Salary OR Dividend?

When it comes to taking money out of your company, the key question is what’s better, salary or dividends?

While there are a number of factors to consider when answering that question, if you’ve worked out that salary is your best option, the next question is how you actually pay yourself that salary.

So just what does it mean to pay yourself a salary?

Simply taking money out of corporation is neither a salary or dividend by CRA standards and is only a shareholder loan. Without somehow declaring to the CRA whether those withdrawals are salary or dividends, it will be as if you are borrowing money from the corporation which you’re expected to pay back.

What truly defines whether compensation is salary or a dividend is the information form that is issued to the CRA.

How do I pay myself?

Each year by the end of February, a corporation must issue a T-slip to inform the CRA whether salary or dividends were taken: a T5 is submitted to declare dividends while a T4 is issued to declare salary. The contents of the T4s or T5s that were issued to you are then recorded on your T1 personal tax return.

Implications of late filing of Income tax?

With so much going on in our life, it’s not always easy to file our taxes on time. So what is the tax implication of filing late?

Before I go into the details, keep in mind that there’s a distinct difference between paying your taxes late and filing your taxes late – a difference that may have a profound effect on your cash situation.

If you file your taxes on time but don’t have the cash to pay the balance owing, you’ll be subject to interest.

However, if you miss the filing deadline and file late, you’ll automatically be subject to a late filing penalty in addition to any interest on the tax balance owing.

It’s this late filing penalty that can make filing your taxes late a real nightmare.

Let’s take a look at what would happen if you filed a few common tax returns one month late with a 20,000 balance outstanding.

Canadian Corporate Minute Book

Please note that I am definitely NOT a legal expert in this area; I’m a professional accountant but I present this information so as to put the Corporate Minute Book on your radar and to facilitate a conversation with your lawyer.

As a small business owner, YOU should also be aware of what you ask your accountant or bookkeeper to do with regards the Minute Book and what you should defer to your lawyer.

What is a Corporate Minute Book?

A corporate minute book is a binder a Canadian Controlled Private Corporation (CCPC) must legally maintain. It should be created when the corporation starts and contain documents about the creation of the company as well as records about the history of running the corporation.

You may choose to hire a lawyer to keep this binder at their premises and update/maintain it on a regular basis for a fee of course.

Incorporating Your Sole Proprietorship: The Section 85 Rollover Question

Are you in the next stage of growth in your business? Are you ready to incorporate? Are you ready to speak to an accountant?

If the answer is yes, then be ready for some additional admin work.

You may have heard the term ‘section 85 rollover’ from other small business owners who’ve gone through the transition from a sole proprietorship to a corporation. The concept is an important process to take into account when making the transition.

When you’re operating as an unincorporated entity, for example an individual/sole proprietor, you’re forming all kinds of relationships. You’ll have relationships with suppliers, customers, competitors, etc. all of which contribute to the growth of your business. By the time you’re ready to incorporate, you’ve likely developed some amount of goodwill.

19 Most Popular Tax Deductions in Calgary

It is the question every Calgary small business owner asks me: What can I deduct from my taxes?

There are an incredible amount of things that can be deducted but there are so many variables that can determine if you are eligible to deduct those items. For example, these factors will certainly affect your eligibility: your location, how much you make, children, personal status, type of business, where you do business, are you incorporated, do you work from home, do you have children, employees, other employment, commissions, employment insurance, capital gains, etc., etc. – and there are many etc’s.

1. Equivalent-to-Spouse Credit
2. Charitable Donations
3. Safety Deposit Boxes at the Bank
4. Childcare Expenses
5. Medical Expenses
6. Your First Home
7. Dividend Income
8. Disability Credits
9. Personal Income Credit
10. Carrying Charges
11. Moving Expenses
12. Self-employment Expenses
13. Kids Activity Expenses
14. Political Donations
15. Transit Pass Receipts
16. RRSP Contributions
17. Office in-home Expenses
18. Professional or union-dues
19. Interest Paid on Student Loans

How to Choose a Fiscal Year-End

It’s one of the first questions people ask themselves after incorporating:

Why choose a fiscal year-end?

A corporation’s fiscal year is an accounting cycle that serves as the basis for its income tax return. At the fiscal year-end, a corporation must prepare its financial statements then file its T2 corporate income tax return. The T2 tax return must be filed within 3 months after the fiscal year-end date to avoid interest and within 6 months to avoid late filing penalties.

So how do I choose a fiscal year ?

Just file your T2 return and your fiscal year will then be set. While the CRA may ask you to choose a fiscal year-end when you first incorporate, this generally relates to your GST/HST filings and can always be changed. Only by filing the first T2 tax return do you lock in your fiscal year.

Note that once you do lock in that fiscal year-end with CRA, it will be a bit of a process to change it. To avoid any hassle and additional professional fees, you want to make sure you choose your year-end carefully.

6 Great Books for Small Business Owners!

If you are a small business owner you may find yourself with little time to read. You may also be running a household or even have a family to support. Either way, reading is an essential component for learning about how to be a better small business owner and manage your money. And simply put, reading is also great for the mind, which can lead to even greater success!

While there are countless numbers of great reads out there these 6 books will be a good beginning if you need a starting point. Tryout these 6 great books:

 

1. “The 7 Habits of Highly Effective People” by Stephen R. Covey

2.“Rich Dad Poor Dad” by Robert T. Kiyosaki

3. “The Key: The Missing Secret for Attracting Anything You Want” by Joe Vitale

4. “Crush It! Why NOW is the time to Cash In on your Passion” by Gary Vaynerchuck

5. “The Art of the Start” by Guy Kawasaki

6. “Canadian Small Business Kit for Dummies” by Margaret Kerr and JoAnn Kurtz

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*p.s. Lawerence Ogbonnah is a small business accountant and growth & profit expert in Calgary, Alberta Canada. Click here to contact me anytime for help with your Small Business Accounting, Bookkeeping, Taxes, and much more. 

CRA Audits: Will I Be Selected?

I am often asked how the Canada Revenue Agency (“CRA”) selects its audit victims; oops, I meant to say taxpayers subject to audit. Basic instinct would suggest that certain taxpayers, certain claims and certain industries seem to trigger audits. With this in mind, I will list below how I believe the CRA may selects certain individuals and businesses for audit.

Reasons for Individuals and Corporations

I would suggest there is nothing worse than a scorned lover, a business partner you have had a falling out with or a dismissed employee to trigger a CRA audit. These individuals know your little secrets; a cash deal here, an offshore account there and a conference you expensed that was really a vacation. These people are also vindictive and in some cases, they make statements and claims that are not factual in nature; however, the claims are enough to bring the CRA to your door.

CRA also loves net worth audits. These are audits undertaken because you live in a 3,000 square foot home, have a Porsche and kids in private school, and yet show minimal income on your tax return.  Typically CRA either stumbles upon these situations, or information from one of the individuals noted in the preceding paragraph provides a lead.

Tax Deductions Tip: Self-employment Expenses

This is essential information that all self-employed business owners need to read!

If you are self-employed in Canada there is a good chance you are working from home. Basically, your home is your office and you can claim a tax deduction for the part of your home you are using as your business.

Owners: If you own your home you can claim a portion of your mortgage interest, property taxes, and capital cost allowance.

Renters: If you rent your home you can claim a portion of your monthly rent. You can include in your deduction a share of the utilities, insurance or home maintenance allotted to the area of the house set aside for business use. For each of these business expenses you can claim a percentage equal to the percentage of your home that is reserved for business.

It is important to note that you are not allowed to use these expenses to create a loss or be deducted against any other sources of income.

Only expenses 100% related to your business, such as travel, entertainment for the customer, and supplies are fully deductible.

CRA has a form that contains a guide entitled “Calculation of Business-Use-of-Home Expenses” that will help you calculate your allowable claim.

*For more information on self-employment expenses please contact me for a consultation and read-up on the Canada Revenue Agency (Small businesses and self-employed) website.

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*p.s. I am a small business accountant and growth & profit expert in Calgary, Alberta Canada. Click here to contact me anytime for help with your Small Business Accounting, Bookkeeping, Taxes, and much more. 

Tax Deductions Tip: Charitable Donations

Did you know that the Canada Revenue Agency (CRA) allows a federal tax credit on charitable donations?

It’s true! You are allowed charitable donations of 15% for the first $200 and 29% on amounts over $200 up to a maximum of 75% of net income. The provincial tax credit for Ontario residents is 6.05 per cent of the first $200 and 11.16 per cent of any amount over $200.

Spouses can also combine their contributions to maximize this great feel-good tax break, which is a very important part of our Canadian giving culture anyway. Basically, charitable donations are a win-win for everyone!

Furthermore, and a very important thing to note, your contributions do not need to be claimed in the same tax year they were made, but can be carried forward for up to five years. FIVE YEARS!

Donations under the $200 limit can be accumulated and claimed in later years to qualify for the higher credit allowance.

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*p.s. Click here to contact me anytime for help with your Small Business Accounting, Bookkeeping, Taxes, and much more.