Category: Insights

First of all, when starting up your own business it is important that you determine the structure of your business.  There are 3 types of business structures to consider.

• Sole proprietorship
• Corporation
• Partnership

For income tax purposes, these structures have different tax implications.  Which is why it’s important to discuss with a tax expert a strategy for success.  When deciding which structure is best, one should consider the advantages and disadvantages of each business structure.

Sole Proprietorship

Advantages

• Easy and inexpensive to register.
• No corporate tax payments.
• Minimal accounting and legal fees to form and operate a sole proprietorship.

Disadvantages

• Unlimited liability (if you have business debt, collectors can make claims against personal assets to pay them off).
• Higher income taxes at your personal rate when the business is profitable.
• More difficult to raise capital from investors.

Corporation

Advantages

• Limited liability and asset protection (if you have business debt, collectors can only make claims up to your investment in the company.
• Corporate tax rates are only 13.00% for small business. This amount is going to decrease to 12.62% in 2017.
• Tax planning is much more effective when you are incorporated and profitable, since you only pay personal taxes on what you draw from the company.
• Income splitting and dividends (a corporation can choose the most tax effective strategy for paying owners or family members involved in the business).
• When it’s time to sell the business, you are selling an independent entity and may be eligible for a one-time capital-gains tax exemption of $800,000. A sole proprietor may not claim this exemption.

Disadvantages

• Higher accounting and legal fees to maintain and startup the company. Typical legal fees range from $1,000-$1,500 to have a lawyer incorporate your business.
• Double taxation. You must file an annual corporate tax return in addition to your personal tax return.
• As a sole proprietor, you can use business losses against other types of income, as a corporation the losses may only be used in the corporation, however, these losses can be carried forward or back to reduce income tax of other years.
• When you want to close a corporation, there is more paperwork involved to dissolve the company.

Partnership

Advantages

• Easy to establish and low startup costs.
• Inexpensive to maintain.
• Ability to pool resources and share financial obligations.
• The partnership doesn’t file its own taxes. Each individual partner files their own tax return.

Disadvantages

• Liability of the partners in unlimited.
• Disagreements among partners.
• Partners are taxed at personal tax rates which are much higher than a corporation when the business is profitable.

Plan Sooner Rather Than Later

It’s very important to decide the structure of your business when you are first getting started.  Once the business accumulates assets and liabilities, there is much more complex accounting work to be done when switching from a sole proprietor to incorporated.  Also, tax planning strategies cannot be put into place retroactively.  Therefore, it’s very important the right business structure is selected from the get-go.

Owners or prospective owners of small businesses should work with their accountant and lawyer to determine what business structure is right for them.

Do you need help filing your tax return? Contact Argento CPA today!

TAXATION

Develop a strategy for distributing earnings and reducing corporate income taxes.

For most owner-managers, their goal is to create personal wealth through the operation of a successful business. Unfortunately, corporate and personal tax liabilities (among other things) stand in the way. Owner-managed businesses must struggle with tax on two fronts:

• making a profit while minimizing the corporate tax liability
• minimizing personal taxes while taking remuneration out of the company.

Have a Strategy

The first step to minimizing personal and corporate taxes is to put a tax strategy in place. Such a strategy depends on each individual owner’s personal cash-flow needs. Because tax rates applicable to corporate income are often lower than to personal income and because this differential is only levied when the owner-manager withdraws the funds, taxes can be deferred to the extent such income is left in the corporation.

Often, this is not a realistic option since the owner-managers may need all or most of this business income for personal use. Then the owner-managers must remunerate themselves in the form of:

• salary
• dividends
• a combination thereof.

Deducting salary expenses reduces taxable income and lowers corporate income taxes. However, because dividend payments are not a deductible expenditure (i.e., it is a distribution of profits), corporate taxes will be higher. Personal income taxes applicable on the dividends are lower than on salary to adjust for the difference (i.e., tax integration).

Tax integration works well for corporations earning active income under $500,000 as the “combined” (i.e., corporate and personal) tax rate differential is minimal (though it varies for different provinces). Therefore, employees are normally indifferent whether they receive salary or dividends, aside from how each affects CPP deductions or RRSP contribution room. However, this is not the case for corporations earning active income above $500,000 as the “combined” tax rate applicable to this layer of income is higher roughly by two-to-five percentage points depending on the provinces.

Avoiding High Tax Rates

Because profits in excess of $500,000 are not eligible for the small-business deduction, consideration must be given to declaring a salary that will drop the corporate taxable income below the $500,000 limit. By declaring a salary, taxpayers do not have to lose two to five percentage points.

After this decision is made, however, employees may find themselves in a higher personal income tax bracket because this remuneration must be added to the regular salary and other benefits received.

Once your personal taxable income exceeds predetermined thresholds, the rate on any excess amount rises significantly. For example, the rates in Ontario for tax year 2016 are scaled as follows for taxable income in excess of:

• $150,000 (47.97%)
• $200,000 (51.97%)
• $220,000 (53.53%).

Sometimes corporate taxpayers may want to be taxed at the higher corporate rate (i.e., decide not to pay the corporate income out in salaries) and leave the corporate income in excess of $500,000. Because the higher corporate rate still provides much lower “immediate” taxes, the corporate taxpayers may choose to pay the extra two-to-five percentage points if their rate of return on the deferral can exceed this eventual cost. Again, such strategy depends on the particular owner-manager’s annual cash flow needs and circumstances.

Be careful when purchasing capital assets.

Avoiding High Tax RatesPurchasing Capital Assets To Save Corporate Taxes

Many owner-managers believe that purchasing capital assets will significantly reduce corporate taxable income. Certainly, purchasing assets will reduce taxable income, but not as significantly as one might believe. Two factors come into play:

• The capital cost allowance permitted by the Canada Revenue Agency (CRA) is a percentage of the cost of the asset and not the entire cost.
• The half-year rule usually comes into play in the year in which the asset is purchased, which restricts your percentage by another 50%.

Example:
Your business purchases equipment for $300,000, which is subject to the prescribed depreciation at the rate of 20%. Therefore, in the year of purchase, your business can deduct $30,000 (i.e., $300,000 × 20% × 50% half-year rule) which only represents 10% of the total purchase price. Assuming the 15% small business rate in Ontario, this provides a tax benefit of $4,500, which is minuscule compared to the actual spending.

The primary purpose of purchasing capital assets should be the need for the capital asset in the business; the tax savings should never be a main objective in arriving at this decision. The need to consider other aspects of purchasing, such as cash flow requirements to meet loan obligations as well as additional expenses for insurance, upkeep and operational costs, should be primary considerations in the decision-making process.

Family

To achieve tax effectiveness, owner-managers may consider bringing family members into the business. There may be benefits to distributing profits through salary or dividends to family members earning lower incomes. However, a caution must be given in both situations. For salary, the amounts paid to the family members must be reasonable and should be a fair consideration for their efforts. For dividends, the family member must own the shares and ensure there is no conferral of benefit when transferring the shares to them. Also, the owner-manager must consider any ownership and control issues consequent upon giving shares to family members.

Bringing family members into the business may also be useful as a long-term strategy in order to reduce or defer the overall impact of personal and “combined” taxes should the owner-manager suddenly die or decide to take early retirement.

Aside from tax objectives, succession planning is also essential should family members want to be part of your successful business. When there is more than one owner, bringing family members into the business needs to be discussed before any problems arise. Original owners will not only want to protect their percentage ownership in the business but will also want to ensure their remuneration is not impacted by distributions to others.

Tax and succession planning require careful review of everyone’s intentions and circumstances and are often technically complex. Your CPA and solicitor should be able to provide guidance as to how to structure ownership through different classes of shares that protect existing owners while providing new shareholders with the rewards of ownership. Such carefully restructured shareholdings can selectively distribute dividends so all shareholders can receive the rewards of ownership and tax savings without undue stress on corporate cash flow.

Plan Early

Because most tax-planning strategies cannot be put in place retroactively, leaving tax planning until the end of your fiscal year end is not a good idea.

Owner-managers should work with their CPA early in the development of the business to establish long-term goals. From then on, they should meet with their CPA annually to monitor whether the goals are being realized. Any adjustments necessary to ensure current financial needs are being met and that the long-term strategy required to build wealth for retirement or succession is on track can be made at these meetings.

 

Contact Argento CPA today!

Source: BUSINESS MATTERS

Disclaimer: BUSINESS MATTERS deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.
Although every reasonable effort has been made to ensure the accuracy of the information contained in this letter, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.
BUSINESS MATTERS is prepared bimonthly by the Chartered Professional Accountants of Canada for the clients of its members.
Richard Fulcher, CPA, CA – Author; Patricia Adamson, M.A., M.I.St. – CPA Canada Editor.
Contact us: patricia@adamsonwriters.ca

MONEYSAVER

Start planning now for interest rate increases.

Historically low rates have encouraged borrowing for equipment, real estate, operating lines of credit and everyday purchases. How much longer interest rates will remain at these levels is an open question but now is a good time to start thinking about the potential impact of higher rates on your business and personal life.

Potential Effects of Higher Interest Rates

Here are some of the effects higher rates could have on your business:

• Higher interest rates will drive up the cost of operations, manufacturing and delivery, which will force small businesses to either increase prices or face a smaller bottom line. If prices go up, consumers cut back their purchases if they need to borrow for vehicles and mortgages, or use lines of credit.
• Any resulting cash crunch may force customers to stretch payment time on their payables. This makes you your customers’ banker.
• Payout periods of as much as eight years for equipment and vehicles have led many purchasers to believe that if they can make the monthly payments they can afford the asset. But, as the years pass, the warranty expires, the vehicle value plummets and repair bills mount. It may be difficult to finance a replacement if a significant amount is still owing.
• Personal finances are affected as well. A salary increase decreases company profit while increasing personal income taxes.
• Financial institutions become more selective. New companies without credit ratings may find it impossible to obtain a loan. Established companies may not be able to extend lines of credit.

Review income statements and balance sheets.

Proactive Planning

The following suggestions may help reduce the impact of rising interest rates on your business:

• Review your corporate income statements and balance sheets for the last five years because they reflect the lower cost of outstanding debt as well as the historical cost of your operating assets. Calculate the impact on the corporate bottom line if interest rates increase by two, three or more percentage points.
• Review your asset base. Determine what assets will need to be replaced within the next five years and estimate their replacement cost. If sales and expenses in the next five years remain the average of the last five years, would the increase in asset cost, combined with the need to borrow additional funds at higher interest rates, put undue stress on your operational capability?
• Review your personal debt at the same time as you review the corporate financials.
• Start building a cash reserve within your business.
• Consider reducing the long-term payouts on equipment and vehicles.
• Lock in existing secured loans.
• Lock in mortgages.
• Start incremental price increases to avoid a sudden and dramatic increase that may scare off clients if imposed later.
• Reduce the number of days outstanding for accounts receivable. Review your client base with the goal of reducing the lines of credit granted. Negotiate new payment terms with your long-term customers.
• Consider deposits on all jobs. Potential customers should understand that there are up-front costs that must be paid for, and that you are not a bank but a contractor.
• If your business has credit card balances or lines of credit with high interest rates, pay them off. If business credit cards are essential to your business, structure cash flow to pay off monthly balances.
• Use a percentage-of-completion method for payment on long-term contracts. If payment is not made as arranged, stop working. Better to walk away with a 20% loss then a 100% write off.
• Review all sources of company credit. Eliminate those with variable rates. Fledgling entrepreneurs should work to establish a line of credit with their financial institutions and increase it over time to ensure that in the future, that line of credit is still available.
• More established businesses should work to reduce the debt on their lines of credit in case a buffer is needed to meet short-term cash needs.

An Ounce of Prevention …

Should interest rates start to rise, the trend is likely to continue upwards. Owner-managers should start now to model their business activity in potential future economic and credit conditions. Business plans derived from these models will help ensure the continued success of their business and family finances when the 2020 decade rolls around.

Contact Argento CPA today!

Source: BUSINESS MATTERS

Disclaimer: BUSINESS MATTERS deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.
Although every reasonable effort has been made to ensure the accuracy of the information contained in this letter, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.
BUSINESS MATTERS is prepared bimonthly by the Chartered Professional Accountants of Canada for the clients of its members.
Richard Fulcher, CPA, CA – Author; Patricia Adamson, M.A., M.I.St. – CPA Canada Editor.
Contact us: patricia@adamsonwriters.ca

MANAGEMENT

The more things change, the more they stay the same.

No matter what the economic conditions, some business worries never go away. Here are a few tips on how to handle some of these eternal problems.

Cash Flow

Customers will continue to extend payments over 90 days.

Understand your cash flow. At the end of each week, review accounts receivable, and accounts payable and make sure you know what you must pay in withholding taxes. Do not use your source deductions to pay suppliers unless those deductions are actually in the bank. Send requests for funds to suppliers before the end of the month.

Owner-Manager Fatigue

Overworked and underpaid will continue to be the mantra.

Learn to pace yourself. Work to make money not save money. Work at what you do best and delegate the rest. Consider that if you work 2,000 hours per year and your business has sales of $400,000, you are effectively generating $200 of revenue per hour. Ask yourself why you are trying to learn how to do something a subcontractor can do in a day.

Maintaining Customer Base

Maintaining clients while working to get new ones is going to be a challenge.

In tough times, even long-time customers may ask you to cut your costs or they may cut back their orders. Review the profit on your best customers, not just their sales volume. Visit the customer and find out their expectations for the coming year. Consider limiting services to marginally profitable customers.

Employers

Finding and keeping good employees is never easy.

Older employees may retire and good employees may leave. New, inexperienced employees do not solve short-term problems.

Happy employees are loyal and productive. Be approachable. Let employees tell you what they need. Employees always appreciate a bigger pay cheque, but a good working environment and feeling valued will also go a long way to keeping employees.

Overhead

The cost of everything will continue to rise.

Capital asset costs, fuel, property taxes, light, heat, power, insurance, and maintenance will continue to rise and put pressure on your cash flow. The same cost pressures will also affect the standard of living of your own family and the families of your employees.

Evaluate all aspects of business costs and perks. Look at discounts, value added and other incentives provided to clients. Review perks to employees and determine whether there are more economical solutions that will retain the good will of the employees but not put more pressure on your cash flow.

Technology and Changing Demands

Keeping up with new developments will be a challenge.

Changes in technology, process, or client needs require training and financing to transition from the tried and true. Budget for the inevitable or you risk being outflanked by the competition.

Social media is changing the entire marketing process.

Marketing and Advertising

Connecting with customers will continue to be a challenge.

Maximizing your brand is difficult at the best of times; unfortunately, social media is making the entire marketing process even more problematic. Analyze your market and decide whether the best way to reach potential customers is: one-to-one contact, social media, online advertising, television, radio, newspapers, or magazines. You may find that more and more dollars have to be spent to create a cross-media presence that provides the same information without any guarantee of a return on investment.

Consider a short-term contract with a marketing specialist to review your company and its client base to help determine the best combination of media to reach your target market. Then, develop a plan to deploy your advertising budget to the appropriate media.

Maintaining Control

Managing all sectors of the business will continue to be a challenge.

Managing sales, manufacturing, ordering, marketing, human resources and administration as well as dealing with the considerable number of regulatory agencies will continue to become more complex. Trying to do everything yourself will undoubtedly lead to failure in one or more areas.

Control your business by managing rather than doing. Find the best person to run each particular part of the business. Define their responsibilities with a detailed and accurate job description and schedule regular reports. This will enable you to understand what is happening within the organization, solve problems and improve operations. Have faith in your subordinates.

Regulations

Red tape is and will continue to be the nemesis of small business.

Research suggests that these compliance issues consume eight weeks of employee time per year.

Because collecting and providing information to governments and regulators cannot be avoided, owner-managers should institute in-house procedures and write manuals. Reduce the use of employee time and associated costs by purchasing reporting software. If you do not have in-house expertise, arrange for a third party to prepare regular reports. Filing reports correctly and on time eliminates the cost and stress that follows from non-compliance.

Plan Ahead

The size and complexity of these and similar issues will move forward in lockstep with the business. Analyzing each potential conflict area and developing a process to stave off potential problems is an excellent offensive tactic that will lessen the cost and uncertainty of moving forward for the balance of 2017 and beyond.

Contact Argento CPA today!

Source: BUSINESS MATTERS

Disclaimer: BUSINESS MATTERS deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.
Although every reasonable effort has been made to ensure the accuracy of the information contained in this letter, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.
BUSINESS MATTERS is prepared bimonthly by the Chartered Professional Accountants of Canada for the clients of its members.
Richard Fulcher, CPA, CA – Author; Patricia Adamson, M.A., M.I.St. – CPA Canada Editor.
Contact us: patricia@adamsonwriters.ca

TECHNOLOGY

Password manager software is an inexpensive way to secure all your passwords.

Our need for passwords to access everything in our life has become pervasive. Every agency, every computer, every credit card, every smartphone requires an exponential explosion of letters, numbers, and symbols to secure all information from hackers, whether it is personal data or corporate information.

To complicate matters, it is no longer permissible (or advisable) on many sites to use a simple password that is easy to remember, such as a word or name. Instead you must create a password with numbers, special characters, upper and lower case letters, and a minimum length.

One study suggests the average individual has at least 25 Internet-accessible accounts with passwords, while other sources suggest that number could be substantially higher. Is it any wonder that most individuals will, whenever possible, assign the same password to as many accounts as they can? Hackers know this and once they compromise one account, it often doesn’t take long to gain access to your other accounts.

Use Different Passwords

The best means of protecting your personal information is to use a different, unguessable password for every account. Most password management software includes the ability to generate passwords, and then store them for you. The beauty of using a password manager is that you only have to remember one password to access all of the passwords you need to remember.

High-end password managers support multiple languages and are able to tie in passwords with hundreds of websites. Two-factor authentication is usually required (and should be!) to protect data in the event someone finds your password and logs in on your device or tries to log in on a new device that is not registered.

Set Up

Setting up a password management app generally requires you to download and install the software and add browser extensions for each browser you use. If you use multiple devices, you will need to load the app on each one. To set up an account, you will use your email address and will need to come up with a master password or passphrase (i.e., one long, hard-to-guess password to rule them all).

One primary password gives you access to all your passwords.

After creating the master password comes the arduous task of entering data about the various accounts or sites you need to access.

Some password managers will import your user names, auto fill standard information, and pull passwords from your existing browsers, although, if you haven’t saved the passwords in the browser, the data will have to be entered manually. The password manager will typically assess the strength of your current password, and prompt you to generate a new, stronger password (typically at least 16 characters) for that site. Experts also suggest that you revisit your security questions and determine whether you want to change them as an added security measure.

Don’t Forget Your Master Password

Unlike a typical website with a “forgot password?” feature, the master password is often not recoverable in that way. There are very few password manager systems that provide a “hint” to enable you to try to rebuild your password. For most, you will have to start all over and rebuild the passwords for every site and every account keystroke by keystroke. Commit your master password to memory; do not click “remember my password” for your master password; typing it often will help you to remember it.

Cost Factor

Most of the providers of password manager software provide free trial subscriptions; several offer a limited version of their software for free, with the ability to upgrade for additional features and support for an annual fee. Freebie options aside, password manager services typically range in price from $20 to $60 annually.

In Case of Emergency …

If a person is incapacitated or dead it will be impossible for someone else to access the accounts. It is important to ensure that the software used provides the ability to set up an emergency contact to inherit your passwords. Some providers allow you to set a waiting period before a trusted individual can access the codes so that the accounts cannot be accessed while you are alive. If someone tries to access your accounts, you will be notified by email. Other providers allow you to designate specific accounts, such as the business account, that can be accessed by specific people, such as your business partner, or to designate personal accounts to a trusted relative or friend.

Large Benefit for Small Cost

Strong passwords are a necessity for everyone, and we all tend to use passwords that are easy to crack; this makes us easy targets for nefarious people looking to steal our information, money or identities. Using a password manager is an inexpensive way of ensuring access to the ever-growing number of sites we must access in our interconnected world while making it difficult for anyone else to gain access to our personal and financial information.

Contact Argento CPA today!

Source: BUSINESS MATTERS

Disclaimer: BUSINESS MATTERS deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.
Although every reasonable effort has been made to ensure the accuracy of the information contained in this letter, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.
BUSINESS MATTERS is prepared bimonthly by the Chartered Professional Accountants of Canada for the clients of its members.
Richard Fulcher, CPA, CA – Author; Patricia Adamson, M.A., M.I.St. – CPA Canada Editor.
Contact us: patricia@adamsonwriters.ca

Taxation

Be aware of changes to the income tax rules that will affect your 2017
filing.

For those already thinking about their 2017 income taxes, the following
summarizes some of the changes from 2016.

Tax Credits

The child tax credit for arts and fitness is gone. Since this tax credit
was capped at a maximum of $500 for fitness and $250 for arts per child in
2016, its removal will not likely have a major impact on most people’s 2017
return.

Education

The tax credit for education and textbooks for full- or part-time students
was eliminated effective December 31, 2016. Taxpayers with unused tax
credits from 2016 or prior years will be able to carry them forward and
apply them against future taxes.

The tuition tax credit is, however, still in effect.

In recognition of the need to support education in technical skills, the
number of courses eligible for the tuition tax credit will be increased.
Occupational courses provided by post-secondary institutions within Canada
will be granted the tax credit. If a bursary is provided, the amount will
likely qualify for either the full or basic scholarship exemption.
Examination fees paid to take an occupational, trade, or professional
examination to obtain a professional status recognized by federal or
provincial statute, or to be licensed or certified as a tradesperson, to
allow you to practise in Canada, may also be eligible for the tuition tax
credit. However, if your fees were paid by your employer or the employer of
one of your parents, or by a government program and not included in your
income, you cannot claim the credit.

Labour-Sponsored Funds

Those who invested in labour-sponsored venture capital corporations will no
longer be able to apply for the federal tax credit. Prior to 2017, a
taxpayer would receive a federal tax credit of 15% of the investment up to
a maximum of $750. Taxpayers should confer with their Chartered
Professional Accountants (CPAs) to determine whether a provincial tax
credit will be available in 2017 should they choose this investment
vehicle.

Income splitting is gone.

Indexing

RRSP contributions, tax brackets, and various tax credits will increase in
2017 to reflect the adjustment for inflation as measured by the Consumer
Price Index (CPI). The percentage increase for 2017 has been pegged at 1.4%
(i.e., the 2017 personal exemption will increase to $11,635 from $11,474 in
2016). To capture information on the new levels for all tax credits and
other deductions that have been indexed, you should visit the CRA website
page: “Indexation adjustment for personal income tax and benefit amounts”
http://www.cra-arc.gc.ca/tx/ndvdls/fq/ndxtn-eng.html

The notable exception to the inflationary increase is the Tax Free Savings
Account that will continue to have a $5,500 per annum maximum contribution
limit.

Work in Progress

Prior to March 22, 2017, unbilled work in progress was allowed to be
deferred until billed to clients. This deferral allowed certain designated
professionals (i.e., lawyers, dentists, doctors, and accountants) to delay
the recognition of income until the year when the work was invoiced to
clients. Effective March 22, 2017, this deferral of work in progress was
eliminated, resulting in an immediate income inclusion of work in progress.
A transitional relief will be available over a two-year period to help
mitigate the tax impact of this change.

Caregiver Amounts

Prior to 2017, three credits were available for those in need of
assistance:

• caregiver credit
• infirm dependant credit
• family caregiver tax credit.

To simplify the process and to recognize the need to provide financial
support to caregivers, a new Canada caregiver credit will provide a 15%
non-refundable tax credit maximizing at $6,883 of expenses for the care of
parents, brothers and sisters, adult children and other specified relatives
who have infirmities. An additional tax credit up to $2,150 on expenses is
available for the care of a dependent spouse, a common-law partner, or a
minor child with infirmities. The tax credit will be calculated using a
formula that reduces the credit dollar for dollar once the dependant’s net
income exceeds $16,163.

Intangibles

Prior to 2017, any gain from the disposition of intangibles such as
goodwill or trademarks, was treated as regular business income and was not
subject to the capital cost allowance rules. Now, any gain from the
disposition of goodwill and trademarks will become fully taxable as
investment income. Companies will now be required to transfer the
cumulative eligible capital pool as at December 31, 2016, to a new capital
cost allowance class 14.1. This pool will be depreciated at 7% annually on
the declining balance for the first 10 years, then at 5% annually
thereafter. For the expenditures incurred after December 31, 2016, a 5%
depreciation rate will apply.

T4s

Prior to 2017, employers were able to supply employees with their T4
information slips electronically if the employee gave permission. Effective
2017, the employer will not need permission. The employer must, however,
have safeguards in place to ensure confidentiality and provide paper copies
to former employees or employees on leave or upon request. Employees must
ensure the information received is correct in order to avoid penalties and
interest if they file an incorrect T1 tax form.

Possible Changes Ahead

While the changes noted in the 2017 Federal Budget were not as significant
as those in the Liberals’ first budget introduced in 2016, it signalled the
government’s intention to review the tax planning techniques that are
currently available to the owners of private corporations. Specifically,
the review will include the tax advantages provided to the business owners
by:

• income sprinkling
• holding passive investments via a corporation
• converting regular income into capital gains.

Unfortunately, the budget did not include much detail. The government is
expected to issue policy papers on this topic sometime during the summer of
2017, however. Any changes could impact the business owners significantly.

 

Contact Argento CPA today!

Source: BUSINESS MATTERS

Disclaimer: BUSINESS MATTERS deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

MANAGEMENT

Even when interest rates are at historic lows, interest costs can be
significant for businesses and owner-managers.

The Business

The significant rise in the cost of equipment, vehicles, real estate, and
inventory has prompted many businesses to increase business debt. Low
interest rates, combined with the ability to obtain larger loans with
extended payment terms, have allowed businesses to operate in a “business
as usual” mode with less consideration for the actual cost of borrowing.

To give some idea of the effect of even low interest rates on an
owner-managed business, the following key elements of most businesses have
been put forward as an example of the effect of interest costs on a
business. The effect of domestic borrowing has been added to show the full
impact of current interest rates on the owner-manager. Since lending rates
vary widely depending on a variety of factors such as risk, item to be
funded and the term, and are usually negotiated,

the interest rates used below have been chosen at random from Internet
sources; calculations are approximate and for illustrative purposes
only

• All loans have been made effective June 1, 2017.
• Commercial mortgage: $600,000 over 25 years at 3%
• Two work vehicles: $120,000 financed over five years at 6%
• Equipment loan: $200,000 financed over five years at 5%
• Operating line of credit: $50,000 at 3% a year
• Credit card debt: $10,000 at 15% a year on the outstanding balance

Commercial Mortgage

• Commercial mortgage amount: $600,000
• Interest for first year: $17,776
• Interest paid over first five years: $83,748
• Interest paid over the 25 years (300 months) of payment: $253,580
• Total commercial mortgage cost: $853,580

A sobering reality is that, when interest costs are factored in, the
$600,000 building ends up costing $853,580. Assuming the interest is a
deductible business expense, and assuming a 17% corporate tax rate, total
interest would be reduced by $43,109, thus reducing the overall cost of
purchasing to $810,471.

Work Vehicles

• Total purchase price of two vehicles: $120,000
• Interest for first year: $6,623
• Interest for five years: $19,196
• Total vehicle cost: $139,196

Equipment Loan

• Loan amount: $200,000
• Interest for first year: $9,179
• Interest for five years: $26,455
• Total loan cost: $226,455

Line of Credit

• Annual outstanding balance: $50,000
• Interest for one year: $1,500
• Interest for five years: $7,500

Credit Cards

• Average annual outstanding balance: $10,000
• Interest for one year: $1,500
• Interest for five years: $7,500

Over five years, the total interest cost to your business is $144,399. Even
at a 17% corporate tax rate and a corresponding $24,548 reduction over five
years, the cost of borrowing is still $119,851.

The hard truth is that interest costs even in times of low interest rates
have a very negative impact on the bottom line.

Canadians are extending repayment periods.

On the Home Front

At the end of Q1 of 2017, the ratio of Canadian household debt to
disposable income was 1.67:1 or $1.67 of debt for every $1 of disposable
income. Canadians borrowed $27.5 million in the first quarter, of which
mortgages accounted for $20.9 billion. Not only are Canadians borrowing a
lot of money, they are extending the periods of repayment for some
expensive items. Recent statistics indicate that in excess of 40% of all
new vehicles purchased are financed from 61 to 72 months; loans extending
from 73 to 84 months now make up almost 20% of new vehicle loans.

Home equity lines of credit (HELOCs) have increased as well. There are
currently about three million HELOC accounts in Canada; the average
outstanding balance in each account is estimated at $70,000.

For a moment, consider that the owner-manager, in addition to the business
debt that has to be serviced, has the following personal debt with the same
interest rates as the business.

Residential Mortgage

• Mortgage: $400,000 amortized over 25 years at 3%
• Interest for first year: $11,851
• Interest paid over five years: $55,833
• Interest paid over 25 years (300 months): $169,054
• Total mortgage cost over 25 years: $569,054

Vehicle Loans

• Two vehicles: $80,000 financed over five years at 2.7%
• Interest for first year: $1,974
• Interest for five years: $5,611
• Total vehicle cost: $85,611

HELOC

• Average annual outstanding balance: $70,000 for five years at 3.2%
• Interest for first year: $2,240
• Interest for five years: $11,200
• Total loan cost: $81,200

Total interest cost to service personal debt for five years is $72,644.

Given that the interest costs are in after-tax dollars and assuming the
individual is in a 30% tax bracket, the taxpayer has effectively paid an
additional $20,186 as well as the opportunity costs of not being able to
purchase investments or other consumer goods.

Impact on Business

Interest costs affect owner-managers both at business and home. Business
interest costs dictate the need to increase cash flow to service the debt
and therefore drive the need to increase sales volumes or prices to
maintain a sustainable profit.

Maintaining a lifestyle supported by debt increases the need to earn more
money to service that debt. For the owner-manager, that means procuring a
higher income from the business. This, in turn, creates additional pressure
on the business to increase cash flow, sales volumes, or prices to satisfy
the owner’s personal needs. An added consternation is personal income tax.
Not only will the additional income to the owner-manager create a higher
personal income tax, but it may result in increased business expenses for
other source deductions.

Risks of Low Interest Costs

The cost of borrowing, whether for business or for personal needs, has a
significant impact on the owner-manager as well as on business operations.
The service costs of debt are a major drag on cash flow, profits, and the
future financial health of the business, even in periods of historically
low rates such as we are living in right now. But merely making the monthly
payments is not enough; the loan must eventually be repaid. With interest
rates so low and the cost of borrowing so high, there is a serious risk
that, when the bank rate starts to move up again, as it inevitably will,
many owner-managers will be caught offside and unable to make even the
monthly payments.

Don’t let that owner-manager be you.

Contact Argento CPA today!

Source: BUSINESS MATTERS

Disclaimer: BUSINESS MATTERS deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

MANAGEMENT

Correct pricing can mean the difference between business success and
failure.

Setting the price point for your product or service is not simply the
process of determining the cost of production then adding a mark-up. It is
more a matter of understanding the price the consumer will accept as the
value of your product or service and keeping the costs of production to a
level that will give you a profit at that price.

Consumers Buy for Value

Cost incorporates all the expenses incurred to bring a product or service
to a customer or client. Costs include: parts, labour, production
machinery, manufacturing space, administration, and transportation to the
consumer. These are the true costs of production and a starting point for
determining the price to the customer.

It is ultimately the consumer who decides the value of your product or
service to them and thus what they are willing to pay. This will be the
price that moves your product off the shelf.

Perception Is Everything

If a product is not moving and the price is reasonable given the cost of
production and the price of competitive products, it may be that the seller
has not provided enough information to the prospective purchaser to
establish value. For example, consider the common incandescent 60-watt
light bulb that traditionally sold for about 50 cents each. Newer LED light
bulbs, providing the same lumens cost $5 to $6, and yet they sell. Why?
Because consumers have been given information that persuades them that the
newer product has value. Governments and manufacturers have persuaded
environmentally aware consumers that long-life bulbs (LED bulbs are rated
to last more than 50,000 hours, which is about 35 years if left on for only
four hours per day, depending on the type of bulb) producing the same
number of lumens at lower operating cost is a value worth paying for.
Consumers are told the environmentally friendly LED bulbs will not only
help to save the planet, but also save money through reduced electricity
costs.

Pricing Strategy

Price is normally determined by cost plus mark-up or by estimating the
perceived value of the product/service. Neither method will move your
product/service if your competition is selling the same thing for less.
Check prices by visiting your competitor’s physical store or going online.

Shoppers are price sensitive. If your price is higher because of your
costs, you must convince the consumer your products are better, your
warranty is better, your service is better, or that you supply some other
advantage. Setting a low price is not the best course of action for any
business either. You may enjoy seeing your sales figures improve for a
while, but you risk destroying your brand if consumers unconsciously
reassign your product to a lower-priced brand category. If you constantly
discount, you will eventually be seen as a discounter. Customers will just
wait until you drop the price again. If the selling price does not cover
all your costs, your business will ultimately fail.

Price Changes

Changing prices should be handled with care. Regular customers are familiar
with your prices and if costs suddenly surge there may be a reduction in
sales. If you have to change prices, remove the old price tags and relabel.

Customers look at price but see value.

Provide Comparison

Shoppers may be looking at prices, but they are seeing value. Offer
products/services across a spectrum of values (i.e., extras cost more). The
automotive industry provides a classic model of this merchandising
approach: a base model with the price rising as features are added. This
approach connects the purchaser to your value proposition. Power windows,
heated seats and a high-end sound system are available on some models but
does the consumer perceive them as having value for them?

Boutique Niche

Once in a while, you may have a unique or trendy product/service or perhaps
you supply products/services associated with special holidays such as
Christmas, Chanukah, Valentine’s Day, special events such as weddings, etc.
These times may allow you to price on a value-added basis rather than
cost-plus-markup because the clientele’s perception of what is needed gives
them permission to spend more than they would if they were just making a
simple everyday purchase.

Know Your Customer Base

Pricing products and services should not be a mechanical process.
Owner-managers should examine their entire product line, determine their
customer base and the product/services expected, and identify the special
events that appeal to the environment they service. Knowing your customer
base allows pricing to be in line with your market and customers’
expectations. This will ensure your business will be able to cover all
operating costs and secure a profit sufficient to allow it to remain in
business for many years to come.

Contact Argento CPA today!

Source: BUSINESS MATTERS

Disclaimer: BUSINESS MATTERS deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

TECHNOLOGY

A review of your HVAC system may show you how to improve your bottom line
by saving on the cost of energy.

Because lighting, heating and cooling represent 19%-25% of the cost of
operating a commercial business, control of energy costs is essential to
improving profit margins. A reduction of even 10% in these costs can
produce a significant improvement. But, because Canada is located in a part
of the world where temperatures can range from 40C below zero to 35C above,
it is inevitably expensive to keep internal temperatures at levels needed
to maintain comfortable working conditions through the changing seasons.

Heating and Air Conditioning

The best means of controlling the temperature in the working environment is
to install commercial programmable thermostats set to the workplace
schedule. Thermostats can maintain comfortable temperatures during working
hours, then be turned down or even off during nights, weekends, or
holidays, when the workplace is not being used. Managing temperatures in
this way can contribute significantly to the bottom line.

Smart thermostats have auto sensors that recognize when people enter or
leave the work area. Once everyone has left for the day, the system
automatically reverts to a lower setting to conserve energy; when the first
worker arrives in the morning, the system will start up and return to the
regular programmed schedule. When employees are absent for longer periods
such as holiday weekends, the automatic system can be shut off completely.
To prevent employees from tinkering with the temperature settings, smart
thermostats incorporate a security code that must be entered before the
temperature or other settings can be changed.

Most work locations have one central heating/cooling system that is fairly
easy to manage. If, however, your building(s) have different areas that
require self-contained heating/cooling systems, or if your business
operates at more than one location, wireless smart systems enable remote
control of individual thermostats through an app you can load onto your
computer or smart phone.

Some systems record the history of heating/cooling adjustments. This data
can be used to identify times and places of peak energy use, which, in
turn, may identify the need to upgrade windows, doors or insulation.

If you install a smart system, have an HVAC technician make sure the new
thermostats will communicate with the existing HVAC system.

Upgrade to multi-glazed windows with low-emissivity coatings.

Windows

Workplace windows should have at least two layers of glass with an inert
gas (e.g., argon) sandwiched between the layers. Normal double-glazed
windows have an R-value (i.e., the ability of material to resist the
transfer of heat) of 2.0; triple-glazed windows provide an R-value of 6.0.
These windows should have insulated edge spacers to reduce condensation,
insulated frames, and low emissivity coatings that reduce heat loss from
within and allow solar energy to enter. Multi-glazed windows not only
prevent heat from escaping, they also prevent the entry of unwanted heat
from the summer sun. Because of their thickness, multi-glazed windows
reduce the effect of road noise and are harder to break than single-pane
windows.

Maximize the return on your window investment by understanding the
benchmark ratings established by the Canadian Standards Association (CSA).
For instance, air tightness is measured from A1 to A3, water tightness
rated from B1-B7, and wind load resistance from C1 to C5. The higher the
number within each measurement category, the better the window.

Light-Blocking Curtains

To supplement new high-R and CSA-rated windows, you may be well advised to
invest in curtains and blinds especially if your building has extreme
window exposure to sun and cold winds. Curtains minimize the intrusion of
heat from the sun and take pressure off the cooling system. During cold
winter days, the curtains can be opened to allow the sun’s energy to
augment the heating system or closed to retain the heat on cloudy days.

Reduce Your Carbon Footprint

Controlling the heating and cooling of your premises with smart thermostats
and retrofitting of windows and window coverings are excellent ways of
reducing the high cost of energy use while reducing your carbon footprint.

Most provinces have programs that help small businesses conserve energy and
therefore reduce operating costs. Check with your provincial energy agency
to save energy through appliance and equipment upgrades, building
enhancements and by educating your employees about the need for proper
maintenance and more efficient use of existing equipment or lighting.

Contact Argento CPA today!

Source: BUSINESS MATTERS

Disclaimer: BUSINESS MATTERS deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

 

TAXATION

Be aware of the changes that affect your 2016 income tax filing and beyond.

As you gather your 2016 tax data together for your CPA, take a few moments to read about the following changes and assess the impact they may have on you and your family’s filing for 2016 and after.

Principal Residence

There has been a significant change in the CRA’s policies regarding principal residency that must be followed by all taxpayers. Prior to 2016, there was a requirement to fill out form T2091 to designate your home as a principal residence. The form required you to designate the years in which the home was your principal residence. Although this form was required to be filed in the year of disposition, most individuals never filed the form because the resulting capital gain was often fully eliminated by claiming the principal residence exemption. Administratively, the CRA had waived this requirement to file if the exemption eliminated the gain.

Significant Rule Changes

For the taxation years that end on or after October 3, 2016 (e.g., the 2016 calendar year), if you sell your principal residence, you are required to report the sale and the resulting capital gain or loss on Schedule 3 of your T1. You are also required to file the form T2091 if you are claiming the principal residence exemption. These requirements are imposed regardless of whether or not the gain is fully exempt as a result of the designation.

A failure to file and disclose the information will have serious implications. Firstly, there is no limitation period (i.e., after which your returns are considered “statute-barred”) on the CRA’s ability to reassess in the future. Therefore, the deadline which would otherwise restrict the CRA’s ability to re-open the tax return would not start unless the information had been fully disclosed in the year of disposition.

Secondly, the principal residence exemption itself will only be allowed if the sale and the designation of principal residence are reported on your income tax return. Should you realize subsequent to the year of sale and filing of your income tax return that you did not file the sale of your principal residence, the CRA is not obligated to accept a late filing that designates the sale as a principal residence sale. Even if the CRA accepts the late filing, the taxpayer will be liable for penalties that are the lesser of $8,000 or $100 for each complete month from the original filing due date to the date the required information was received by the CRA in an acceptable format.

Since these rules will be effective for the 2016 calendar year, you should remember to report the sale of your principal residence if you had a disposition during the year.

Basic Personal Amount

The Federal Basic Personal Amount will increase to $11,474 for 2016, up from $11,327 in 2015. For 2017, the amount will be $11,635.

Marginal rates remain the same in 2017.

Marginal Rates

There have been no changes in the overall federal marginal tax rates; however, the thresholds for taxable income have been changed as indicated in the comparison table below. Keep in mind that these rates do not include the provincial rate nor do they include the various credits and deductions that may reduce the overall income tax for which you may be liable.

Other Changes

The 15% children’s fitness and arts tax credit, as well as the education and textbook tax credit, will be eliminated effective January 1, 2017. For 2016, the maximum Children’s Fitness and Arts tax credit will be 50% of the previous allowable amounts. Unused textbook and education tax credits from previous years may be carried forward and applied to reduce future taxable income.

• Teachers and early childhood educators will be able to purchase up to $1,000 of eligible school supplies for use in the classroom. From January 1, 2016, a 15% tax credit will be available on those purchases. For instance, if $500 is spent, a tax credit of $75 would become available to reduce taxable income. Teachers and early childhood educators should familiarize themselves with the allowable expenses and prepare a summary supported by the original receipts to assist in meeting Canada Revenue Agency’s guidelines.
• Prior to January 1, 2016, if a couple was supporting a child under the age of 18, the couple was able to split income to reduce the overall family tax liability. Effective January 1, 2016, income splitting is no longer available.
• Northern residents will have their residency deduction increased for the 2016 taxation year. The northern residency deduction will increase from $8.25 to $11 per day (or from $16.50 to $22 per day for living in a self-maintained dwelling) if you lived in Zone A for at least six consecutive months. If you lived in Zone B, the intermediate area, the deduction will increase from $4.125 to $5.50. ($8.25 to $11 per day for living in a self-maintained dwelling). The zone for deductions is determined on a province-by-province basis. Thus, to ensure the appropriate tax deductions are available to you, consult the CRA website, click on your province’s name, and search for your place of residence. Make sure your CPA is aware you resided in a zone that provided deductions for line 255 of the tax return.

Check with Your CPA for the Required Documents

There have been changes in personal tax issues in the 2016 year, but none are as important as the principal residence rules. If you have sold your principal residence in 2016, contact your CPA to find out what documentation is required to ensure you are meeting the CRA reporting requirements.

Contact Argento CPA today!

Source: BUSINESS MATTERS

Disclaimer: BUSINESS MATTERS deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.
Although every reasonable effort has been made to ensure the accuracy of the information contained in this letter, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.
BUSINESS MATTERS is prepared bimonthly by the Chartered Professional Accountants of Canada for the clients of its members.
Richard Fulcher, CPA, CA – Author; Patricia Adamson, M.A., M.I.St. – CPA Canada Editor.
Contact us: patricia@adamsonwriters.ca