What You Should Know About Tax Free Shareholder Loans

What You Should Know About Tax Free Shareholder Loans

As a business owner and manager, you work hard and it is nice to be compensated for all that effort. After all, you got into the business to make money. There are several ways to get paid. 1. Salary 

2. Dividends 

3. Management fees 

4. Shareholder loan 

Each form of this payment carries its own tax implications. Today we will explore a shareholder loan. 

What is a shareholder loan? A shareholder loan is when you borrow money from the corporation that you own shares in. It's like borrowing from yourself, but with restrictions and tax implications. In this post, we'll answer some of your questions about shareholder loans, including how they work and what types of businesses qualify for them. 

A shareholder loan is issued from a company that if is repaid one year from the end of the taxable year, it is not necessary to include this as income of the borrower. So, first, you need to look at the fiscal year-end of the company. This is usually December 31, but not always. As an example, if the loan is issued on March 20, 2021, and the year-end of the company is December 31, the borrower has until the end of 2022 to repay. 

However, if the loan is not repaid within that time period, the full amount of the loan is taxable to the borrower. This is designed to keep the owner from just withdrawing amounts by loans without paying taxes. 

If you miss that one-year deadline, you can repay the loan, and all interest, in the future and then deduct the repayment from your personal income that year. This may mean the opportunity for an income split. 

It's hard to have a rule without exceptions and here is this one. A loan is made to a shareholder who is also an employee (or the employee's spouse or common-law partner), but the loan is not made to the person as a shareholder, plus the money is used to purchase a principal residence, a vehicle for business purposes, or to buy shares in the company, it falls in this exception area.

If all of this sounds complicated, that's because it is. Don't undertake this operation on your own. Consult with a tax attorney, CPA, or other professionals to be sure all the rules are followed and it will be to the best tax advantage of the company and the borrower. 

Paper Trail 

One important element of ensuring legality is demonstrating a paper trail. To start with, it must be created by the director’s resolution and approved. It has to be an arms-length arrangement. All the paperwork must be in order and signed. It has to be recorded in the company ledger. It must be recorded in a general ledger for this specific purpose. It cannot be tracked like an advance or loan. That way if the CRA questions anything, you will have all the documentation available to show the legitimacy of the loan. 

Also, from a corporate standpoint, withdrawals can present complex tax issues. In addition to all the paperwork, the loan needs to be tracked, especially if the interest charged will be tax deductible for the shareholder. 

As mentioned earlier, this is hardly an ordinary transaction. It should be considered carefully and only with the advice of professionals who have dealt with the issue in the past.

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

Consider Incorporating: Why Choose Sole Proprietorship vs. Corporate Entity

Consider Incorporating: Why Choose Sole Proprietorship vs. Corporate Entity

For any established business owner, there comes a time when they have to make the decision whether or not to incorporate. It's an important decision that can't be made lightly! In this article, we will discuss how to incorporate your company as well as some of the benefits you might get from incorporating. There are two primary types of incorporation - Sole Proprietorship and Corporate Entity. We'll also talk about how different structures affect how profits are taxed and how much money is required for startup costs.

First, there are a few advantages to a sole proprietorship: 

● Full control 

● No separate income tax return. Just include everything on the T1. 

● If you operate under your own name, you don't have to register it. If you do need to register, it is less expensive than a corporation. 

Now, here are advantages to a corporate entity: 

● Limited Liability Protection. That means if you are sued, the only assets that a person can get are those that belong to the corporation. Your home, savings, and other assets are protected. If you remain a sole proprietorship, everything is fair game. That means your business assets as well as all your personal assets. 

● Lower Tax Rate. The corporate tax rate is lower than the personal tax rate.

● Dividends. Using the distribution of dividends, it is easier to spread the business income among your family members. 

To begin the process, close the sole proprietorship. That means to cancel the business registration with the Province and contact the Canada Revenue Agency to cancel your business number, HST number, and payroll number. This can be done by telephone. 

Next, you need to transfer assets into the corporation. That includes anything physical like computers, furniture, vehicles, or other equipment. Intangible assets are probably goodwill. There is a formula for this but it will include your client list, trademarks, trade secrets, contracts, etc. 

When transferring assets do it under the provisions of Section 85 of the Income Tax Act by filing the appropriate forms. In this way, you avoid paying taxes on any of the assets, tangible or intangible, 

Your previous Workplace Safety and Insurance Board (WSIB) account will transfer to the corporation. 

There are also the mechanics of incorporating: 

● Name. Using a NUANS report you can find similar names and as long as there are no other existing names, you can proceed. 

● Business address. 

● Shares. Issuing shares of your corporation to yourself and others. 

● Minimum and maximum number of directors. A good choice is a minimum of one and a maximum of ten to give yourself some room to change if necessary. 

● Telephone and email address for official communications. 

Some mistakes you might want to avoid include selling your business assets for only $1.00. That is because the CRA will reassess the assets upward to fair market value and you will then be required to pay capital gains tax on the difference between the purchase price and the CRA-adjusted price. It

is also not a good idea to gift assets or transfer them without any monetary exchange. Again, this is a red flag for the CRA and you will end up paying capital gains taxes. 

The best way to handle a change from a sole proprietorship to a corporation is to work with professionals who have experience in this endeavor. That means your accountant, attorney, financial advisor, and anyone else who has the expertise.

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

How to File the T1 General Return: What You Need and How To Prepare

How to File the T1 General Return: What You Need and How To Prepare

The Canadian Government has given Canadian citizens a number of ways to file their taxes. Some people may prefer to have an accountant do the work for them, but there are also many that choose to do it on their own. The T1 General Return is one way in which Canadian citizens can file personal income tax information with the Canada Revenue Agency (CRA). It details personal financial information like income, provincial and territorial taxes, deductions, credits etc. In this article, we will discuss how you should go about filing your Canadian Income Tax return and what documents you need before doing so! 

The T1 General Return is also known as the Income Tax and Benefit Return. The CRA website will have a downloadable T1 General Return Package. You need to select the province in which you lived for the year. You can also use a program that you can purchase that will walk you through each phase of the return and the T1 will be automatically filled from the information you enter. 

The T1 summarizes the full return including the total income, net income, deductions, credits and tax due. This form is used to apply for the Canada Child Benefit or GST/HST credits. 

The new-look on CRA package in 2020 has some notable changes such as more pages and larger font. In fact, it doubled in size from four pages to eight. Also, some of the line numbers now have five digits instead of the three or four you may be used to. The change is intended to facilitate the use of software packages available. Some of the alterations include the use of plain language as much as possible, more white space, and larger font.

Page 1 of the T1 General Return still asks for many basic personal information questions like name, province, marital status. Page 2 now requests details about any tax-exempt income under Indian Act and whether or not you need to file a T90 in this instance. On the whole, it should be pretty much the same as with RRSP contributions, childcare, net, and taxable income. 

Page 3 deals with the following: 

Other changes include the ability to pay the balance using PayPal and to check how much time remains for the CRA to finish processing your return. 

When you're filing your taxes, be sure to attach the federal tax information on page 1 of Schedule 1. The CRA also requires that you include Form 428 - Provincial or Territorial Tax for any provinces or territories in Canada. Include this with Page 3 and any receipts, invoices, income statements from work, etc., if these are required. 

Page 4 deals with the bottom line of a refund or tax due, the direct deposit information, and the Ontario Opportunities Fund. 

When filling out your annual tax return, which includes the T1 General Return and all its accompanying forms like federal income tax, provincial taxes, deductions, and credits, etc., you have two choices. The first option is to go old school to complete this task by using paper and pen. You can also download Netfile software from www.cra.gc.ca/getready. With this, you can install it on your PC and have all the forms at your fingertips. This software has a charge associated with it. 

The second option is to reach out to an accountant. Even though this tends to come with a fee, the expert that you hire will know all of the tax laws and get you as many deductions and credits as possible for your income in order to minimize your tax burden. Next year when it is time to file again, you will already have established a relationship with your accountant and it will be much easier to deal with this annual obligation.

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

Real Estate for Non-residents: The Ultimate Guide

Real Estate for Non-residents: The Ultimate Guide

Canadians love real estate. Many Canadians invest in real estate, either as a property for themselves or to make money on the side. Non-residents can also buy real estate in Canada and sell it on the Canadian market with various tax implications for both parties involved. However, before you go any further, here are some things that you need to know about non-resident real estate transactions: 

1. It is illegal for a non-resident of Canada to purchase land from another person who is not a resident of Canada; 

2. The seller must withhold 15% GST (Goods and Services Tax); 

3. There are no capital gains taxes or income taxes payable by the buyer under certain conditions 

Withholding Taxes 

If you are selling rental property, 25% of the sale price goes to the CRA. If you are selling residential property, then 50% goes to the CRA. The attorney handling the sale will remit this amount, but that is quite a chunk out of your price. The seller can file a Section 116 tax return by April 30 for a refund of the excess taxes based on the actual capital gain. 

However, there is a way to minimize the withholding taxes. If you file a Section 116 Clearance Certificate before the sale closing date, or within 10 days of the completed sale, you can reduce the withholding from 25% of the selling price to 25% of the capital gain. The attorney holds the amount in trust until the CRA gives its approval. Then the lawyer releases the funds to the CRA and they, in turn, issue an official clearance certificate. Then the attorney will release the remaining funds to the seller. 

This process can take between six and eight weeks. Then, as before, the seller must file a Section 116 income tax return to receive their refund if any. Therefore, buyers should factor in the wait when making decisions on purchasing decisions to avoid being frustrated by delays. 

As a Purchaser 

As you can tell, there is a lot of paperwork involved in buying a house. You need to hire an attorney and an accountant to help with the paperwork. The attorney will hold the funds while the accountant will file the Section 116 Clearance Certificate; receipt of the approvals; and final release. As the purchaser, your lawyer will take care of all of your side of the paperwork. It is just a good idea that you understand what is going on. 

The Clearance Certificate will fully protect you as the purchaser from any CRA intervention to collect taxes.

Sometimes the real estate you are purchasing is tax-exempt. This is terrific, except be sure to get copies of all their supporting documentation to prove the tax-exempt status just in case there is some glitch. 

The bottom line is that with careful planning the Canadian non-resident selling real estate can do so and still minimize the withholding taxes. Before you list the property for sale, make an appointment with an accountant to discuss your plans. He or she will ask a lot of questions to determine the best route. Together with the attorney involved in the sale, you can develop the best plan to get you the most out of the property sale. 

Capex CPA has significant experience dealing with non-resident real estate sales. Make an appointment today to discuss your situation and to find the best route to the least amount of taxes. In fact, our staff is familiar with many of the issues surrounding a Canadian non-resident and we are happy to advise on any of those financial matters.

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

Beware of Capital Gains by Renting Out a Basement

Beware of Capital Gains by Renting Out a Basement

Whether it is to help defray mortgage costs or to create a little incremental income, many Canadians are eyeing unused space like a basement or extra bedroom and thinking about how handy that rent money would come in every month.  If so, there are some CRA rules that will apply.

If this property is your principal residence and you intend to claim the Principal Residence Exemption (PRE), the tax folks will look very carefully at the transaction when you eventually sell the property at a profit. 

The tax rules provide that if you convert a part of your principal residence (even a single room) to a rental property, you have disposed of the property at its fair market value.  At that same time, you reacquired the property at the new value which becomes your new adjusted cost base (ACB).  This means you will need to report the capital gain for the tax year in which the change happened. While this change allows you to qualify for the PRE, when you eventually sell the house, part of the gain may be taxable.

One option is to change the classification of the entire house to rental property.  If you do that there is a special tax election to let you claim the house as your principal residence if you relinquish any tax depreciation for the rental company.  This is only valid if you claim this as your principal residence.  If you decide to call some other property your principal residence, like a vacation home, the option is off the table.  Also, note that this is not permitted for only a partial change in use like a single room or basement.

 There is a reprieve, however.  The CRA says that there is no change in use if you meet three conditions:

•  The rental is “ancillary” to the home's use as your principal residence.

•  There are no “structural changes” made.

•  You don't deduct any tax depreciation on the portion of the house you are renting out.

If you don't meet these standards, when you sell the house that now has a rental unit, you have to calculate the tax for the portion that was used as rental against the wholesale price.  This can be based on square meters or feet, or a number of rooms.  However, the CRA must consider the allocation “reasonable”.  Otherwise, you need to report any capital gains on the portion that you rented out.

The CRA offers publications on how they interpret some of these rules.  Recently they said that to be considered “ancillary,” the space must be “subordinate or secondary to a more important or primary purpose”.  It also says that it will review each case separately to decide if the percentage used is appropriate to the taxation or not.

Structural changes are considered if they are permanent, like adding a kitchen area or removing or adding walls.  Again, the CRA will review the individual facts and circumstances to make their determination.

If all of this sounds confusing and complicated, it is.  The best way to proceed is to discuss your ideas with an accountant in Mississauga before putting the “for rent” sign outside your door.

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

 

 

 Non-Resident Owning Real Estate in Canada Tips

 Non-Resident Owning Real Estate in Canada Tips

If you are not a Canadian citizen but want to purchase real estate, there are, of course, rules and regulations.  Many of them vary by area, so be sure to double-check especially if you are interested in agricultural or recreational property purchases.

In order to determine your residency status, you should get solid clarification because it will affect your taxation.  For example, if you are married to a Canadian citizen or permanent resident and jointly purchasing property, you could be exempt.  On the other hand, if you are buying in with some Canadian pals, you could be liable for taxation even though you only own a small share.  Also, if you are making the purchase to rent the property and you have no intent to be a Canadian resident yourself, you may be liable for additional taxation.  Just be sure you get the right information the first time and before you put money down.

 Secure a Mortgage 

You may be required to secure a local mortgage.  Canadian banks have been known to require non-residents to offer larger down payments, like 35%.  You will also need to identify the source of the funds and gifts are not permitted.  Banks may be more lenient if you are a U.S. Citizen or buying the house to live in rather than as an investment.  Generally, this down payment is about 20%.

To apply for the loan, you will need a Canadian bank account, which you must set up in person.  If you are already banking with an international financial institution that has a Canadian presence, you may be able to set up your account remotely.  Transferring money internationally can prove expensive and will take several business days to clear.  Some currency specialists can expedite the process with a low-cost fee.

 Working through your own bank, you should verify exactly what will be required.  Usually, it is a deposit of at least 35% of the property value, a reference letter from your bank, proof of income, bank statements concerning your spending habits, a letter from your employer verifying your salary, and a clear Canadian credit check.

In addition to taxes, there will be some fees.  Both taxes and additional costs will vary depending on your non-resident status and the province in which you are making the purchase.  You can, however, expect:

•  Legal and notary costs

•  If purchasing in or around Toronto, Non-resident Speculation Tax (NRST) of about 15% of the property value.

•  Land transfer taxes

•  Annual property taxes or vacancy taxes.

•  Capital gains taxes if you are buying as an investment, which will come to about 25% of the sale price when it happens.

If you are indeed serious about purchasing real estate in Canada, a good place to start is with a Canadian CPA. A good accounting firm will be able to provide you with counsel and explain all of the intricacies of buying property as a non-resident and advice about the best way to proceed for your particular circumstances.

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

First Time Independent Contractor Start-Up Guide

First Time Independent Contractor Start-Up Guide

Starting a new business is exciting but still takes careful planning.  Some of the things to consider are whether your business idea is viable, whether you can secure financing, and whether you possess the qualities for running the operation, like self-motivation and time management, risk acceptance or aversion, and a proper support system available. 

The CRA has specific criteria to define an independent contractor over an employee.  These include:

•  You determine how or when the work is performed.  An employee is directed to work sites.

•  You own and maintain your own tools.  An employee uses the tools provided by the hirer.

•  Financial risk including securing and completing contracts.  An employee gets paid regardless.

Understanding the finances is important.  You will need to know how much money is necessary to start and then continue running the business until a profit is shown.  You will need to know whether you need to invest funds in purchasing or leasing tools or equipment.  Much of this depends on your personal financial reserves and credit history.

Have a Business Plan

Start with a business plan.  Do not skip this step.  It will be necessary to present to financial institutions and is a good road map for your progress.  This will include the basics like name, date, etc.  You need to have a specific summary of the business including mission and vision statements, detailed product or service descriptions, and background of skills or abilities to support the plan.  You will also need a solid marketing plan.  As you can tell, all of this is to show that you have carefully and thoroughly thought out all of the aspects of your proposed business.

You will need to decide on a business structure, i.e. sole proprietorship, partnership, or incorporation.  Along with this, you will need to decide if you will do business in a single or multiple provinces or federally.  You will need to name and register the business and apply for all appropriate licenses and permits.  Along with this will be the necessary insurance and safety requirements. 

Set up a business banking account and bookkeeping records.  If you will need help, decide whether it will be through employees or independent contractors.

Understand the nuances of your field.  It may mean that you pre-qualify as a supplier to be part of a database where you can get more contracts or jobs.  In addition, you will need to find resources to tap for referrals and contract opportunities.  You may be required to submit a proposal or bids to get the job.  If you are not good at numbers or verbiage, you may want to find a good resource.

Speaking of resources, one of the best choices is to start by contacting an accounting firm.  Especially one that deals with small businesses and start-ups.  They have the experience and expertise to talk you through all of the steps necessary to get running and on the right foot.  It is also likely that they will have additional tips and tactics that will stand you in good stead.  They can also be a gateway to financiers to underwrite your enterprise.

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

Buying Real Estate Under a Corporation

Buying Real Estate Under a Corporation

If you are thinking about purchasing some real estate, you are probably trying to figure out the best way to finance the deal.  One option is to have a corporation purchase the property instead of buying it in your personal name.  The question is simple enough but the answer can be quite complex.

Liability

Commercial rental property has a higher risk of liability, especially compared to residential rentals.  In either event, the real estate purchased under a corporate name protects your personal assets.  If there should be an issue, the corporation takes the financial burden, not your home, investments, or other assets.  Just realize that there will be more expense and paperwork with a corporation including annual income taxes.

There is no direct tax advantage whether the property is corporately or individually owned. 

The lifetime capital gains exemption applies only to the disposition of an active business corporation. Real estate corporations are passive income so the $800,000 exemption won't apply here.

If you want to minimize estate taxes but still pass your assets on to your family, the real estate held in a corporation is a good option. There are some income tax act elections that will allow for flexibility in estate distributions.

If this is sounding pretty good, here are some strategies that may apply.

•  Your corporation makes a tax-free loan to you.  This must be a legitimate loan with all the paperwork in place like an agreement and mortgage.  You must also put up collateral like your personal residence.

•  You must pay reasonable interest.  You can easily find the current market rate and charge that.

•  The agreement must have a reasonable repayment period, usually not to exceed 20 years. Again, look to your local banks to see the amortization period they establish for conventional mortgages.

•  You must be an employee of the company.  So you must receive regular payroll checks.

One thing to avoid is having the corporation pay you a bonus or a single salary payment.  This is not financially advantageous because the CRA will take half of that lump sum in taxes and you will only be left with 50% of the amount for the purchase of the property.

There are a number of legal and technical details.  This includes corporate tax returns, personal tax returns, documentation, and so forth.  There are certainly tax benefits on both sides but the deal must be carefully structured to provide the best protection.  This applies if the real estate purchased is going to be used for a personal residence or for income producing rental property.

This is not a DIY project.  In order to consider all the consequences, discuss your ideas with a tax consultant.  If there are any errors in the set up, the CRA can include the loan as personal taxable income, which will be exactly the opposite of what you are trying to achieve.  Select an accounting firm that has experience with these types of loans and that regularly works with small businesses.

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

HST Quick or Simple Method

HST Quick or Simple Method

HST or Harmonized Sales Tax is paid on most goods and services in Canada.  In order to remit this amount to the CRA, you must calculate the remittance.  To calculate it, the corporation totals Input Tax Credits (ITCs) on all expenses and subtracts them from the HST collected on sales.  Another option is called the Quick method, which bases the amount on a percentage of sales. 

The quick method affects only how you complete the HST remittance.  The business still charges HST at the same rate, you will still pay HST on expenses, and track HST on all transactions. 

However, when you calculate using the quick method,

•  Start with sales

•  Add HST collected

•  Multiply that number by a percentage based on your business

If you sell goods, like a grocery store, use 4.4%; for services like a fitness instructor, you use 8.8%.  Sales to other provinces will be somewhat different.

•  Subtract $300 of ITC on eligible purchases plus full HST on any capital asset purchases.

This gives you the net HST.

Some of the requirements include that you must be operating the business for at least one year, plus revenues on taxable supplies must be under $400,000 over the previous year.  There are some businesses like accountants, attorneys, actuaries, who are not eligible to use this method.  Plus some non profits are prohibited.  Pretty much everyone else, whether they are or are not incorporated, have the green light to use this calculation method.

Just because you can use it, should you?  If you dread adding all the ITCs, you might want to give it a try.  There are some businesses that will pay significantly less HST using the Quick calculation versus the standard method.  For those who provide services with minimal expense, like that fitness instructor working from home, the quick method is preferred, but if you are renting a storefront, it may not be as good.  Back to someone working from home, using the quick method means you won't be able to deduct rent ITC.

If you file HST annually, you must elect the quick method by the end of the first quarter, March 31, 2021.  You need to complete and remit Form GST74, Election and Revocation of an Election to Use the Quick Method of Accounting.  You can find the form on the CRA website and download it.

For many small businesses, the quick method is a reduction in the amount they send to the CRA so there is more usable cash available.  However, if you have a significant number of taxable expenses, the quick method won't gain you any financial advantages, but it can save you time and effort in calculating.

Before making a final decision, check with your accountant.  Especially if he or she is used to dealing with small businesses, you will have access to sound advice and recommendations.  Capex CPA has those experts who are more than willing to discuss your particular circumstances and offer their opinion.

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

Having Trouble Collecting Payment? It Doesn’t Have to Be This Way!

Having Trouble Collecting Payment? It Doesn’t Have to Be This Way!

Running a small business means that you constantly have a million things on your plate. Unfortunately, when one of these is dealing with a multitude of late payments, you may find yourself running around in a proverbial circle instead of moving in the forward trajectory you need for your business’s success. In this case, you have two choices: outsource collection or handle it on your own.

 

An Outside Party

When you don’t have time to handle financials yourself, you can outsource many of your operational duties to a full-service small business accounting agency. Capex CPA offers all of the services you need, including bookkeeping, financial statement generation, and even helping you write a business plan, which you can use to ensure that your business is operating according to your vision.

 

If you prefer someone full-time that can handle day-to-day transactions and, potentially, some administrative tasks, consider using an employee sourcing firm. Look for a recruiting agency that sorts through candidates and can vet your potential recruits based on the experience you need. Regardless of whether you choose direct hire or agency hire, make sure that you are upfront about their expected tasks, whether that’s tracking late payments, making daily outreach calls, or providing you with financial reports weekly or monthly.

 

Another, ideally last-resort, option is to begin pushing excessively late payments over to a collection agency. Keep in mind here, however, that a debt collection agency may take up to 50% of the money they collect. Experian also notes that this might hurt your customers' credit, which could damage your relationship with otherwise good customers, who may have fallen on hard times or simply missed the invoice.

 

DIY Collections

 

Should you choose to collect late payments on your own, it is those same relationships you want to keep intact. Even if you don’t necessarily mind losing one customer, don’t forget that they may wind up leaving a negative review, which can sway up to 86% of other consumers to hesitate to use your business. Here are a few tips on how to keep payments on track while also building and maintaining healthy professional relationships.

 

●     Reward early payments. Rewarding early payments is one of the best ways to ensure that you get your money. One way to do this is to offer a small percentage off of their total balance. Before you do this, calculate your profit margin and the amount it would cost you to collect a late payment. You can use these numbers to decide on a total discount.

 

●     Send a friendly reminder. People are busy, and, sometimes, late payments are simply a side-effect of being on the go. Send out a friendly reminder of payment due one week before the date, on the due date, and then at recurrent intervals once the payment is late. You can use a pre-scripted letter to ensure consistency. These emails should include a company name, contact information, a copy of their invoice, which should also show their balance and due dates. You can also make a special note of potential late fees and alternative payment methods, if applicable.

 

●     Pick up the phone (and text). A few years ago, one of the best ways to communicate with your customers was to simply pick up the phone and give them a call. Not today. According to PC Magazine, the vast majority of your customers prefer text and are more likely to read these instead of answering the call.

 

●     Offer payment plans. Finally, consider setting up your customers on installment payments. You can do this at the point of purchase, which ensures you at least get part of your money upfront. You can then require payment at intervals of your choice, which will have the added benefit to your customers by making a large purchase more affordable over time.

 

Collecting past due payment isn’t a fun job. But, someone has to do it. Whether you choose to outsource or DIY your collection endeavors, the above tips can help. Whatever you do, remember that attitude is everything, and you do not want to lose customers because of a potential payment misunderstanding.

 

Capex CPA Is one of Canada’s premier bookkeeping and accounting firms. For more information, dial 416.903.4040.


Tips for Non Residents Incorporating a Company in Canada

Tips for Non Residents Incorporating a Company in Canada

In order to establish a non-resident business in Canada, you will need to meet certain requirements.  These may vary from one province to another and will depend upon the type of business you want to operate.  If you are not a Canadian citizen, you may need to partner with someone or relocate to this country. 

As a citizen

If you have a Canadian address, not a post office box, and are a Canadian citizen or landed immigrant, you may register your business as any of the permitted options, including sole proprietorship.  The registration process will vary depending on the provincial requirements.  If you plan to operate countrywide, you might want to consider a federal incorporation that will allow you to operate across the nation under the same name.

Not a citizen

Your options become more limited if you are not a Canadian citizen or landed immigrant.

•  Partner with a Canadian living in Canada, using their address.

•  Incorporate.  You will still need a Canadian address but can form a Canadian controlled private corporation (CCPC) with the correct number of Canadians on your Board of Directors, meet all the other requirements, and you can still enjoy tax benefits.  The procedural specifics, including number of Canadians on the Board, will vary depending on if you opt for a federal registration or the province.

Foreign Corporation

An existing corporation from another country can operate in Canada by:

•  Opening a branch office.  In order to accomplish this, the foreign corporation must apply for registration as an extra-provincial or foreign corporation in each province in which it intends to operate.

•  Subsidiary.  Establish yourself as a subsidiary of a Canadian corporation that has shares owned by a foreign, parent company.  The subsidiary can be either federal or provincial.  This option gives the parent company limited liability from the actions of the subsidiary.

With either option, Canadian director residency is required.

These are the basics for someone who intends to remain a nonresident.  If you contemplate immigrating, you must apply through the Canadian immigration program.  If you anticipate continuing to live outside Canada, you need to partner with one or more Canadian citizens to establish your business.

There is a start-up visa program.  Its requirements are:

•  Have a qualifying business

•  Have a letter of support from a designated organization like an investor

•  Meet Canadian language requirements

•  Have sufficient capital or assets to settle and live in Canada before the business makes money.

If you come to Canada as a self-employed person, you must have relevant experience in either cultural activities or athletics, plus be able to make a significant contribution in one of those areas.  Other considerations are education and age.  Language is a major factor and you must be able to listen, speak, read, and write English or French. 

Understanding the nuances of a non-resident incorporating in Canada can be difficult.  The best option is to contact an accounting firm in Canada that is familiar with the procedures and processes.  They can provide solid advice.  They can also refer you to other professionals that will be necessary like attorneys.

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

Salary vs Dividends - Which One Pays Out

Salary vs Dividends - Which One Pays Out

As you establish your small Canadian business you will have the choice of how to pay yourself.  The options are to take a salary, receive dividends, or both. There are pros and cons to any of the three selections.

Salary

Benefits include:

•  You can contribute to the Canada Pension Plan (CPP).  If you plan to work for an extended period and/or contribute a fair amount, you could be compiling a nice retirement plan.

•  Your salary or bonus is a corporate tax deduction.

•  Income splitting with family members will be allowed.

•  Other retirement options include contributing to a Registered Retirement Savings Plan (RRSP) or a tax-free savings account (TFSA).

Disadvantages:

•  The salary is 100% taxable on your personal income taxes.

•  For the Canada Pension Plan (CCP), you will need to contribute both sides since you are both the employer and employee.

•  You must be included in a payroll account for the CRA, even if you are the only employee. That could be a lot of paperwork.

Dividends

Benefits:

•  Dividends are in a lower tax rate than a salary.

•  Dividends can be declared at any time.  That means you can schedule your disbursements when you need them.  This creates a great deal of flexibility in both personal and corporate cash flow.

•  Eliminating the CPP payments can help with cash flow.

•  Paying dividends is very simple.  You write a check to yourself from the corporation and update the Minute Book and prepare a director's resolution. 

Disadvantages:

•  Not paying into the CPP will reduce the retirement benefits.

•  You will not be able to contribute to an RRSP.

•  Dividends instead of a salary may eliminate the opportunity to claim income tax deductions, like child care.

•  You will need to be methodical about saving for your retirement.

•  Dividends are not considered for line of credit or mortgage applications.

Combination Payments

In Canada, the small business earnings limit is $500,000.  Earnings below that level allow the corporation to pay tax at a much lower rate.  Paying a salary or dividends can help keep the corporation under that $500,000 threshold.  Which option you choose depends on your personal finances.  Some of the areas you may want to consider include:

•  Current income level

•  Current and future income needs

•  Corporate cash flow needs

•  Projected earnings

•  Personal cash needs

•  Age

As you can tell, this process takes much consideration and careful planning.  A good place to start is an appointment with your legal advisor and accountant.  Together they can help you make the best decision based on your current and projected circumstances. 

Capex CPA has extensive experience working with start ups, small businesses, and expanding operations.  They will be a good source of information as you make this critical decision.  Contact us to arrange for a convenient time to discuss the various options and how they will impact your business and personal finances in both the short and long term.

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

How to Incorporate a Company in Canada

How to Incorporate a Company in Canada

As you probably know, there are a number of ways to operate a business in Canada.  Examples are a sole proprietorship, partnership, or corporation.  If you are seriously considering incorporating, there are some of the basics:

Jurisdiction

You can choose to incorporate in any of the Canadian provinces or territorial jurisdictions, or one federal jurisdiction.  Generally, it will either be the province or territory where you live or operate or to the federal jurisdiction in play.  Federal corporations are covered under the Canada Business Corporations Act and they can operate anywhere in Canada, subject to provincial regulations.  Provincial corporations are governed by provincial statutes and laws.  If you are only incorporated in a single province but want to do business in another, you need to make an extra-provincial registration.  There is a cost difference between federal and provincial filings.

Some of the things to consider when deciding on jurisdiction are where the business will be conducted, name choice and importance, and plans for future expansion.

Name

Choosing a corporate name can be more critical and more complex than you think.  While there are no mandatory requirements, each jurisdiction has specific guidelines.  In most cases, Corporations Canada will require distinctive and descriptive elements.  Many proposed names are rejected.  You should probably hire a firm that specializes in corporation names and have a stockpile of at least three choices.

The name needs to be available.  That is, no one else is using it.  There are computer programs that will help with the research.

Articles of Incorporation

There are basic decisions that need to be made.  Attorneys specializing in corporations can help you as well as your accountants.

•       Registered office location

•       Classes and volume of shares that can be issued

•       Share transfer restrictions

•       Directors, minimum and maximum

•       Business activities and restrictions

The articles must be signed in duplicate by at least one incorporator who is competent, 18 or older, and not bankrupt.  Then all the paperwork, including name search, and filing fee must be filed.

Records

While waiting for approval, you need to start your record keeping.  By law, you need to have specific corporate documents including, but not limited to:

•       Copy of the Articles of Incorporation

•       Bylaws

•       Minutes of shareholder meetings

•       Resolutions

•       Minutes of Directors' meetings

•       Directors register

•       Securities register

•       Share Transfer register

•       Copies of all forms filed with the government

•       Copy of any unanimous shareholder agreements

All of this needs to be organized for handy reference and is necessary for many corporate transactions. 

Documentation

The first meeting of the Board needs to have written approval of:

•       Bylaws

•       Issuance of shares

•       Election of directors

•       Appointment of officers

•       Shareholder agreements

•       Any other resolutions

You will also need to apply for any permits, licenses or patents.  There will also be some industry-specific regulations that you may need to take care of

Apply for a federal Business Number; register any non-corporate names; obtain a provincial sales tax account, Employer Health Tax, and worker's compensation. 

Finances

You will need to establish a bank account and set up financial accounting (books). After all this, and all approvals, you can actually, legally do business.

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

- The Capex Team

 

Should I Lease or Buy a Car for Business?

Should I Lease or Buy a Car for Business?

In Canada, business owners can claim a tax advantage for the use of a vehicle for business purposes.  The CRA has some very strict guidelines.

The amount of the tax deduction is directly related to the amount of time the car is used for business.  For example, if the car is used to generate income for 60% of its use, then you can claim 60% of the lease cost.  There are additional expenses that can be claimed like insurance, repairs, licenses, etc.  There is a current cap in Ontario of $800 plus HST.  It is a good idea to make a large down payment on the lease since you may not be able to deduct the full use of the vehicle in the first year of the lease.

Purchasing a Vehicle

Purchasing a vehicle is different.  The tax deductions depend on the amount of the car at the time it is purchased and whether it is purchased outright or financed.  If the car is purchased in full without financing, the amount of purchase is spread out (amortized) over the useful life of the vehicle. Using depreciation, the amount is included in a Capital Cost Allowance (CCA) and a percentage is claimed each year.  There is a maximum allowance of $30,000 to prevent the purchase of a luxury vehicle.  There may be some incentives if you buy an energy-efficient vehicle by upping the maximum price to $55,000. 

If the car is financed, the interest paid during that year is a tax deduction, up to a maximum, of course. A proportionate amount of the vehicle usage, insurance, gas, license, etc. is a legitimate claim.

Sole Proprietorship

If your business is a sole proprietorship, you can deduct mileage on either a leased or purchased car.  You can use either the standard rate or the actual costs for a lease.  If you want to use the standard mileage rate on a leased vehicle, you must use this rate starting with the first year's tax filing and continue with that for all subsequent years. 

Leasing incorporates a number of expenses unrelated to taxes.  When you return the car to the dealership at the end of the contract, you must have completed all necessary repairs so that the vehicle is in stable condition.  There is also generally a limit on the number of kilometers and charges for excess driving.  The final issue is the interest rate you will be charged and billed on the loan.

Credit Rating

The last factor to consider is the credit rating.  With bad credit history, the payments will be higher regardless of whether you purchase or lease.  For someone with a bad rating, leasing would be the less desirable decision since the car could not be used as collateral.

Since both options have advantages and disadvantages, it may come down to a personal decision.  For a good-sounding board, talk with your accountant to see if he or she has any thoughts on the matter.

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

- The Capex Team

Benefits of a Holding Company

Benefits of a Holding Company

Accountants often encourage the formation of a holding company.  If you have wondered if it is right for you, read on.

A holding company is incorporated but is used only to hold investment, but not to operate any type of business.  The holding company can own shares in any public company, real estate, shares in private companies, or other interest-producing investments like bonds.

 There are some very valid reasons to use a holding company.

 Asset Protection

If something happens to the operating company, the assets are kept safe from creditors.  As an example, your operating company is sued and that puts all the assets held in the operating company at risk.  If the profits from the operating company were transferred to the holding company and invested through that holding company, it would be much more difficult for the plaintiff to access that money should the operating company lose the lawsuit.

 Tax Savings

Under certain circumstances, corporations have a lower tax rate than individuals.  Recently there have been changes in the tax law that can make it advantageous for the individual to earn passive income through a holding company.  Some of the details surround the province, the amount of both corporate and individual income, and the type of income earned.

 Estate Planning

Passing assets, especially family-owned businesses, from one generation to another can be easier by using a holding company. Using a tactic called estate freeze will allow the owner to make a successor a shareholder and move any future growth of the company to the successor.  At the same time, it allows the owner to remain in control of the business operations.  It has the added effect of limiting the income tax liability at the time of the owner's death.

 Lifetime Capital Gains Exemption

Most small businesses in Canada fall under the Canadian Controlled Private Corporation.  If the company is sold there is no tax on a gain of up to $867,000.  There are some very specific rules to follow like 90% of the business's assets are used to run the company; 50% of the assets must be used to run the company in the two years prior to the sale, and the owner must have held the shares for at least two years prior to the sale.  A holding company can be beneficial under the right circumstances. 

 Tax Deferral

This centers around the timing of when income is earned.  This means that some of the tax can be deferred to put off from one period to another, saving money.

All of this probably sounds great, but, just like anything, there are some downsides like incorporation and ongoing costs, complicating your current operations, and the administration of two companies.

As you can tell, there are a lot of rules and details around using a holding company.  If you think it might be a solution for you, consult with your accounting firm.  They will be able to analyze your personal and corporate circumstances and help you decide whether a holding company will be an advantage or not.

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

- The Capex Team

 

How to Prepare a T2 Corporate Income Tax Return

How to Prepare a T2 Corporate Income Tax Return

In Canada all corporations must file a T2 income tax return each year, even if there is no tax due.  This includes non-profits, tax-exempt, and inactive.  In addition, non-resident corporations are required to file a T2 in specific circumstances.  There are two types of T2 returns, a short return and a longer version simply called Corporation Income Tax Return.

 •        Corporation return – This is nine pages and can be used by any corporation.  However, there are also a number of Schedules to complete and other financial statements required.

•        Short return – This is only two pages plus three schedules.  Not all corporations are eligible to file a short return and you should check with your accountant if you are unsure.

 In order to complete either return, you will need the following information.

 •        Company name and address

•        Business number from the CRA

•        Full names, addresses and residence country for all shareholders

•        Full names, addresses and residence country for all authorized corporate signature shareholders

•        Complete financial statements filed with the GIFI

•        Company's main activities

•        Sources of income

•        Whether shareholders own shares in other companies

•        Whether the company is associated with other companies

•        Performs activities or owns property abroad

•        All Canadian provinces where it has activities

•        Dividends paid and received

•        Fixed assets acquired or sold

You are going to need a lot more information but these are the basics.

Undoubtedly the easiest way to file a T2 is to use the services of an accountant.  You will be required to sign a T183 which will allow the accountant to file your return electronically.  If you prefer DIY there are some good software programs that will work.  For the non-professional, there is a greater chance of errors or omissions.

If your company has gross revenues over $1 million, you must file electronically; paper is not acceptable.

The deadline for filing is within six months of the end of the corporation's tax year.  If the tax year ends on the last day of the month, you have until the last day of the sixth month following the year-end.  Here are some examples.

•        Tax year ends December 31 and the filing deadline is June 30

•        Tax year ends July 31 and the filing deadline is January 31

If the corporation's tax year does not end on the last day of a month, then you have exactly 6 months from the date of the corporate year-end.

As you can tell, filing a corporation tax return can become very involved and complicated.  It is not an especially easy task and that is why most corporations use a professional accountant to deal with the matter.  As you narrow down your search for an appropriate accounting firm, be sure to ask about their procedures for filing your return and their experience dealing with the CRA.  Keeping up with the tax laws can be difficult.  Ask about their process for this as well.  With the right questions, you can find the best accountant for your tax filing needs.

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

- The Capex Team

 

Basic Accounting Terms you Should Know

Basic Accounting Terms you Should Know

If you have recently started a business and you feel that your accountant is speaking a foreign language, perhaps you need a refresher on some basic accounting terms everyone should know.

Balance Sheet

This is one of two basic statements you will need to effectively run your business.

•      Accounts Payable – AP are the expenses you owe but not yet paid

•      Accounts Receivable – AR are the sales made but not yet paid

•      Asset – Anything of value

•      Balance Sheet – BS is the report of all assets, liabilities, and equity.  The total liabilities plus equity must equal assets.

•      Book Value – BV is the original value of an asset, less accumulated depreciation

•      Equity – The portion of the company that is owned by you and/or investors

•      Liability – L all debts to be paid, commonly AP, payroll, and loans

Income Statement

This is the other most common report.  It is also called a profit and loss statement.

•      Cost of Goods Sold – CoGS are the expenses that directly relate to the product or service.  This excludes those items that are needed to run the business like rent.  Examples of CoGS is the price of the raw materials or direct labor in the case of a service.

•      Depreciation – Dep is the loss of value over time for an asset. 

•      Expense – Cost is anything incurred by the business that needs to be paid.

•      Gross Margin – GM – Divide gross profit into revenue for the same period and you have gross margin.  It is the profit after deducting cost of goods sold.

•      Gross Profit – GP Subtract the cost of goods sold from revenue.  It is the company's profit without overhead expenses.

•      Income Statement – Profit and Loss shows the revenues, expenses and profits for a specified period.  Expenses are subtracted from revenue to give net income.

•      Net Income – NI is profit.

•      Net Margin – Percent of profit in relation to revenue.  Divide net income by revenue for the period.

•      Revenue – Sales is any money earned.

General

There are also some terms that are not directly associated with any report.

•      Accounting period – Dates included in the report.

•      Allocation – Assigning funds to various accounts or periods.

•      Business Entity – Legal structure of the company.  It can be sole proprietor, partnership, limited liability company (LLC), etc.  Each type of company has its own laws and tax rules.

•      Cash Flow – CF is money in and money out.  Subtract the ending cash balance from the beginning cash balance.  A negative number means you spent more than you took in.

As your business progresses, don't hesitate to speak with your accountant about any terms you don't understand.  He or she should be willing and happy to explain any details.  If not, find yourself a new accountant.  Try Capex CPA and see how friendly and professional an accounting firm in Mississauga can help.

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

- The Capex Team

What are Accounting Liabilities?

What are Accounting Liabilities?

Liabilities are financial responsibilities that need to be repaid.  In business terms, they are often referred to as payables or accounts payable.  This is one of the items you will find on a balance sheet.

 In small business accounting, common liabilities include payroll; the cost of any goods, raw materials, supplies; and taxes, including taxes on sales.  Most small businesses also have interest and principal payments on loans or lines of credit.  This is expected since asset purchases are part of doing business.  However, a business should have enough assets to cover the debt.  This is a ratio of debt to equity and debt to assets.

Liabilities are often confused with expenses.  Liabilities are money owed usually like a loan to purchase office equipment.  Expenses are ongoing payments that have no physical value.  Utilities are an expense; the mortgage is a liability.  Expenses are listed on your income statements but not on the balance sheet.  So the liabilities are shown on the balance sheet if:

•      Owed as a past transaction

•      Owed as of the date the balance sheet is prepared

•      Includes advances, or money paid in before it has been earned

Some of the titles would be:

•      Accounts payable

•      Short-term loans

•      Accrued liabilities

•      Deferred revenues

The balance sheet will list two classifications:  current and long-term.  Current liabilities are payable within one year of the balance sheet date and will use some assets to secure the payment.  That would be like a short-term loan (credit card) or the portion of a long-term debt owed that year (interest).  It will also include accounts payable, income taxes due, and others.

•      Short-term loans are obligations where the principal amount must be repaid within one year or sooner, unlike a mortgage that can span decades. 

•      The current portion of long-term debt is the amount of the principal that is due within the next 12 months.

•      Accounts payable is probably the most common liability.  It is the compilation of all the money the business owes to vendors or suppliers for materials that were purchased on credit.  In other words, you ordered a load of lumber for your carpentry business and the lumber yard sends you an invoice for the amount of the purchase and that amount is due within the time specified on the bill.  Accounts payable are usually backed up with written invoices that have been received, approved for payment, and recorded in the bookkeeping system.

•      Taxes are another common item on the balance sheet.  This is the amount of the annual tax debt based on the type of business (i.e. corporation, sole proprietorship, partnership, etc.).  It also includes any taxes based on sales.

 All of this can be pretty confusing.  A good source of information is your accountant.  In fact, they will probably recommend software packages that will make the job easier.  Couple that with cloud storage and you will be able to handle the bookkeeping much easier and always have the information close at hand. 

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

- The Capex Team

5 Best Small Business Starter Tips

5 Best Small Business Starter Tips

As you get closer to opening your new business, you will hear lots of tips and tricks.  The thing to remember is there is no perfect recipe for success.  To add to your growing list of advice, here are a few more. 

Take Action

Make sure you put your dreams into motion.  There will always be excuses or reasons to delay.  Entrepreneurship is scary.  That's a fact.  Worrying about the risks won't make them disappear.  Look for solutions and then move forward.

Learn

In gardening, it is said that you learn as much from the plants that fail as those that thrive.  As you listen to the stories of what everyone (friends, family, experts, etc.) says listen to what they say, including the horror stories.  Privately take notes to incorporate into your plan.   

Ask advice especially from veteran owners who started small and grew.  These mentors can be invaluable.  As you ask questions, observe body language as well as the words they say. 

Approach

If you want to go out on your own but are struggling with finding something unique to sell, switch thought gears.  Think about a problem you can solve.  It is easier to attract a customer if you are filling a need they have.  Know the problems your target group is facing and see if you can solve even one of them.

Simplicity

Once you have an idea, it is easy to allow it to grow in your mind.  That is good, to an extent.  As you start out, keep the basic product simple.  Start with a non-complicated, good quality product or service.  Save money on those parts of the product or service that will increase the cost to the consumer.  Keep all those good ideas in reserve to implement as your company grows.

Costs

As you begin, add each and every cost into your estimate.  Don't dismiss smaller items as easily absorbable.  All those little things will add up until you are overwhelmed.  When you feel you have a solid number, at least triple it.  It is better to overestimate expenses and have some seed money left over than the other way around. 

Remember you will need to pay yourself.  Determine how much you will need to live, including that second mortgage payment, car expenses including repairs, and family needs. 

Create a budget.  Far too many new businesses believe that budgeting is a step they can bypass.  Don't.  While you are making out the budget for the business, add one for your personal expenses.  Only then can you determine how much money you can afford to risk from your personal savings in order to get your business off the ground.  These two budgets will also be valuable tools if you are looking for outside financing.  If nothing else, it will show that you are responsible enough to do the homework.

A great source for financing options and how to complete all the documentation you need is to consult with an accounting firm that works with small and medium-sized businesses, and startups.  They have a wealth of knowledge they are willing to share and will welcome your questions.

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

- The Capex Team