Category: News

Historically, your accountant probably issued an NTR as part of their offering, sometimes without considering who the users of the financial statements will be. Assuming you don’t need a Review or Audit Engagement and before choosing a Compilation Engagement, ask yourself this, “do you have any third parties that intend to use the financial information?” For our clients at Argento CPA, the third party is typically the bank. For example, you may be looking to get a mortgage, credit card, or business loan, and your bank will ask that you have financial statements prepared by a licensed Chartered Professional Accountant. If that sounds like you, you are probably going to need a Compilation Engagement.

As of December 2021, there will be substantial changes to your typical year-end financial statements. Here are the main points you need to know.

· What is a Compilation Engagement?

· What is the basis of accounting, and why does it matter?

· How does this affect your business?

· Why were there changes needed?

· What if you don’t want them?

· How can you prepare for a Compilation Engagement?

· Discuss with your accountant

What is a Compilation Engagement?

There are three types of engagements and financial statements your accountant can issue.

1. Compilation Engagements

2. Review Engagements

3. Audit Engagements

Formerly known as Notice to Reader (NTR) engagement, the new Compilation Engagement Report (CER) will replace the previously accepted standards of financial statement preparation. The CER resembles many characteristics from NTR and still no assurance by the practitioner; however, there are significant changes to the level of detail in the financial information. The most notable difference being the mandatory inclusion of disclosures around the basis of accounting.

What is the basis of accounting, and why does it matter?

There will be a note disclosure describing the basis of accounting. For example, was the accounting prepared on a cash or accrual basis, or a combination of both? What is the method for reporting inventory or investments? To determine the basis of accounting, you will have a conversation with your accountant. It’s important to know that third-party users of financial information (i.e., your bank) may require you to follow a specific basis of accounting, and those principles must apply to your bookkeeping method. For example, a cash vs. accrual basis can make a big difference on the bottom-line net income. You may have a significant number of accounts payable at year-end. If payables are not presented on the financial statements at year-end as a payable/expense, you are significantly overstating your profitability. A lender may want to know all your accrued liabilities and payables at year-end; therefore, they may not accept cash basis accounting and request you to prepare accrual-based. Talk to your bank about what basis of accounting they require, if any. Alternatively, if this stuff is way over your head, connect your CPA to the bank and let them handle the discussion.

How does this affect your business?

You will have extra discussions with your accountant to prepare your Compilation Engagement before finalizing your year-end. As a result, your accountant will get a better understanding of your business and how they can help you succeed. Here are some examples of the types of questions you will hear in the discussion.

· Who are the intended users of your financial information?

· What is the basis of your accounting?

· How are your accounting records kept?

· What accounting system do you use?

We will already know the answers to most of these questions for Argento CPA clients subscribed to our monthly bookkeeping service. However, if you prepare your bookkeeping, it will take some extra time to discuss and review your records to understand your basis of accounting. 

Accounting costs will increase due to your accountant’s extra work, but at least now your financial information will be prepared to a higher standard.  

Why were there changes needed?

The biggest reason for changes was to clarify the extent of work performed by Chartered Professional Accountants. The difference between various methods of accounting can make a significant impact on judgment when reviewing financial information. Disclosing the method of accounting or asking for the basis to be prepared in a certain way provides clarity to the user of the financial statement.  

The current Notice to Reader standard assumes financial information is only used by management. However, financial information is most likely shared with your bank when considering you for a mortgage, credit card, or loan. The new standard ensures consideration for the third party since they are the ones who must make decisions based on the financial information presented to them.  

The new Compilation Engagement gives your bank confidence that the financial information is not misleading and sets a standard for work performed by your accountant.

What if you don’t want them?

You can still engage your accountant to file a corporate tax return without compiling your financial information under these new standards.  

 We strongly recommend you engage your accountant for a Compilation Engagement Report! There is a 99% chance that your lender will ask for a Compilation Engagement Report before giving you a mortgage, credit card, or loan. Investors will also want to see this financial information before investing in your company.  

We understand you may want to save some extra cash by not paying for a Compilation Report. However, if your bank asks for this information in the future and you don’t have it, you will have to go back and prepare it for them. For example, you may be under a time crunch to get approval on a mortgage for a new home, and your accountant may not have enough time to get this done in time for your bank’s approval. This can be costly and disastrous down the road if your accounting wasn’t prepared under the bank’s requested basis of accounting, since you are going to have to redo bookkeeping, which will impact previously filed corporate tax returns. In the end, this is going to cost you a lot to fix, and it would have saved significantly more time, money, and stress if you had just paid for a Compilation Engagement from the beginning.

How can you prepare yourself for a Compilation Engagement Report?

See below for a few tips to make sure you are ready for year-end and your Compilation Engagement Report.

· Schedule a consultation with your accountant and discuss your needs.

· Contact your bank and ask them what basis of accounting (if any) they want for your financial information. 

· Get your books in order! Your accountant is obligated to determine your basis of accounting. If your financial information is unreconciled, contains errors, or is misleading, they will not be able to issue financial statements. Therefore, we strongly recommend requesting our team to handle your monthly bookkeeping. That way, you rest assured your books are ready at year-end for your Compilation Engagement Report.

Discuss with your accountant

The easiest thing to do is discuss with your accountant or contact Argento CPA for a free initial consultation. Your accountant will guide you with this new process and ensure your needs are met and comply with the new standards.

New engagement letters are issued for all December 2021 year-ends, and additional planning is required before getting started. Fall 2021 is the perfect time for you to contact your accountant and make sure you are set for success under this new process.

Contact Argento CPA for assistance on the new Compilation Engagement Report.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Starting a business is always an exciting time, but it can also be daunting. There are so many things that need to get done before you even start your business. One thing that often gets overlooked is hiring an accountant. Hiring an accountant will help you prepare for the future and ensure that your finances are in order. So don’t wait another day to hire a professional!

Business Planning

An accountant can help you create a realistic business plan to make your startup more likely to succeed. There are many reasons why startups fail, and it’s essential for an entrepreneur not to ignore the warning signs from their own financials. An experienced professional is invaluable when creating a budget or developing projections because they have seen what works and what doesn’t in other businesses’ planning models before working with yours–bringing valuable experience into every step of your company-building process!

You want to build a small business that works. A good starting point is to ask yourself, “why are you getting into business in the first place?” Are you providing a service or a product, or is it a feeling that customers are willing to pay for and value? What business are you really in? Think hard about what it is that you ultimately deliver for customers and determine whether or not it is a business that is worth pursuing. Most often, it is not only a product or service that people are after. Therefore, to succeed for an extended period, focus on user experience, so people come back when they have such great feelings from being with your company!

The customer who is most important to your business might be lurking in the shadows. Once you know what type of business you are, narrowing down and identifying an ideal demographic is much easier. Of course, you need customers for a successful company, but don’t just look at demographics like age or gender: psychographics will help reveal why they buy from your brand.

When you start your business, you have to plan with your end-product in mind. Think of a systems mindset from the beginning, and you will save yourself a lot of frustration down the road. Work on “building the business,” not working in it. If all you do is start a company and do all the work, are you an entrepreneur? Or are you “self-employed?” The entrepreneur has a vision and is a dreamer. Entrepreneur lives their lives today as if it is the future. The employee is the individual contributor and technical master of getting things done. Early on in your business, you are both of these characteristics because you, as an entrepreneur, may not be able to afford an employee. So you wear both hats. That’s completely normal. But that doesn’t mean you can’t have a systems mindset from the get-go.  

Focus on building your business as if one day you were going to sell it. What would your buyers want? They would like to see a company that operates seamlessly, with processes and systems for every aspect of its organizational structure. From finance and administration, marketing and sales, and product and delivery. All functions of your organization should be documented, with a management system in place. You, as the visionary, are at the top of this organizational structure, leading the company via innovation and strategy. However, you are just starting, so it’s ok to wear all the business hats. Just make sure you have different color hats so you can tell the difference and don’t get them confused. It’s essential to define roles for each aspect of your organization and be well aware of when you perform different job roles. When it comes time to build your empire, you will want to hire employees based on these well-defined roles. When it comes to supporting your business, that’s where you need a good accountant—one who has experience with cloud accounting and knows how to get the business books organized and automated.  

Should you incorporate your business?

Should you incorporate your business or run it as a sole proprietor? Choosing the proper business structure is one of the most critical decisions an entrepreneur will make, and understanding the pros and cons can help. The tax implications may be advantageous, but there are also legal considerations to consider before making this decision.

Register for Tax Accounts

There are many different programs to register for when starting a new business. It’s not always easy to tell what you need, so an accountant can help you figure out which ones are required. They can save time and money in the long run. Here are a couple of tax accounts you will want to consider.

Register for GST/HST so that you can claim input tax credits on expenses paid. For example, if you are about to purchase an expensive piece of equipment for $10,000, you will be spending 5% GST on that purchase (if you live in B.C.). However, you can get that $500 back when you file a GST return if you make sure that you have registered before purchasing that equipment.

Register for PST or provincial sales tax. Determine what provinces you will be doing business in. Every region has its own rules and regulations around sales tax, so it’s crucial to determine where you need to register to comply with provincial authorities.  

Register for payroll if you have employees. Payroll is significant to get right since your employees depend on you to do this accurately. If errors are made, they are very costly to fix, and CRA loves to audit your payroll account. So don’t make any errors! Get set up correctly from the start, and before you have employees you need to pay.

Hire an Accountant to Help you Determine Whether Dividends vs. Salary is Better for You

There are pros and cons to each of these methods, and trying to figure this out on your own will be a fool’s errand. If you choose to hire an accountant, they can explain what is better for you in layman’s terms. Everyone’s situation is different, and laws and tax rates are constantly changing. 

Many entrepreneurs overlook long-term factors, such as retirement strategy – RRSPs and long-term investments and principal residence – when do you want to purchase a home and for how much? To determine which method is best for you, it’s a good idea to hire an accountant. A lot of entrepreneurs have trouble understanding the shareholder loan and what that means. Discussing with your accountant earlier on will make sure you don’t make any poor tax planning decisions.

Hire an Accountant to Determine Technology for Bookkeeping

When you start a business, it is good to have the right accounting software. Of course, you might think it’s a good idea to start with a spreadsheet, and we agree that’s better than nothing! But sooner or later, you need something more intuitive. An accountant can help you get set up with a proper technology stack and provide you with tips for cloud accounting and online bookkeeping.

We understand this kind of stuff may be way over your head, and that’s why we are here to help simplify this for you. By working with your accountant on your cloud accounting setup, you will be set for success with an automated and straightforward system to understand. It’s a little more work up-front, but the payout is massive in the long run. Time is the most valuable resource we all have, and it’s up to you as the entrepreneur to make sure it’s used wisely. Use your time wisely by hiring an accountant to save you time and money and, above all else, keep those books clean and organized.  

Hire an Accountant Who Can Also Be Your Consultant

With all the improvements with automation, accountants need to be doing more than just crunching numbers and telling you how much tax you owe. We are here as your strategic advisors and consultant. An outside opinion is valuable when it comes to the growth of your business. Whether you meet monthly, quarterly, or annually with your advisor, the time is well spent and keeps your business moving in the right direction.

Conclusion: Hire an Accountant!

Hiring an accountant can save you money and give you back the time you need to take care of other things. It also reduces the stress in your life, which will help make it better and improve your mental health. We have experience assisting businesses in each stage of their process, so we would love to help you too! Contact Argento CPA today!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Part 1 of this 3-part series explained the taxation of U.S. stock options.  In this article we will discuss the tax implications of Canadian stock options.

The tax consequences resulting from Canadian stock options is differentiated by the type of company that is granting the option. This is because stock options grant by Canadian controlled private corporations (CCPC’s) enjoy additional special benefits that other corporations to not qualify for. CCPC’s are corporations that are residents of Canada, that are not controlled by non-residents or public corporations. In general, when any company grants a stock option to an employee there are no tax implications; however, a divergence arises between CCPC’s and other companies at the time of exercise.

Stock Options Issued by Other Corporations

When an employee of a non-CCPC company exercises their options, they incur a taxable benefit that is included in their taxable income as ordinary income. The amount of the benefit is equal to the difference between the fair market value of the shares at the time they are exercised, the amount paid by the employee to the corporation for the shares and the amount paid by the employee to acquire the right to acquire the shares.

When the shares are eventually sold the employee will incur a capital gain or loss that is calculated as the difference between the proceeds on the sale and the fair market value at the time they were exercised. Only 50% of a capital gain is taxable and a capital loss cannot be used to offset the taxable benefit previously incurred.

Example: Cindy is a Canadian resident that is employed by Dot.ca, a public company listed on the Toronto Stock Exchange. She was granted 1,000 stock options at no cost on Nov 1, 2018 with an exercise price of $1 per share. The fair market value of the shares at that time was $5 per share. On Nov 1, 2019 she exercised the options when the fair market value of the shares was $10 per share, and then sold the shares 2 week later for $12 per share.

There are no tax consequences in 2018 when the options were granted, however, she will incur a taxable benefit of $9,000 ($10,000-$1,000) in 2019 when she exercised her options. In addition, in 2019 she will incur a capital gain of $2,000 ($12,000-$10,000) of which 50% or $1,000 will be taxable.

Taxable Benefit Deduction

If the following criteria are met an employee can deduct 50% of the taxable benefit when the options are exercised:

• The shares are “prescribed” shares (equivalent to common shares)
• The option price was not less than the fair market value of the shares at the time that the option was granted
• The corporation is dealing with the employee at arm’s length

Example: Cindy is a Canadian resident that is employed as a manager by Dot.ca, a public company listed on the Toronto Stock Exchange. She was granted 1,000 stock options to purchase common shares at no cost on Nov 1, 2018 with an exercise price of $5 per share. The company was dealing at arm’s length with Cindy at the time the options were granted. The fair market value of the shares at that time was $5 per share. On Nov 1, 2019 she exercised the options when the fair market value of the shares was $10 per share, and then sold the shares 2 week later for $12 per share.

There are no tax consequences in 2018 when the options were granted, however, she will incur a taxable benefit of $2,500 (50% x ($10,000-$5,000)) in 2019 when she exercised her options. In addition, in she will incur a capital gain of $2,000 ($12,000-$10,000) of which 50% or $1,000 will be taxable.

Deduction Limit Change

The 50% deduction of the taxable benefit, discussed above, will be subject to limitations on stock options granted after June 30, 2021. After that date there will be a $200,000 limit to this preferential rate. This limit will be based on the fair market value of the underlying shares at the time the options are granted and is an annual per employee limit. These new rules will not apply to CCPCs, or non-CCPC employers with annual gross revenues of $500 million or less. Employees exercising stock options that exceed the $200,000 annual limit will no longer be eligible for the 50% stock option deduction.

Example: Cindy is a Canadian resident that is employed as a manager by Dot.ca, a public company listed on the Toronto Stock Exchange. She was granted 100,000 stock options to purchase common shares at no cost on July 1, 2021 with an exercise price of $5 per share. The company was dealing at arm’s length with Cindy at the time the options were granted. The fair market value of the shares at that time was $5 per share. On Nov 1, 2021 she exercised the options when the fair market value of the shares was $10 per share, and then sold the shares 2 week later for $12 per share.

There are no tax consequences when the options were granted. Because her options were granted after June 30, 2021, and the value of the underlying shares at the time the options were granted was $500,0000 she is not eligible for the 50% stock option deduction. In 2021, she will incur a taxable benefit of $500,000 ($1,000,000-$500,000. In addition, she will incur a capital gain of $200,000 ($1,200,000-$1,000,000) of which 50% or $100,000 will be taxable.

Stock Options Issued by CCPCs

When an arm’s length employee exercises stock options issued by a CCPC, the taxable benefit is deferred until the underlying shares are eventually sold. When the shares are sold the employee incurs a taxable benefit calculated as the difference between the fair market value when the option was exercised and the option price. In addition, they will also incur a capital gain or loss calculated as the difference between the proceeds and the fair market value of the shares when the option was exercised. If a capital loss is incurred it cannot be used to reduce the taxable benefit, however, it can be used to reduce other capital gains incurred.

Example: Cindy is a Canadian resident that is employed as a manager by Dot.ca, an CCPC. She was granted 1,000 stock options on Nov 1, 2018 with an exercise price of $1 per share. The fair market value of the shares at that time was $1 per share. On July 1, 2019 she exercised the options when the fair market value of the shares was $4 per share, and then sold the shares on January 1, 2020 when the value of the shares was $6 per share.

There are no tax consequences in 2018 or 2019 when the options were granted and subsequently exercised because the company is a CCPC. The $3,000 ($4,000-$1,000) taxable benefit is deferred until 2020 when she sold the shares. In addition, she will incur a capital gain in 2020 of $2,000 ($6,000-$4,000) of which 50% or $1,000 will be taxable.

Taxable Benefit Deduction

An employee of an CCPC can also deduct 50% of the taxable benefit if the following conditions are met:

• The employee is still dealing at arm’s length with the company in the year of disposition
• The shares are held for at least two years from the date they were acquired

Example: Cindy is a Canadian resident that is employed as a manager by Dot.ca, an CCPC. She was dealing at arm’s length with the company when the options were granted and when the options were sold. She was granted 1,000 stock options on November 1, 2017 with an exercise price of $1 per share. The fair market value of the shares at that time was $1 per share. On November 1, 2018 she exercised the options when the fair market value of the shares was $4 per share, and then sold the shares on November 30, 2020 when the value of the shares was $6 per share.

There are no tax consequences in 2017 or 2018 when the options were granted and subsequently exercised because the company is an CCPC. The $1,500 (50% x ($4,000-$1,000)) taxable benefit is deferred until 2020 when she sold the shares. In addition, she will incur a capital gain in 2020 of $2,000 ($6,000-$4,000) of which 50% or $1,000 will be taxable.

Part 3 of this series will discuss cross border taxation of stock options.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Welcome to the 21^st century!  A new paradigm for accounting through cloud computing. 

Digitization and automation are progressing quicker than what most people can keep up with.  Business owners are constantly bombarded by new apps and technology that seem to be getting better and better.  Is your accounting system equipped with the latest and greatest tech?  

At Argento CPA, we have a few apps up our sleeves that are helpful for you.

First and foremost, you must choose your cloud accounting software.  We recommend using Quickbooks Online or Xero.  The biggest advantage to cloud accounting software is, you (or your accountant), have access real-time financial data from anywhere and anytime. 

Your bank and credit card transactions are pulled from online banking directly into your cloud accounting software.  This saves you a lot of time, since you do not need to wait until the end of the month to start recording transactions manually off bank statements.  Your bookkeeper can work real-time, so your financial information is always up to date.

Invoicing and collecting payments are simplified using cloud accounting software.  You can generate invoices from your tablet or mobile phone and email your clients directly. 

One of the newest features in cloud accounting is auto-recording through machine learning.  Your cloud accounting software can recognize recurring transactions, and you can set up rules so that transactions are auto allocated.  As this function improves, your accountant can spend more time adding value through advisory services instead of recording transactions.   

Receipt Bank is highly recommended for your modern-day accounting tech stack.  Receipt Bank uses OCR technology to scan and extract written information on receipts or invoices.  This means your bookkeeper does not need to enter transactions line by line, they only need to verify the scanned data.  Receipt Bank complies with the Canada Revenue Agency and is sufficient documentation for proof of purchase.  It also stores your data for up to 10 years.  If you choose to cancel your subscription, you can download a PDF copy of all your submitted items.

Another favorite of ours is Plooto.  This app is your all-in-one payment platform for accounts receivable and accounts payable functions.  Plooto simplifies international payments for a flat fee, remits taxes to CRA, and allows your controller or bookkeeper to pay vendors when authorized by you to do so.  In addition, you can automate your accounts receivable and request to be paid with preauthorized debit, so you do not have to spend thousands on credit card merchant fees.  It synchronizes perfectly with Quickbooks Online and Xero, which means your accounts are easily reconciled.  

When it comes to running payroll, we recommend using Wagepoint.  This service will do everything from time tracking, direct deposit for employees, automatic payroll remittances to CRA, generate and submit ROEs, and prepare T4s at year-end. 

If you are looking for expert advice on cloud accounting and online bookkeeping, Contact Argento CPA today!