The Transition from Employed to Self Employed Part 3

Let’s now move onto the 3^rd option in the transition from employed to self employed.  The 3^rd main option for making the transition from employed to self employed is through a 3^rd party contract service, such as the one we use called Job Works.  A third party contract solution allows you to have a steady contract with one company, similar to being employed with the same company.  The main difference is that you would be legally on contract, saving lots in tax through deductions, income splitting, dividends and more!  The key here is legal structuring as you don’t want CRA to come back and say you are an employee!  In a 3^rd party contract solution, you would have a corporation set up that contracts with the 3^rd party contract provider.  The 3^rd party contract provider has a contract with the company that pays the 3^rd party contract provider for the services that you will provide and then the 3^rd party contract provider has you fulfill the work that the company is looking for.  So in essence, your corporation that you work for and are an owner of, works through a 3^rd party contract provider to provide services for a company that has contracted with the 3^rd party contract provider.  There are many people who have been employed by a company and then the company that they worked for agreed to go through the 3^rd party contract provider allowing them to transition from employed to self employed!  For more information on Job Works, a 3^rd party contract service provider, you can go to www.jobworksinc.ca 

If you want to discuss your transition from employed to self employed, or the possibility of making the transition, don’t hesitate to contact us.  Also if you are an employer or a business that is looking to hire or transition your current employees, do speak with us first!

The Transition from Employed to Self Employed Part 2

We’ll pick up where we left off on my previous blog where we started our discussion on the first option for the transition from employed to self employed.

As we mentioned already, a gradual transition is when you continue to work while starting your business on the side.  The bad thing about a gradual transition is that it will now be like having 2 jobs, where you will work days, nights and weekends.  The workload will be much more, and as the business grows you will get to a point where you feel that you can’t manage both the job and the business.  When it comes to that point, it is time to look at the full transition to self employed!

The second option to make the transition from employed to self employed is to do an instant transition.  This means that as soon as you cease to be employed, you are going full time into your business!  The issue with using this method is that you will no longer have the steady paycheck of employment, so if your business is struggling to make enough income at the beginning, you and your family could be affected by having little to no income for a period of time.  The key to making an instant transition is to either have capital in reserve, have a spouse that can cover your closed circle budget, or to have business arranged that will generate enough income to run your business immediately and provide for you personally!  In looking at the option of gradual transition and instant transition, you may want to look at a combination of the two.  For example you may want to change the employment from full time to part time for a period of time until you are ready to fully leave the employment.  There are many options to look at, and all of the details revolve around planning.  If you are considering a transition, don’t hesitate to come see us to assist in planning your transition!

We’ll discuss the 3^rd option on my next blog. 

The Transition from Employed to Self Employed Part 1

Many people who are employed at one time or another in their life, consider making a transition to being self employed.  Be it a dream of opportunity, more freedom, more time to spend with family, more options to travel, or other dreams and goals, many things can draw the employed to becoming self employed!  Although these things may draw people, they forget that it can be much harder work, longer hours, and less free time when the self employment starts!  This of course is not always the norm, and if you work hard at the beginning, you probably will have more free time later down the road!  Becoming Self Employed is a major decision and should not be taken lightly.  If you are considering becoming self employed than you want to ensure your family is on side with this decision because the more support you have in becoming self employed, the better chance you have of succeeding.  Self Employment is not for everyone, so weigh out everything very careful when making this decision.

There are many ways people make the transition from employed to self employed, however they mainly fall into 3 categories:

1. Gradual Transition
2. Instant Transition
3. 3^rd Party Contract Services

In this blog series we will discuss all 3 of these options.

Let’s start with the first option – Gradual Transition. 

The first option to make the transition from employed to self employed is through a gradual transition.  This means that you would continue to stay employed while starting your business on the side.  The good thing about a gradual transition is that you will continue to have stable income from employment while you build your business slowly. If the business doesn’t work out, you still have your job.  Many businesses do not start with a lot of income, so in the case where you will build up income in your business slowly you will still have the comfort of a steady paycheck.

We’ll continue our discussion on Gradual Transition on my next blog post! 

Taking Money from your Corporation Part 3

The 3^rd main way that you will take money from you corporation is through payroll.  Payroll can come in the form of wages, salaries, bonuses, benefits, severance and more.  Payroll may be good if you have a lot of employees, however it is very inefficient if you are a small corporation with little to no employees!  Payroll brings great administrative work, regular $ remitting requirements, and extra CRA filing requirements.  If you are late on a payroll remittance by even a day you could wind up with large penalties, tacking on interest daily.  Having payroll also makes you more prone to a CRA audit as many CRA audits begin with Payroll Trust Exams!  There are many reasons to stay away from payroll, so please do talk to us about your options. 

The key when deciding how to take money from your corporation is understand the rules and follow them.  Now that we’ve outlined Shareholder Loans, Dividends and Payroll in this blog series you have a little understanding of what you can and can’t do.  Here is my tip to you: The best way to take money from your corporation or pay yourself is to simply take draws monthly of what you need to live on (your closed circle) and then when tax planning at the corporation’s year end, we can decide if the draws you took were shareholder loan, dividends, wages or a combination of!  This principal applies the same for taking out a lump sum when necessary.  Keep in mind that if you are married and your spouse is also a shareholder of the corporation, the draws should be in both of your name and put into a joint bank account to give maximum control of income splitting. This is very efficient for tax planning and is legal as you are allowed to borrow/draw money (shareholder loan) from your corporation for up to a year past the corporation’s year end.  In the case of the tip I just gave you, we wouldn’t even need to go past the current corporate year end before we claim it as income, and if there is a reason to not claim it as income this year then we have the option of deferring it.

You now have some great knowledge on the basics of taking money out of your corporation.  Do it wisely and save many headaches and taxes, putting more in your pocket!  For questions, to talk further about this topic and others, or to look at Kustom Design taking care of your corporate accounting and tax needs, don’t hesitate to contact us!

Taking Money from your Corporation Part 2

The other side of the shareholder loan is when you borrow money from the corporation.  This may be a one time lump sum, or may be a series of draws monthly, regularly or sporadically.  You are allowed to have a shareholder loan owing to your corporation for up to one year after the Corporation’s year end date.  So, for example, if you borrowed money from your corporation in the year and then still owed the money on your corporation’s next year end, you would have 1 year from that corporate year end to either pay back the loan, or claim it as personal income.  Now that we understand that rule, does it not seem simple to just take monthly or semi-monthly draws from the company and then at the end of the year, determine if it is in fact shareholder loan, wages, or dividends?  A lot of times you may not know until the year end anyway!  This is a great alternative to trying to keep up with all the payroll administration, remitting and filing headaches!  We will discuss this further in this blog series.

Second, we will now discuss dividends as a way to take money from your corporation.  For more on dividends, please do search my blogs as there is a lot more in depth teaching on dividends.  Dividends are simply a payment of profit from the corporation to its shareholders.  The first rule of dividends from corporations is that dividends can only be paid if the end result, after the dividends are paid, is that the Retained Earnings of the corporation are positive (above zero).  The Retained Earnings of a corporation put simply are a sum of the profits and losses of the corporation, less dividends, since the corporation’s inception.  The second rule of dividends paid from corporations is that each shareholder that owns the same class of shares must receive the same amount of dividends per share.  This is an important topic that is discussed in great length in some of my other blogs, and is important in determining your share structure.  Simply put, if you plan on paying dividends to anyone but yourself (ie. Spouse) then ensure they have a different class of shares than you do, so you remain in control of the income splitting (who gets how much).  Dividends are claimed on the corporation’s T2 income tax return, and are given to you on a T5 reporting slip, which is filed as income on your T1 personal income tax return. 

We’ll cover the third way to take money from your corporation in the next blog. 

Taking Money from your Corporation Part 1

If you own a corporation (or if you are a shareholder), you must know all the ways to take money from the corporation.  Maybe you work for this corporation full time or part time, or maybe you don’t.  Many people from CRA try to convince you to set up a payroll account and make monthly remittances.  This is definitely not the most efficient way to get money from your corporation.  In fact, it’s one of the least.  What if the corporation owes you money for money you loaned it or for an asset you sold to the corporation?  This is called a shareholder loan.  Shareholder loans must always be considered when taking money from your corporation.  In this blog series, we will understand the basics in 3 categories of taking money from your corporation:

1. Shareholder Loans: Loans to and from your corporation
2. Dividends: Payment of profits of the corporation to the shareholders
3. Payroll: Direct Remuneration for work/services rendered

A Shareholder Loan is a loan that can be both from the shareholder to the corporation and from the corporation to the shareholder. Let’s start by looking at a loan from the shareholder to the corporation to get the basic idea.  If you put start up capital into your corporation, pay for expenses on behalf of the corporation or loan the corporation money the corporation now owes you, the shareholder, the money.  You typically won’t collect interest, but you may want to in specific circumstances. 

Another way that you may have a shareholder loan owing to you from your corporation is if your corporation was in need of certain assets that you own personally, such as a car or computer, and you sold the assets to the corporation.  For any asset that the corporation purchases from you it must purchase the asset at Fair Market Value.  Keep in mind that if you are selling an asset that appreciates (not depreciates) than you may end up with a Capital Gain personally when you sell the asset to the corporation.  (This can also be deferred in certain instances)  When you sell the asset to the corporation, the corporation will either pay you right away for it, or pay you later.  If the corporation pays you later then you simply have a shareholder loan owing to you. 

There is another side to the shareholder loan that we will be discussing on the next blog. Please check back next week!