfer certain property to a trust

  • Your property is expropriated (government takes it over)

  • Your property is stolen/destroyed

  • A Corporation redeems or cancels shares (T5 slip)

  • You leave Canada permanently

  • The owner dies.

If any of these above situations apply to you then you would have to declare them on your personal T1 Tax filing (line 174 for the curious people).

There is an exemption on your principal home being the house you live in. When you sell your principal home and move to another home the gain on such a transaction is free of capital gains to the maximum of $813,600 lifetime exemption (line 254). In fact, up until Oct 2016 you didn't even have to declare any of these transactions on the T1 Tax returns. The Minister of Finance declared that a major change to the principal home exemption will be that all such sales will need to be reported on all Tax returns effective November 2016. Why these rule changes you might be wondering? Perhaps the CRA are trying to limit the house flippers in the market or maybe it's because too many people are misusing or not paying the capital gains on these property dispositions. #TaxLoopHoles

To fully understand the capital gains taxation, we have to look at the adjusted cost base. The adjusted cost base (ACB) is essentially the total cost of buying the property plus any expenses on disposition. Once you have the ACB what you can do now is take the total sale price ($100) minus the cost ($80) gives a total profit of $20. This profit of $20 will be 50% exempt from capital gains tax but the other 50% will be taxable. The $10 profit realized will be taxed at 35% which would raise a capital gains tax of $3.50. #Simple

There are certain rules in the tax act which are "special" in nature and can truly work in your favour. One such special rule is identical property rules or better known as replacement property rules. Let's think of a golf course and owner John bought this property in 1988 and sells it now in 2016. Now evidently, the price paid for such a golf course in 1988 would have had a smaller ACB resulting in a higher capital gain. Identical replacement property rules allow for the capital gains tax to be deferred by replacing the property with another golf course. This golf course can be anywhere within Canada and in many such cases, it's cheaper to buy another replacement property than it is to pay the capital gains tax.

It might be beneficial for you to speak to your accountant to time your financial transaction to ensure you are not hit with a Capital Gain tax. A great CRA resource to check out is the following below link.

http://www.cra-arc.gc.ca/E/pub/tg/t4037/README.html

Click on the link below to book a meeting.
https://calendly.com/capexcpa/phone-call-with-jag

- Written by: Jag Bath

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Charity Tax Benefits

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Charity Tax Benefits

Generally, there are two main advantages that arise from giving to registered charities. Well, the first one is that you're helping out some people who actually need help and you’re getting a tax break. If you’re in the Christmas spirit and would like to make some charity donations then it might be a "Taxvantage" for you to donate to a registered charity. The tax savings you get from the first $200 of donations on your federal income is 15% ($30 tax benefit) and if you decided to donate $100 more bringing the total donation to $300 the federal income tax credit jumps to 29% ($29 tax benefit). The obvious incentive by the government is to have you donate more than $200 a year.

To receive credit for the donation you made you must receive an official receipt from the registered charity. An exception to this is when donations have been made by your employer on your request which shows up on your T4 tax slip. It's always a great tax strategy to bump up on your donations during the end of the year like December is a perfect month to be charitable. You can make your charitable donations using your credit card and as long as the donation is processed by the end of the year the receipt will be dated for the current year. This is important because for T1 tax returns are based on a calendar basis i.e. Jan 1st to Dec 31st.

Take advantage of the special tax rules by donating other types of assets than cash. When you "gift" an asset in most cases you're considered to have sold the asset for a price equal to the market value at the time. That is what tax geeks like us refer to as "deemed disposition" and it would trigger a capital gain on the asset which directly translates into a tax liability despite there was no cash that traded hands. However, there will likely be no tax to pay because you'll receive an official tax receipt to claim the charitable donation equal to the market value. This can be beneficial where you would like to help out the charity with musical equipment which generally holds their respective market values.

A common tax scam is charity scam. It's sad that some people misuse the tax system where charities are targeted as tax shelters. The reasoning for the rise of tax shelters is because you can legally donate 75% of your gross income to a charity. A number of organizations give out receipts for your donation that are not really "official" receipts. The amounts you give to these charities can't be claimed. The question to ask isn't if you will receive a receipt but if you will receive an official receipt being the charity's registration number is noted on the receipt. You can do your due diligence by checking the following link to see if the charity is registered on the CRA website --> http://www.cra-arc.gc.ca/charities/

The CRA requires the following to be noted on an official receipt:

  • Your name and address.

  • The charity’s business number (BN), which is also known as its charitable registration number. This is a 9-digit number followed by “RR.”

  • The amount of the cash donated or the market value of a noncash donation.

  • The date of the donation. If the donation was in cash, then simply the year needs to be noted.

  • The statement “official receipt for income tax purposes.”

  • A notation of the CRA’s name and Web site (www.cra.gc.ca/charities).

  • A unique serial number.

P.s. Don't fall for those charity scams offering you $10,000 donation official receipts when you pay these scam artists $1,000. All it takes for the CRA is to find one person who fell for this and everyone who took part of the scam will be hit with penalties and interest at the bare minimum. It's not worth it! Keep your tax returns #clean.

Click on the link below to book a meeting.
https://calendly.com/capexcpa/phone-call-with-jag

- Written by: Jag Bath

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Shareholder Loan - Don't get Burned!

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Shareholder Loan - Don't get Burned!

In a ideal world, it would be great to keep "borrowing" the cash from your business without ever paying personal tax on it #iWish. However the CRA have rules/regulations to ensure this does not happen and they collect the personal tax element by having you declare it as a dividend, bonus or salary. With some planning, you can minimize the personal tax hit on this. Generally speaking you as the director/shareholder can borrow funds from your company and when you do not repay it back within one year, the CRA will assess the loan balance as "ordinary income" which is a similar tax rate as salary. Unlike salary, however you can not expense the shareholder loans leading to no real benefit being realized. Confused yet? Let's run through an example

For example, John borrows from the business ($50,000) throughout the year which was tracked by his accountant in an account called "Shareholder loan" at the end of the year the proceeds of the loan were not declared as a salary or dividend. The CRA can assess this to be income carrying with it a tax payment of $9,000 personal taxation and $7,500 in taxes to your Corporate tax, roughly $6,000 more than had you declared this income to be a dividend or salary.

To avoid the double taxation hit you have a few options. You can repay the total loan amount of $50,000 back to the corporation within the year and not trigger any taxes. Borrowing more money from the corporation to offset the original loan won't work the CRA are smarter than this and have rules placed for this too. The CRA will call this out to be a continuation of the original loan leading to a bigger tax problem. #TaxProblems

Let's assume that you declared this loan as a dividend. You can now write off the entire $50,000 against your corporation as a Dividend expense. You can additionally claim the small business deduction and pay 15.5% on the income that is left over in the corporation after paying the Dividend. The shareholder can effectively take the non-eligible dividend amount of $35,000 tax-free and then pay the taxes on the left over $15,000 which would roughly be $2000 taxes on this dividend.

Being able to draw funds from your company is a great benefit rather than taking a salary because your cash needs changes on a year to year basis. Paying tax on money that you do not need does not make sense. It's important to figure out what your total budget is and withdraw the funds required. Remember to declare your dividends before Feb of the next year if your year-end is Dec 31st.

Bookkeeping helps to keep track of this. Don't be caught in a homegrown tax problem. Let your Accountant handle it!

Click on the link below to book a meeting.
https://calendly.com/capexcpa/phone-call-with-jag

- Written by: Jag Bath

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Life as a Realtor

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Life as a Realtor

Realtors are amongst the top earners in Canada and with record high commissions for the year 2015, being a realtor was very profitable. The property prices are so expensive in the GTA that it reminds one of #SanFrancisco. With the rise of property prices followed higher commission income which pushed many realtors into higher personal tax brackets leading to higher tax liabilities. Since RECO does not allow Realtors to incorporate their real estate business they are forced to collect cheques under their own names from their respective brokerages being hit with the highest personal tax brackets (46%+) #Yikes

There are many strategies that exist to counter these higher tax hits. Consider the strategy of incorporating a management company which would pay for all the advertising, gas, promotions and other eligible realtor expenses. This management company can turn around and upcharge the realtor from 5% to 15%. Since the management company will be eligible for the small business deduction the corporate tax rate will be 15.5% on all active income. The Realtor pays the management company for all the expenses incurred, this can effectively help reduce the Realtor's tax liabilities with an expense lift and shift #Strategy. There are certain details that must be followed in order to make such a strategy work and we can help you with that.

If you have a spouse or family member who manages your management company which is paying the bills and managing your overall business affairs you can pay them a management salary which would shift some income from your personal tax bracket to them. If the spouse has no other income for the year they can take out $35,000 of non-eligible dividends tax-free from the management company.

Vehicle mileage needs to be recorded on a daily basis. This is an audit area that is consistently checked by all CRA auditors to ensure that the mileage being deducted is being recorded correctly. Realtors tend to drive more during the year so the percentage of business kilometers driven in a year is quite high comparatively to other professionals. The management company can help adhere to these regulations by helping support the realtor with a correct recording of mileage. As a reminder, it is important to keep the date, time, the purpose of the trip, starting and ending mileage on a daily basis.

Realtors are also responsible for HST collection and remittance on a quarterly/annual basis. It is important to check if your accountant is not using the simple method of HST calculation which does not usually work well with realtor incomes. It is important to check if you accountant is taking the right ITC (Income tax credits) against your HST collection so that the correct amount of HST remittance can be calculated. 

The Canadian taxation system is designed to give every Canadian the right to strategically do tax planning. Why not use the systems in place to help save you some coin? #TaxStrategies 

Click on the link below to book a meeting.
https://calendly.com/capexcpa/phone-call-with-jag

- Written by: Jag Bath

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Employee v.s. Contractor

Employee v.s. Contractor

There are benefits to both being an Employee and Contractor. If you aren't sure what your new endeavor treats you as an employee or a contractor than the below should help you clear out some of the confusion.

Determining whether a worker is an employee or a contractor is based on a few CRA tests that need to be passed. Typically an employee would have their taxes withheld at the source being the Provincial & Federal taxes plus the remittances for EI and CPP. The Contractor has the responsibility to remit the income taxes and CPP (contractors are EI exempt) to the government. If the Contractor elects to pay themselves as an employee they will have to pay both the employee and employer piece of the CPP. The CRA uses the following approach to determine if you are an employee/contractor.

First test: Showing your Intention What's the intent? The intention of both the worker and payer must be clearly defined. If the contract defines the duties required to perform then the CRA will view this typically as an employer/employee relationship. However if the intent was to enter a service agreement then the CRA will view this as a business relationship. We strongly suggest seeking legal consultation to draft your service agreements.  

Second Test: Testing the facts Once the CRA confirms that the intention is to be in a "business relationship" based on the contract the CRA move over to testing the 5 pillars.

  • Control - Who has the control over the activities is it the worker or the payer

  • Financial Risk - Does the worker carry a Financial risk and more importantly is there an opportunity for a profit?

  • Tools - The tools and equipment are they being supplied by the worker?

  • Subcontracting - If the worker can subcontract or hire help

  • # of clients - You must have more than just one client and the time spent needs to be reasonable.

Putting it together:
If you answer yes to any of these then you are more likely considered an Employee.

  • Do you have a set number of hours you have to work? i.e. 9AM to 5PM

  • Have accounted for the hours worked? i.e. Timesheets

  • Under supervision and told what job next to do? i.e. Task 1, 2 3

  • Part of the company insurance plan? i.e. Medical/Pension

  • Using the company tools? i.e. Computers/Supplies

If you answer yes to all of these then you are more likely considered a Contractor

  • Agree to have the work completed based on your scheduling?

  • Work on your own with no supervision but reporting back on progress?

  • Issue invoices and receive cheques?

  • Not part of the insurance plan? (Medical/supplies)

  • Use your own equipment?

  • Provide services to more? then just one company

There are many "Taxvantages" to you being a Contractor. You can claim any reasonable business expenses incurred to generate the revenue (Meals, Car Expenses, Telephone, Promotion etc). You also get to dodge the EI premiums but get stuck with paying the CPP employer and employee portions. People love hiring contractors because it is less expensive to hire a contractor. Employees traditionally carry other hidden nonsalary costs such as pensions, insurances and added admin paperwork.

Caution: Misusing the system carries hefty penalties and interest charges. Incorporating your business can carry a negative tax consequence where the CRA might deem your corporation as a PSB (Personal Services Business) which is a double taxation hit at about 46%. If the CRA determines that you did not satisfy the rules stated above you will be required to pay the Income Taxes, EI premiums, CPP deductions and penalties/interest.

It is strongly recommended to seek consultation from an Accountant who can discuss your particular situation to ensure you don't get hit with a potential tax liability for the future. 

Click on the link below to book a meeting.
https://calendly.com/capexcpa/phone-call-with-jag

- Written by: Jag Bath

Top 5 Benefits of Cloud Accounting

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Top 5 Benefits of Cloud Accounting

If you have an email account from Microsoft or Google, then Cloud based technology is not a new concept to you. The technology has finally hit the Accounting industry and is making a huge difference and changing the role of Accountants for years to come. The cloud provides great benefits that save time and money which is re-invested into your business.

Moving your accounting from "On-Premise" to "The-Cloud" can bring significant benefits. Not only is it cheaper, more secure but also accessible comparatively to the desktop counterpart. Below are the Top 5 reasons I think Cloud technology is the best thing after bread.

1.       Accessible anywhere providing the required flexibility - Cloud accounting software allows the user to access their information securely 24/7 from anywhere all that is needed is an internet connection. You no longer have to buy multiple licenses or carry your laptop everywhere. As small business owners are out and about and now have access to the engine room anywhere. That quick report to see how your business is doing. Done.

2.       Cloud Accounting is a time saver. This is taking the traditional method of Accounting and reversing it on it's head. Connecting your online banking to your cloud software package means the bank feeds from your credit card and bank card statements come directly through to the software system. The reconciliation process of accounting used to be a huge headache but with bank feeds your constantly synced to the bank so your reconciliation is never off. No data entry. More strategy.

3.       Build your customized cloud software. In the past building your own customized solution would have been extremely expensive with hiring IT consultants and other experts. Products like Xero and Quickbooks online have an ecosystem of apps to choose from which are called "add-ons". Some add-ons are free while others carry a fee of a few extra bucks monthly. Thinking of automating your Accounts Receivable collection process...Yup there's a app for that!

4.       Sharing and collaboration has been overhauled. In the old days the accountant would spend most of time "converting" a Simply Accounting file to a useable Quickbooks format. Once this conversion was completed the accountant would then move on to the actual year-end process. With the ability of sharing and collaboration the Accountant is now put in a position of having a conversation with clients during the year not just during the year-end. No more copying data to USB drives sharing is effortless.

5.       Improved security. A lot of people object to the security element of financial information in the cloud. Actually cloud-hosted software is more secure than software hosted locally on your desktop or your own server. The data is stored in high security storage facilities and your data is encrypted meaning it is unreadable to hackers. Additionally, your data is backed up multiple times in a day in many different locations to help protect your data. If your laptop is stolen well that's okay just buy a new one because your data is safe. If you are comfortable using online banking, you should be equally comfortable using Cloud technology.

Essentially with Cloud technology you have the ability to compete with bigger companies on a technological level but get to keep that small business owner mindset. I think this marriage of the two principals will help grow businesses. Most businesses see Accounting as a necessary tax compliance, it is but Accounting is the business language and if you know the language well you can really start to realize the benefits the information can provide. 

Click on the link below to book a meeting.
https://calendly.com/capexcpa/phone-call-with-jag

- Written by: Jag Bath

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Uber v.s Tax[i]

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Uber v.s Tax[i]

The simplest innovations are sometimes the most creative. In Uber's case scenario they targeted a dinosaur aged Taxi industry which hadn't seen any technology changes in over 100's of years. Uber is to the Taxi industry as iTunes was to the music industry #GameChanging. The Taxi industry was devastated with the new entrant Uber. In fact I even saw a video of a Taxi Driver hanging on to a UberX car #StruggleIsReal.

Uber is gaining more and more acceptance from the local municipalities but these Uber drivers need to be aware of the Tax implications that are carried. Firstly, Uber passes the contractor vs employee test where Uber is not considered a employer hence Uber drivers are contractors. Uber does not take source deductions from the driver's pay. However, the drivers might not be aware that they still have to declare the income generated through Uber and remit the respective taxes.

 Canada's tax assessment system is a "self-assessment" system where the Canada Revenue Agency routinely audits tax filers. Let's take the scenario where a Uber driver forgot or purposely did not declare the revenue generated by driving Uber on the T2125 (Statement of Business or professional activities) tax return. If the CRA audit the Uber driver, they will not only ding the driver penalties and interest charges but can also charge the Uber driver with a criminal charge. #DontDoIt

Let's think of it this way if you rent out your basement/property and you earn rental income this must be declared during tax season, the same holds true with Uber drivers. Uber drivers must register a HST account number if they anticipate to make over $30,000 annually. Regular businesses usually have to collect the HST portion but in the case of Taxi's and Uber this is already included in the Driver's pay. The 13% HST less business expenses must be remitted from the total sale or using the simple method 8.8% of the HST collected based on sales.

Here's some estimated $ impact numbers. Please don't rely on these numbers solely meant for explanation #disclaimer.

Let's do some #math. If an Uber Driver makes $1000 a week and $4000 a month that's $48,000 yearly. Using the simple method of HST at 8.8% the year-end HST remittance would be $4224, and Fed+Prov Tax cumulative amount of $10,253.

Total Collected Sale          = $48,000   (Total Collected from Uber)
Less HST Liability               = $   4,224  (Simple method of calculating HST)
Less Business Expenses   = $    5,450  (Fuel, Repairs, Accounting, Supplies etc)
Less Fed + Prov Tax          = $    8,579  (Using the T2125 form in Profile (Intuit)
Total Net Take home       = $     29,747  (Total net take home income)

It might be worth your time to see an Accountant to ensure you mitigate and understand your potential Uber Tax Liability. Prevention is better than the CRA Tax Sting. 

Click on the link below to book a meeting.
https://calendly.com/capexcpa/phone-call-with-jag

- Written by: Jag Bath

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