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Corporate Tax Strategy Considerations

Behind every small to medium enterprise is a person. Does your corporate tax strategy consider the person that is the entrepreneur?

A tax strategy should consider both the corporate tax AND personal tax implications.

What mix puts the most dollars in your jeans at the end of the day?

Open and honest communication with your accountant is critical.

Does your accountant know YOU as well as your business?

Knowing YOU is a critical factor in deciding on the best solution for owner compensation. Without a full understanding of your situation, the wrong compensation plan can cost you big bucks.

What do you have going on in your household for tax purposes?

  1. Do you have a spouse? What is their income level?
  2. Do you have other sources of income? Giant expenses to deduct this year?
  3. Significant life changes planned in the next year or two? A new house, children, a marriage, a divorce? Retirement plans?
  4. What is your five-year plan?
  5. What about children? How old are they? Plans for post-secondary education?
  6. Does anyone in your household have medical issues or disabilities?

I’ve often said that the more I know about my clients, the more opportunities for tax savings. A corporate tax strategy that fails to consider these factors isn’t much of a plan.

The corporate tax strategy should be pro-active.

  1. AVOID PERSONAL TAX SURPRISES. Based on your corporate activities, what is your personal tax bill going to be? What are some opportunities to mitigate that personal tax hit? RRSPs? Donations? (One of my favorite clients has me calculate how many charitable donations are required to eliminate his personal tax bill each year. That guy makes my heart smile.)
  2. TAKE ADVANTAGE OF LOWER TAX BRACKETS. Perhaps your personal income is low this year, but you are planning on buying a house next year. You were planning on drawing significantly more out of your corporation for the down payment. It’s likely a terrible idea to have personal income in 2020 of $20,000 and $200,000 in 2021. Smooth this out over the two years so that you’re taking full advantage of the pleasant tax brackets in 2020 and avoiding the ugly brackets in 2021. Think about bumping up your income to $120,000 in 2020 and buying an RRSP to take advantage of the Home Buyers Plan for that down payment (if you qualify).
  3. INCOME SPLITTING OPPORTUNITIES. In a family business, everyone pitches in at some point or another. Should you consider paying your spouse a wage? Can you justify putting your children on the payroll? ***NOT YOUR TODDLER*** Perhaps your older child helps clean up the shop or organize paperwork. Pay them a reasonable and justifiable wage instead of an allowance. From there, they can pay for their own expenses or college savings.
  4. DO NOT PROCRASTINATE. The longer you wait to supply your year-end to your accountant, the fewer tax planning opportunities there are. Keep on top of things and get your corporate documents to your accountant within a month or two of your year-end. I picture my October year-end guy that brings his year-end to me in April. There is very little I can recommend for him to reduce the corporate tax bill or his personal tax bill. To further rub salt in those tax bill wounds, he typically has to pay interest and penalties for late remittances.

Do you think you have a “one strategy for all” accountant? I’d be happy to provide a second opinion in a complimentary consultation. Contact Richardson Miller LLP today!

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Salary versus Dividends

The ongoing discussion of Salary versus Dividends has got to be one of the oldest debates since the dawn of complex taxation. Over the years, I’ve heard many people (accountants included) preach that dividends are the way to go. I cringe at these “one size fits all” solutions.

Salary versus Dividends – how to choose

The increasing Canada Pension Plan (CPP) rates make a dividend only compensation strategy tempting, but consider this:

  1. Childcare costs can only be deducted against employment (or self-employment) income. If you have dividend-only income, those daycare receipts could be worthless at personal tax time.
  2. Did you move during the year? Moving expenses can only be deducted against employment income.
  3. Do you have a health spending account in your corporation? This is only deductible in your corporation if you are an employee of your corporation. You are not an employee if you are only paid a dividend.
  4. Dividends are grossed up on your personal taxes. This means that your taxable income is essentially inflated for calculating credits and programs that are income-dependent. Dividends will mean reduced Child Tax Benefits or GST credits. For older entrepreneurs, it can mean clawed back Old Age Security benefits.

Perhaps dividends are the most cost-effective method of compensation for you. Consider taking a tiny wage from your corporation so that you are technically an employee and can access benefits and tax credits aimed at people who report T4 income.

Be aware of the consequences of dividend-only compensation.

  1. No (or reduced) CPP benefits. Think retirement plan and disability payments. Consider taking those employer and employee CPP savings and locking them into a long-term investment plan to save for the lost future benefits.
  2. No accumulation of RRSP contribution room.

The answer isn’t simple and each individual situation needs to be evaluated separately. Depending on the various taxation policies at provincial and federal levels of government, the ideal compensation strategy can flip flop annually. Make sure your accountant is aware of any changes in your household and personal plans.

Richardson Miller LLP is here to help you with all of your Accounting needs. Contact us today.

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Contractor Reporting – The T5018 Slip

Have you heard of the T5018 slip?

Did you know that if your business is operating in the construction industry, you may be required to file an annual T5018 Statement of Contractor Payments with Canada Revenue Agency (CRA)?

The why

What is the reasoning behind yet another filing obligation with CRA you may ask? Well, it is estimated that the underground economy totals over $45 billion a year in unreported income in Canada and that the construction industry represents almost 1/3 of the underground economy. With those kinds of statistics, it is no surprise that CRA is taking action to combat this and one of their weapons of choice is the T5018.

The T5018 requires the payer to report to CRA who and what they have paid to subcontractors so that CRA can match those payments up to ensure that the income is being reported by the subcontractors.

So does this form impact you?

First, you need to determine if your business is considered to be operating in construction activities according to the list provided by CRA. Most of this list is the expected: drywalling, electrical, plumbing and carpentry; however, there are some less expected construction activities such as fencing and swimming pool installation.

Second, if you are in the construction, do have more than 50% of your revenue coming from construction activities? If the answer is yes, then you may have to continue to the third criteria.

Finally, did you make payments to subcontractors for construction services? Don’t forget that cash payments and barter payments are considered payments.

At the end of all of this if you are operating in the construction industry, have more than 50% of your revenues from these sources, and paid subcontractors, then you should be filing the T5018 annually with CRA.

What is the downside of failing to file these returns? The failure to file penalty is $25 a day with a minimum penalty of $100 and a maximum penalty of $2,500. And of course, these late filing penalties are not deductible for tax purposes.

If you have questions on the T5018 Statement of Contractor Payments, give us a call, and we will be happy to discuss it with you.

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What Can I Expense Through My Corporation?

What constitutes a business expense?

I get this question ALL the time from my business clients.

As a general rule, expenses must be incurred with the purpose of earning business income. The expenses must be reasonable and justifiable. I’ve compiled a list of the more common expense questions with the answers to perhaps paint a clearer picture.

Are haircuts a business expense?

This is a solid NO.

Personal grooming costs are not deductible… even though you may have to look presentable and professional to meet with customers and clients. Let’s be honest, almost everyone who is working with the general public should be somewhat groomed. This is a human thing—not a business expense.

What about clothing?

Canada Revenue has a stance that unless the clothing is considered a uniform, it is not deductible. A loose definition of a uniform is something that a normal person would not wear to a mall. (I purposely did not mention Walmart here). This means that your business suits are not deductible. There are occasions where clothing may be permitted as an expense.

  1. Clothing that is specifically required safety gear is a reasonable and justifiable deduction.
  2. Clothing that contains your logo for advertising purposes would also be considered deductible.

Go ahead and order your next golf shirt, jacket or hoodie from a promotional supply store and be a walking billboard (I personally think this would be hilarious if you had a numbered company with no real logo).

Is a home office a business expense?

If you are working out of your home, yes, a portion of the expenses can be expensed. If you are paying rent at an official business location (or own the space), you likely cannot also deduct for your home office. If you are expensing a portion of your home for business purposes, do be careful not to be too aggressive with those claims.

I’d be hesitant to claim more than 10% of your homes’ costs (mortgage interest, property taxes, repairs and maintenance, utilities, insurance, security system, etc.).

If you’re claiming more, Canada Revenue Agency deny a portion of your principal residence exemption when you go and sell your home. In other words, if you claim 40% of your home expenses for your business, CRA would argue that 40% of your home was for not for personal use and therefore, you’d have to report 40% of any gains on sale as income on your taxes.

How are telephones a business expense?

If you still have a landline in your home, you cannot deduct this for business purposes… just the specific charges for any long-distance calls related to business. Your business cell phone can be deductible. Communicate with your cell phone provider that you have a business as certain carriers have special pricing for business owners.

What about conferences?

Here is a brilliant way to make your next trip to Vegas a business expense! Find a conference that is somewhat relevant to your business operations. You can deduct up to two conferences per year.

Paying your children or spouse a wage.

This one boils down to the expense has to be reasonable and justifiable.

  1. Can you pay your 3 year old $10,000 a year for sweeping out the garage?
    • No. This is not reasonable.
  2. Can you pay your husband $150,000 per year for sorting receipts?
    • Likely no—because you wouldn’t pay someone you weren’t related to that kind of amount.
  3. Can you pay your teen minimum wage for sweeping out your shop? Or pay your spouse fair market value for administrative work?
    • Yes. This would probably be considered reasonable.

Keep a detailed timesheet to document and justify the expense…just as you would to any other employee that wasn’t closely related to you or sharing your bed.

How do meals and entertainment factor into business expenses?

Yes, these are deductible expenses… but don’t go too crazy.

  • Go for lunch with that potential referral partner.
  • Buy a coffee for the potential new client.
  • Take the staff out to celebrate completing a major project.
  • Order dinner in house when key staff are staying late to get the job done.

Don’t try and expense every single meal you eat through your company. Similarly, your personal groceries are not deductible. Again, these expenses need to be reasonable and justifiable.

For example, an oilfield contractor would have a tough time justifying how Oilers season tickets were a legit expense to earn business income. On the other hand, if you typically dealt with many customers and relied on referrals, perhaps you could deduct some of those hockey tickets because you gave them to clients or associates as a thank you for referring new business. Documentation is key in this case. Who got the ticket and why?

Every business is unique. If you have specific questions of what types of expenses would be considered reasonable and justifiable for your operations, feel free to contact us.

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What does CPA mean?

CPA makes a difference in your protection

Have you ever looked for professional accounting services and been overwhelmed by the number of businesses to choose from? Have you ever noticed some of these companies have a Chartered Professional Accountant and some do not? What does Chartered Professional Accountant, or CPA, even mean?

Let us help shed some light on this.

Chartered Professional Accountants Association aka CPA

The Chartered Professional Accountants Association is a professional regulatory body that focuses on protecting the public. What does CPA stand for? When an accountant has CPA after their name that means they have completed:

  • a university degree (or equivalent);
  • a couple of years of practical work experience;
  • and professional level exams in order to receive the CPA designation.

An ongoing 40 hours a year of professional development is required to maintain the CPA letters. The Association protects the public by ensuring its members meet their high professional conduct and ethical accounting standards. They continue to monitor CPA firms to ensure ongoing competency, absence of professional misconduct, and validity of applicants for membership

Who is regulating the non-CPA firm to ensure they are qualified as well?

Unfortunately, in Alberta, there is no law to prevent anyone from calling themselves an “accountant”. It is the old “buyer beware”; if there is no CPA in the firm name or behind the accountant’s name, there is no one regulating the work being performed.

If the strict monitoring of a CPA firm isn’t enough to help you make a choice, you should also consider current and future financing. Depending on the level of financing, financial institutions may require a company’s financial statements to be prepared by Chartered Professional Accountant.

Check out the CPA Alberta website for more information on protecting the public or to verify that a chartered accountant, or a firm, is registered with the CPA Alberta Association.

How Can a CPA Help Me?

A chartered professional accountant can offer a variety of services to ease the burden of finances. Professional accountants can offer tax services, manage audits, and perform CFO functions. As a business owner, the business is your top priority. Hiring a chartered professional accountant to manage your finances gives you the extra time to invest in your business. CPAs can perform financial services in less time, with fewer clerical errors, and with a wider range of knowledge gained from education and experience.

“Many businesses choose to work with chartered accountants because of so many reasons. These professionals are experienced and vigorously trained to handle all tax and finance-related problems. Yes, hiring a chartered accountant will be an added expenditure, but the money they help you save will certainly outweigh those costs.” source: Small Business Sense

Investing in a CPA is investing in your business

Tax planning can assist you in saving thousands of dollars. Proper planning and filing of forms help you to avoid audits, penalties, or late filings. CPAs are professionally trained and knowledgeable on tax laws and how to use them to their advantage. We all know the headache of cutting through the red tape of taxes. CPAs will slice through and come out saving you in the end.

Nothing is certain in life except death and taxes. What comes with taxes? Audits. Chartered accountants can help protect your business and prepare you for the inevitable. Having a chartered professional accountant backing you when the Canadian Revenue Agency comes knocking is the highest reassurance one can have. They will know the proper steps and procedures to appease the CRA. Knowing your finances have been professionally prepared and documented takes all the burden during this potentially stressful time.

Did you know that chartered accountants can do more than just taxes?

CPAs can fill the role of Chief Financial Officers, CFOs. They can help manage expenses, perform payroll analysis, and assist in financial planning for the future. Outsourcing the role of CFO helps businesses have a professional perspective of the entirety of their finances. Along with business owners and management, CPAs can help develop solid financial plans to ensure the growth of businesses.

With ongoing training and certified professional education requirements. chartered professional accountants a wealth of knowledge available to business owners. Laws and industry standards are constantly changing. CPAs make staying on top of these changes their job. Knowledge is power and nothing comes close to the strength of CPAs when it comes to finances. This powerful ally is waiting to be called on whenever necessary.

Industry-Specific CPAs

Within the Accounting Industry, the CPA profession is diverse as the businesses they serve. CPAs can choose to specialize in certain areas of the accounting profession. A chartered professional accountant’s specialty can vary based on the size of the business they wish to represent, the types of businesses, or even accounting services they have honed throughout their accounting career. Business size has a massive impact on money management.

CPAs choosing to specialize in small businesses will have many more strategies and methods to best serve their clients. CPAs choosing to focus on a type of business within a specific service or industry will have more knowledge of the laws and regulations of this field. They are trained and educated in all areas of the accounting profession, however, CPAs can be more proficient in some services.

Hiring a Chartered Professional Accountant is important for your business. We have a proven track record of success and are qualified and motivated to provide you with the best financial advice and tax strategies for your business.

Click here to contact us today and learn more about how we can help your business grow.

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Get Paid Faster – Tips on Quick Accounts Receivable Collections

Getting paid should be easy.

Many entrepreneurs struggle with cash flow and wish they had more money in the bank. One of the most significant keys maintaining a healthy cash balance is collecting accounts receivable in a timely manner.

Here are some tips and tricks to ensure you’re collecting your accounts receivables as fast as possible.

Stay on top of your invoicing.

Picture the entrepreneur that is too busy doing the work to invoice his customer. Most people would agree that there is very little point to working in your business if you never receive any money. Hire staff/contractors to help you with this if you are too busy.

    • Invoice for work completed as soon as possible. If your customer typically takes 30 days to pay your invoice, the extra time that the paper sits on your desk equals added extra days before that money lands in your bank account.
    • After delivery of the invoice, consider following up with your customer to ensure that they have received your invoice as well as any other documents and information required for payment. This may include PO numbers, proof of delivery, etc. Missing information can add days/weeks or more to your collection time.
    • Consider automating your internal processes to save time in paper processing.
    • Ensure that your staff are aware that invoicing is a priority and that you have the manpower to get the task done on time.

Call and ask for the money.

Don’t be too busy to remember to call and collect from your customers. The money doesn’t land in your bank account any faster by sitting, hoping and waiting.

    • As time passes, consider simply picking up the phone and calling the customer. If your customer normally pays within 30 days and its day 35. Perhaps a gentle reminder is all that they need. Perhaps there are other circumstances.
    • It’s important that your customer be aware that they have bills to pay. Be the squeaky wheel. If they are in a tight cash flow position, when there is cash available for payments, you want your invoice to be on the top of the list.
    • Often calling and collecting money ends up on the bottom of the priority list for busy staff. Ensure that staff know that collection activities are a priority and consider hiring help as required.

Offer quick and easy payment options.

    • Do you accept electronic payments? E-transfers? Credit cards? While the merchant fees on credit card payments can cut into your profit, so can paying interest on your operating line of credit… or not being paid at all. There are many mobile debit and credit card processing options. If your customer is the general public, strongly consider some of these immediate payment alternatives.
    • Electronic and card payments can eliminate the old “the check is in the mail” excuse. Mailing payment can add an additional week to your collection time. Mention your electronic payment options so that your customer can also save money on postage

Offer discounts on quick payments or charge interest.

    • Does it make sense to offer your customers a few percent off of their bill if they pay immediately or within 15 days?
    • Alternatively, consider charging interest on late payments. Often people will delay paying you simply because there is no consequence to not paying you.

Evaluate your policies for granting credit.

    • Who are you offering goods and services to without knowing of their ability to pay?
    • Do your customers have to fill out a credit application?
    • Do you obtain their credit history?
    • Do you have internal controls that prevent sales staff to extend additional credit when previous invoices have not been paid?
    • Consider obtaining a retainer or deposit.

Know your legal rights.

    • If your customer is delaying payment, can you place a lien on a property? Make sure you are aware of your options and any applicable deadlines to register such liens.
    • What are your options with small claims court?
    • What are your rights to collect on invoices outstanding for over a year or two?
    • Develop a relationship with a good collection agent to assist with difficult cases.

Stay current on your record keeping.

You don’t know what you don’t know. Get meaningful financial reporting on a timely basis.

    • Current financial records will indicate exactly who still owes you money. Keep on top of bookkeeping and reconciling your bank account. Review your accounts receivable listing regularly.
    • Become immediately aware of any NSF payments by your customers.
    • If you take your box of records to a bookkeeper quarterly or annually, you may not realize that your customers invoice over 60 days old. Perhaps monthly bookkeeping options would be better for your operations.
    • Even with very simple operations with very few customers, it’s easy to forget that an invoice is outstanding.

Need assistance with bookkeeping or automating your invoicing processes? Send me an email angela@rmllp.ca.

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