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. 

Contact your Accountants today click on this link —> https://capexcpa.com/contact

- The Capex Team

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. 

Contact your Accountants today click on this link —> https://capexcpa.com/contact

- The Capex Team

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. 

Contact your Accountants today click on this link —> https://capexcpa.com/contact

- The Capex Team

CRA’s Voluntary Disclosure Program

When you think of CRA (Canada Revenue Agency) they probably don't come off as people who want to help you #Grizzlybear. CRA routinely gets bad publicity and distaste from people yet a less known fact is that the CRA have set up programs to help the average Canadian if they choose preventive programs.

CRA has a preventive program set up known as the voluntary disclosure program for individuals who have fallen behind in their tax filings. The CRA knows that it’s near impossible to Audit every Canadian and hence why our Tax system is based on a “Self-Assessment”. This Self-Assessment is a double edged sword because if you declare something falsified on your tax return you will be sentenced to penalties and interest hits that ‘would’ have potentially bought you a new Car. #ItStings

Life happens and as such Tax filing take a back seat. To be eligible for this program there are a few conditions that must be met before the tax payer can take advantage of this. The following Four conditions must exist for Voluntary Disclosure

1. The Disclosure must be “voluntary” #CaptainObvious. If you have already received a letter from the CRA stating you are being investigated or audited. It’s already too late and you are no longer eligible. You must initiate the disclosure and contact the CRA before they contact you.
   

2. The Disclosure must be complete and accurate to the best of your knowledge. You can’t conveniently leave out details. Trust me you don’t want to go down this path.
   

3. The Disclosure needs to involve a penalty. A penalty only exists if you owed taxes according to your tax assessment. If no penalty exists then declare and file your tax return as usual even if it’s late. If the CRA owes you a refund there is no penalty.
   

4. The Disclosure of the information being provided must be a minimum of one year old. If the Disclosure is less than one year and you are not employed in an attempt to use this program to file late and avoid penalty. Nope not going to work!

All these conditions are meant to be clear from the CRA’s perspective however sometimes a consultation is required to ensure you are truly eligible for the assistance. It’s critical to consult your Accountant/Tax Lawyer to see if you can be eligible for this program or the Tax Payer Relief program. Not filing your taxes is a downward spiral to financial trouble. Remember the CRA is merciless and will #ding you with compounding penalties and interest.

Prevention is better than Medicine and this is the CRA’s way to help individuals get out of tax troubles and get back on the right track. The first step and most important step is to get your taxes filed. Wait for the notice of assessment and then move forward with the clean-up. You can try doing this yourself as well or if you’re not comfortable you can engage an Accountant to help you get this quickly and accurately filed.

Contact your Accountants today click on this link —> https://capexcpa.com/contact

- The Capex Team

Leave the Cash in the Business

Building a business is tough, it takes time and patience and a lot of strategy. With the future Income Tax hikes planned by the Liberal Government your Tax strategy might need to be refined. How do you take the money out of your business without being taxed heavily?

Incorporating a business offers benefits and really does help soften the blow considering the small business deduction for the first $500,000 of your active income is taxed at 15.5%. The rest of the money sitting in your bank account will only be taxed when you withdraw it as a dividend that’s when you get hit with the personal tax #Yikes. However thankfully the small business deduction was spared during the Liberal Federal budget. Close call though since Justin Trudeau has ‘promised’ to increase taxes on the wealthiest of Canadians. #TaxManGrins

Keeping the money inside the corporation is a tax deferral strategy where you defer the personal tax hit to be paid at a later date. You can always use an income splitting strategy which is paying dividends to family members who are in a lower personal tax bracket. Your kids are quite useful #TrustMe so spread the love. New PlayStation Jimmy? No problem! The main reason why a business owner would use a tax deferral or an income splitting strategy is to well…lower the taxes #CaptainObvious and because the Marginal tax rate in Ontario for income over $220,000 is 53.5% (2016 rates).

Now keeping money inside your corporation indefinitely is not feasible #iWish because business people also have cash needs, mortgages to pay, clothes to buy, food, vacations etc. You need to determine what your “cash need” will be and plan accordingly. Considering the low rate of interest given today it might make more sense to carry debt and avoid accelerating the paydown of debt through corporate withdrawals. You can withdrawal these funds sitting in your bank account at a later date maybe during retirement when your tax bracket is ‘likely’ to be lower. That new Tesla you been eyeing well, better to buy a nice car and drive it than to be taxed right? ($800 a month write-off limit by the way).

The key take away message is if you’re earning income that you don’t need to live on then its best to keep it in the business. You can re-invest it in the business and if your business doesn’t need that high capital then re-invest into other securities or alternatively into a life insurance policy. This life insurance policy is super useful when the business owner passes away the money paid out through the Capital Dividend Account (CDA) is usually tax free to the beneficiaries. So plan for the future? It’s critical you do and avoid the “Death Tax”. 

Hope you gained some Taxvantage from this blog! It’s in your best interest to hire the right accountant who will create you the right strategy which will save you just the right amount of tax right? #KaChing

Contact your Accountants today click on this link —> https://capexcpa.com/contact

- The Capex Team

Operating company? Holding company? So Confusing?!?

So you are a seasoned business person and have been making sales ninja style. However what happens if you are sued? How do we eliminate the additional liability from your operations? You made a profit this year and that's awesome but how do we keep this money safe from sticky fingered Lawyers?

The short answer is incorporation of a Holding company. The idea behind such a setup is that you do all your regular operations on your current company that means all your revenues and expenses remain within OpCo however we transfer the "Net Income" or in the accounting world we call "Retained Earnings" directly as a dividend to HoldCo. Tax Free. Yes that's right.

Some associations such as Doctors, Dentists and Engineers are required to have professional corporations where only another Doctor/Dentist/Engineer can be a partner and own shares. The rules are very strict but they do allow a HoldCo to own the building and receive rental income from the OpCo for using the premises. So technically you are paying your own company rent at market price. Yes it gets confusing but it's legit. #LegitAccounting

So once the money is being held in HoldCo you are reasonably protected by any potential law suits. What do you do with the money that's in the HoldCo you ask? Well you can use it for something accountants call "Dividend Sprinkling". If you have a spouse or children the right amount of dividend can be declared to maximize the after tax income you will receive. Setting up your corporate structure is critical to the success of your company. If you plan for the future then this HoldCo can one day evolve into becoming your Estate where you can transfer the entire corporation to your Kin(s) Tax Free upon retirement or death.

The incorporation costs are relatively minor compared to the peace of mind and additional security of your investments. It can get confusing to manage a HoldCo but remember it's in your “Taxvantage” to do so!

Contact your Accountants today click on this link —> https://capexcpa.com/contact

- The Capex Team

Why Do I need to get my Business Incorporated?

Well the short answer is you don’t need to but it’s in your benefit to do so. In Canada the government wants entrepreneurs to start new companies which generates new jobs and stimulates the economy. If the government stimulates the economy in a positive manner then what do you know you have the same government next election #Liberals. So the government provides tax incentives by offering a special tax deduction called the “Small business deduction”. This deduction in one word is Awesome.

Basically on your first $500,000 of income you make within your business you are going to pay a far less taxable liability compared to if you made the same income under employment taxes. On average a Corporation is taxed much lower and a good rule of thumb is 15%. A average employee would be taxed in the 35-40% bracket. Simply by incorporating and keeping the profits inside the company and only giving yourself a salary/dividend on what cash requirements you personally have will help you in your personal taxes because of the basic salary tax deduction offsetting your income. You can always implement a dividend sprinkling strategy more on this later. #WinWin

Apart from the tax savings there’s a security and peace of mind element to incorporations. In the unfortunate circumstance that you are sued under most circumstances your liability to the corporation is limited to the assets within the corporation. Since you are an employee/shareholder your personal assets are not impacted so you won’t lose your house/car.

Additionally since you have an incorporation you can take your papers to the bank and open a Business Bank account and a Business credit card. When you borrow money under your business it doesn’t show up under your personal liability which in short is a win/win situation for you. Since you legally own the name/company you can have a level of ownership and build your space in the market where no one else can do business using your name. You can now effectively start to brand and build your profile online. #Marketing101

So going back to the original question do you really need to get your business incorporated? Reading the above makes you wonder why wouldn’t you? The costs of sustaining a corporation are offset by the great savings and value of having one. #MakeItOffical

Contact your Accountants today click on this link —> https://capexcpa.com/contact

- The Capex Team

SETTING UP YOUR RECORD KEEPING SYSTEM

One of the most frequently asked questions we get is, "How long do I have to keep my business receipts?" Well the short answer is 6 years. 

Not keeping your receipts is the leading reason why people end up paying more tax then required. Keeping lousy records only hurts your business net income. Taming that paper pile is difficult but a necessary evil. Your tax organization and preparation will not only keep you audit proof but will also put you in the driver seat on cost control. 

Save all the receipts and records associated to the business. The CRA require source documents (your receipts) to be available if they ever come to audit. You only need to keep the relevant receipts and can throw the other unnecessary paper. If you like to keep it old school we recommend picking up a file accordion at Staples or any office supply store. If your feeling Techy Evernote or Genius scanner smartphone apps do a great job. Label each section by expense category such as donations, office supplies, repairs, auto-gas, parking, advertising etc. As you go out during the year keep filing all these receipts away. 

When it comes time to filing your taxes simply add all your receipts in Excel or a simple calculator ensuring you are taking calculating that sneaky HST tax. All these summary numbers get reported on the tax return schedules such as statement of real estate rentals, capital gains and losses, GIFI statements and statement of business activities. 

At Capex we want to make record keeping as easy and simple as possible allowing you to focus on growing your business. We digitize your box of receipts by scanning and filing all your receipts and get your accounting/bookkeeping done at the same time. This service is quite popular amongst our clients as they love their accounting to be on cruise control. 

Contact your Accountants today click on this link —> https://capexcpa.com/contact

- The Capex Team

Why is Marketing so Important?

As a Chartered Professional Accountant I see many people excited to come see us Accountants with their business idea. They engage my firm for business plans and forecasted financials. During this process of planning I consistently see many of these individuals cutting down marketing budgets. Stretching your dollar is great but completely cutting down on your marketing budget is business suicide.

Now it might seem a little odd that an “Accountant” suggesting the idea of marketing is ironic considering many Accountants don’t really need to market it’s a word of mouth business but hear me out! #Stigma. Word of mouth marketing has lasted the test of time and it holds true even today. The reason word of mouth marketing is so effective is because of one fundamental reason. Trust. Building trust is fundamental and essential to long term growth.

The internet as we know it has been changing and evolving just look at the last 10-12 years. The Internet was not readily available and trust me we were all excited about the next flip phone. Many companies have harnessed the power of the internet and almost effectively replaced Television and Radio advertisements with the internet stretching their dollar with targeted marketing such as Facebook, Twitter and Youtube.

I always recommend start-up’s to keep a healthy budget for marketing. The real tangible results come after having an online presence. The old days where we could just open a newspaper or open up Yellow Pages and find someone to do the job are long gone. Future clients/customers want to be engaged they want to be educated and most importantly they need to know you exist. Ultimately the client is voting. Voting with their money. It’s your job to present your candidacy and promote your campaign.

Having a great idea is awesome, getting your governmental filings done gets you an A+ but nothing becomes more important than spending on marketing because here’s the equation. Higher marketing expense suggests higher sales which increases your revenues and given all of you will keep a sharp eye on your expenses your bottom line will only grow.

Which means more money for you. Which means more vacations. Vacations are awesome. Online Accounting Firms like Capex can help you get there.

Contact your Accountants today click on this link —> https://capexcpa.com/contact

- The Capex Team

Help I overpaid on my Payroll Taxes!?!

Switching jobs can be a exciting time. Meeting new people and learning new skills is awesome but what's the tax impact of switching employers? Yes, there is a tax impact.  All employers in Canada are required to collect "source deductions" which are typically your CPP (Canada pension plan), EI (employment insurance) and income taxes from your paycheque. Your employer remits these payroll taxes on your behalf to the CRA in addition to the employer contribution portion. 

If you have worked at one Job for the entire year then it is unlikely your CPP and EI are incorrect. However if you had more than one employer or switched employers in a year then both employers old and new will have to deduct CPP and EI regardless of the fact you have paid them before. This has nothing to do with your old employer's payroll skills its solely because of the way the calculation is done. #IncomeTaxAct

Clear as mud? Ok, let's say Jag worked at company old from Jan 2015 to Sept 2015. Old employer would have deducted the required source deductions between these months and remitted to the CRA. Good job old employer! The new employer will start your CPP and EI deductions from Oct 2015 to Dec 2015 and will not account for your payments to CPP and EI from the old Employer this leads to overpayment on CPP and EI. Assuming you paid your total maximum 2015 CPP amount of $2479.95 and your EI amount of $930.60 any additional dollar paid over this turns magically into a refund.

It sucks to overpay but it's your responsibility to keep both T4 slips so when you file your income taxes the difference of the over payment will be refunded to you. Small business tax accountants can help you with this.

Let's think of it as forced saving *cough* or Vacation money?

Contact your Accountants today click on this link —> https://capexcpa.com/contact

- The Capex Team