The Michael Lepitre Blog

RRSP’s – What are they & Are they good or bad? Part 4

2012-01-24T09:06:00.000-07:00

So let’s now breakdown some of the Goods and Bads of RRSPs, starting with the Goods:

Good facts about RRSPs:

1. Tax Deduction in the year you contribute

2. Long Term Growth of Investments

3. Deferred tax on Growth of Investments

4. Forced Savings program

Bad facts about RRSPs:

1. You are eventually taxed

2. There is a limit on how much you can contribute (may be a good)

3. Unlike other investment vehicles, you cannot use RRSPs as collateral

4. You are restricted as to what you can invest in

5. There are age and income restrictions to RRSPs

6. Government is in control of the rules

7. RRSPs are in trust for the government

8. You cannot receive the tax favorable benefits of Capital Gains and Dividend Income inside of an RRSP

9. You cannot deduct investment losses on your taxes

10. You cannot deduct interest and carrying charges if you borrow money to invest in an RRSP

This gives you an idea of some of the main Goods and Bads of using RRSPs. Your bottom line is that you need to plan thoroughly to decide if using RRSPs is for you or not! Again remember the key if you are using RRSPs is to contribute when your income is high and withdraw when your income is low.

If you are contributing to RRSPs definitely consider using a self directed RRSP as there are many advantages. Also if you are considering withdrawing from your RRSP, do it in increments of $5,000 or less as the withholding tax is lower. The key in withdrawing an RRSP is to have a tax plan. Kustom Design can help you plan a tax effective RRSP withdrawl if this is what you are looking at doing.
There are many more strategies available with and without RRSPs so do come plan with Kustom Design to ensure you maximize your potential and minimize your tax. Some of the other things you can look at is using your RRSP to give yourself a “Self Directed Mortgage”, where your RRSP holds your mortgage! Other strategies could be tax shelters and flow through shares. Come take our Financial Boot Camp to learn more about all of these topics and more. You can sign up for the Financial Boot Camp on our website at www.kustomdesign.ca/.

RRSP’s – What are they & Are they good or bad? Part 3

2012-01-19T09:11:00.000-07:00

RRSP contribution limits are calculated annually on your “earned income”, not passive income, and show up on your Notice of Assessment. Always know your contribution limit before contributing, because if you over-contribute you will get penalized and have to pay for it! If you are unsure of your contribution limit you can always contact CRA to get it.

Another interesting fact about RRSPs is that you don’t have to contribute cash. You can contribute stocks or securities that you already own. They key is that they must be RRSP eligible investments.

There is so much to learn about RRSPs…let’s go on. You can also take a withdrawal from your RRSP to purchase your first home. This is called the Home Buyer’s Plan. You are not taxed on this withdrawal, but must pay it back over the next 15 years, or claim it as income over the next 15 years.

There is also something called the Lifelong Learning Plan (LLP), you can withdraw up to $10,000 a year, or up to $20,000 in total each time you participate in the LLP to help pay for your education. All you have to do is repay at least 10% per year for up to ten years. Participants must start to make repayments two years after their last eligible withdrawal, or five years after the first withdrawal, depending on which due date comes first. Amounts withdrawn must be repaid within 10 years.

RRSPs are one of the few “after the year” tax planning opportunities that the government allows. You can contribute to an RRSP for up to 60 days after the end of the calendar year and still have it qualify for that calendar year. This is an interesting factor as you can contribute to your RRSP in February 2012 and get a tax deduction for 2011.(an example) Why would the government allow this? There are a few reasons, such as RRSPs can bring out hidden money into the financial realm which earns income for financial companies, and those financial companies pay tax on the revenue generated. Also we must keep in mind that RRSPs are actually in trust for the government. If the government were in a position where they were collapsing financially they could take all the RRSPs as they are in trust essentially for the government if they need them! …This is of course a scary thought, but it must be considered!

RRSP’s – What are they & Are they good or bad? Part 2

2012-01-17T09:27:00.000-07:00

There are many other things to consider in deciding whether or not to do an RRSP. You must understand the basic concept of an RRSP from a tax perspective. When you contribute to an RRSP you get a tax deduction, then when you pull the RRSP out you are taxed on that as income. So therefore, you may not be saving tax when you contribute to an RRSP, but rather deferring tax. The key to saving tax if you decide to do an RRSP is to contribute when you have high income and pull out the RRSP when your income is low. You would not want to contribute into an RRSP in a low income year. Also if you have a plan that will continuously provide high income later in life, then RRSP’s may not be good for you.

Basically there are 2 sides to the RRSP, the tax deduction (which we just discussed) and the investment side. Once you make the RRSP contribution you can now invest the money from within your RRSP. You can either have someone that is licensed invest it for you, or you can set it up as Self Directed RRSP and invest it yourself.

Another thing to understand is that some RRSP’s are locked in and some or not. This is typically a choice that must be made. Unless you have a specific purpose for locking in the RRSP, then you are best to go with an RRSP that is not locked in. If your RRSP is locked in then you will not be able to withdraw it until you are in your elder years (currently 71) and can transition it into a RRIF (Registered Retirement Income Fund)

Although the majority of people that do RRSPs contribute to their own RRSP, you can also contribute to a spousal RRSP which gives you a tax deduction, but allows your spouse to withdraw it later on. The other main type of RRSPs is group RRSPs, which are typically contributed to through employment arrangements and are deducted off of paycheques.

RRSP’s – What are they & Are they good or bad? Part 1

2012-01-12T10:28:00.000-07:00

First of all we should start off with what is an RRSP? The letters RRSP stand for Registered Retirement Savings Plan. An RRSP is a trust account in Canada that allows you to hold investments in it, earning income tax free until you withdraw the money. We must understand the concept and not get confused in that an RRSP is not an investment, but instead a way to hold investments. RRSP’ have been around since 1957 and still stand today in 2012, over 50 years!

Everyone has a different opinion on RRSP’s, but the key is to have your own understanding of RRSP’s, knowing the goods and the bads, and seeing if RRSP’s will work for your retirement plan. Every one and every situation is unique, so while RRSP’s may work for some, they don’t work for others. The key is not to take the facts and opinions of the people selling RRSP’s, form your own opinion! Everyone should have an RSP (Retirement Savings Plan), but an RRSP is a choice.

Here is a statement by the CD Howe Institute, a very reputable research firm “Millions of Canadians accept the homogenous advice of governments and the financial community and put billions into RRSPs. However, for many lower-income Canadians RRSPs are a terrible investment. They are victims of a fraud, however unintentional. Only when more Canadians are aware of the perverse treatment of lower-income citizens’ savings will Ottawa be forced to develop measures that reward, rather than punish, their savings efforts.” So we see clearly here that RRSP’s are not good for lower-income Canadians! Other studies show that very few Wealthy people do RRSP’s, as there retirement plans are Real Estate, Businesses and other investments held outside of RRSPs. So we can now see that the group of people in Canada that are eligible to do RRSP’s are the middle class!

Why you need a Closed Circle, Part 2

2012-01-10T09:30:00.002-07:00

As discussed in my other blogs on the Closed Circle Budget, when creating and managing a Closed Circle we should break down our spending into Obligations, Necessities and Wants. Obligations are items that you are obligated to each month, Necessities are things that are needs but are not obligated to, and wants are your material wants. For more on creating a Closed Circle in more detail, please see my other blogs.

One of the main reasons we create a Closed Circle is so we can have regular overflow in our life. Overflow is the abundance of finances that come in above and beyond your closed circle. Once you have answered the question as to “How Much is Enough?” you can then decide where overflow will go. Overflow can be used for many different things. Overflow can be used for Accumulating Wealth and Creating Passive Cash Flow (investing). It can be used to pay debt faster, give more or to help you achiever other goals that you and/or your family may have.

Let’s face it. The majority of people in the world are not operating on good financial principles. 2 of the main superpowers in the world, the United States and Europe are both in great financial trouble! Do you think any of their financial troubles could have something to do with the way they spend? Don’t get yourself into financial trouble and become a slave to debt, instead take control of your finances with a Closed Circle! To learn more about the Closed Circle, read more of our blogs, contact us, and come attend one of our Financial Boot Camps!

Why you need a Closed Circle, Part 1

2012-01-05T09:26:00.000-07:00

In seeing how houses are built, we find that the first step before building the framework, electrical and plumbing, is the foundation. Without a strong foundation, everything else is irrelevant! Storms will come, and when the foundation is strong the house will stand. In life, all kinds of storms come including relational, health and financial storms. In each area, you need to have a foundation. In the area of finance, a closed circle can be your financial foundation.

A Closed Circle answers the question “How much is enough?” If you cannot answer that question then no amount will ever be enough and you will spend everything you make no matter how much you make! Imagine that, not having enough money to accumulate Wealth or even have enough to retire on! Funny enough the majority of people in the world are in exactly this position!

A Closed Circle also brings agreement, which is a major contention among people and relationships. When there is agreement, there can be little to no arguing over finances. When there is agreement there can be growth and success in the pursuit of goals! When we answer the question “How much is enough?” it allows us to have peace at all times over our finances!

Employee Profit Sharing Plans (EPSP’s), Part 4 of 4

2011-12-20T09:07:00.000-07:00

This is the last part of our EPSP blog series where we will discuss the remaining items on the summary of consultations.

3. Limitations on contributions

Under the Income Tax Act, employers may deduct expenses and outlays only to the extent that they are reasonable in the circumstances. The Income Tax Act also includes specific limits to employer contributions to certain plans. For example, consistent with limits on other retirement savings vehicles, employer contributions to a Deferred Profit Sharing Plan may not exceed the lesser of 18 per cent of an employee’s compensation, or one-half of the money purchase Retirement Pension Plan limit (for 2011, one-half of the money purchase limit is $11,485).

While studies have indicated that a profit pool between 3 and 5 per cent of salaries/wages is sufficient to positively influence the behavior of employees, the Income Tax Act does not place a specific limit on the size of EPSP employer contributions ^[2]. This could change under the new provisions.

Is there a specific rationale for allowing unlimited EPSP employer contributions?

What would be the impact on your business or clients if employer contributions to an EPSP were subject to a specified limit, such as a certain percentage of an employee’s salary or wages paid directly by the employer for the year? What would be an appropriate limit?

4. Withholding Requirements

The Income Tax Act imposes withholding requirements on several sources of income and includes tax by installment rules. EPSP allocations are not subject to the same income tax withholding requirements as salary and wages paid directly by the employer, and can be structured to avoid tax by installment rules. This can allow related persons to delay the payment of income taxes.

As EPSP contributions are allocated directly from the trust rather than the employer, they are also not subject to EI and CPP withholding requirements. This could change with the revision.

What would be the impact on your business or clients if EPSPs became subject to income tax withholding requirements similar to those applying to salary or wages paid directly by the employer for the year? What would be the effect of this change if EPSP allocations were also considered employment income paid by the employer for EI and CPP purposes (and, therefore, subject to EI and CPP withholdings)?

5. Additional Questions

In the context of reviewing EPSP rules, are there additional aspects of EPSPs that you think should be reviewed, or taken into consideration, to ensure that EPSPs remain an effective compensation tool? Are there any technical improvements that could be proposed as part of the review of EPSP rules?

Currently, while we wait, it may not be good to set up an EPSP where the rules are going to change. It is best to know all the current rules before getting into something such as an EPSP. EPSPs can still be used for the purpose designed by the government, but should not be used as a way to avoid CPP and/or EI. There are other ways to achieve this goal that are much more efficient and are not being looked at to be changed by parliament! Don’t hesitate to contact us at Kustom Design to consult further on this topic.

Employee Profit Sharing Plans (EPSP’s), Part 3 of 4

2011-12-15T09:14:00.000-07:00

Here is the 3^rd part of our EPSP blog series. In this 3^rd part, we focus on the consultations made in connection with some proposals to change EPSP rules.

If the rules change as we think they may, this could really put a damper on this loophole for many business owners. Here is the summary of the consultation that was published.

1. Eligibility to participate in an EPSP

The Income Tax Act contains provisions that limit the ability of employees who do not deal at arm’s length with their employer to enter into certain compensation arrangements with their employer. For example:

To be accepted for registration, a deferred profit sharing plan must exclude persons related to the employer and specified shareholders from participating in the plan; and
To qualify for a deduction, employees who exercise stock options must deal at arm’s length with the employer.

With the proposed changes, EPSP provisions may include similar restrictions on the participation of employees.

Is there a specific rationale for allowing non-arm’s length employees to participate in an EPSP?

What would be the impact on your business or clients if employees who do not deal at arm’s length with the employer, such as related persons, were excluded as eligible EPSP beneficiaries?

2. Role of Minor Children

The Income Tax Act contains provisions to limit income-splitting techniques that seek to shift certain types of income (e.g., certain capital gains, taxable dividends, income from partnerships) from a higher-income individual to a lower-income minor. Under the tax on split income provisions, for example, income received by minor children is taxed at the highest federal marginal income tax rate (29 per cent). In Budget 2011, the Government extended the tax on split income to certain capital gains on shares of most unlisted corporations. EPSP allocations are not subject to these provisions currently, however the revision could change this.

Is there a specific rationale for excluding EPSP allocations from the tax on split income provisions?

What would be the impact on your business or clients if EPSP allocations to minor children were subject to the tax on split income?

There are 3 items left on the summary of the consultation – Limitations on contributions, Withholding Requirements and Additional Questions. We will take a look at these on the next part of this series.

Employee Profit Sharing Plans (EPSP’s), Part 2 of 4

2011-12-13T09:04:00.002-07:00

This is the 2^nd part of our 4-part blog series on EPSP’s. This part will talk more about the benefits of EPSP’s and how they can affect your taxes.

Getting back to EPSPs, there have been some benefits to setting one up. One is that the trust is not taxed. No tax is payable by a trust governed by an E.P.S.P. on its taxable income. This means that like registered pension plans or R.R.S.P.'s, the income of the trust accumulates on an untaxed basis. Another benefit is that employees are taxed annually on the activities of the trust. The allocations are included in the employee’s income in the year of allocation but income tax is not withheld on the transaction. The employer will deduct the amounts paid to the EPSP within 120 days of the Corporation’s year end. The EPSP can be used as an opportunity to reward employees and help create loyalty.

Many EPSPs have been a way for small business owners to distribute profit among family members, children and other employees. However, the original intent behind EPSPs, as a parliament initiative, was to create a way for business owners to align the interests of their employees with those of the business by sharing the profits of their business with their employees. The intent was to create vehicles for employees to save money through the EPSP that would be invested tax free, allowing the profits plus gains to be distributed on an annual basis to employees. Since many business owners have simply been using it as a way to get around CPP and EI, there are currently major consultations going on with the department of finance in the way of proposed changes. If you’d like to see the consultations that closed just recently (October 25, 2011) go to http://www.fin.gc.ca/activty/consult/epsp-rpeb-eng.asp.

On part 3, we’ll talk about the different scenarios involved when EPSP rules change.

Employee Profit Sharing Plans (EPSP’s), Part 1 of 4

2011-12-09T12:20:00.000-07:00

This is a 4-part blog series focusing on Employee Profit Sharing Plans or EPSP’s. I will discuss this in as much detail as I can. But if you need further clarification, please feel free to contact me at info@kustomdesign.ca. Thank you and I look forward to hearing from you soon! Here is the first part of our series:

The average person does not hear about things like EPSP’s. However, over the last number of years, with the increase of knowledge through the internet and other sources, many other smaller private Corporations are beginning to use them. In fact between 2005 and 2009, the number of EPSPs has increased about fivefold, mostly among small, closely-held Canadian-controlled private corporations.

So what is an EPSP? An Employees Profit Sharing Plan ("E.P.S.P.") is a trust that allows an employer to share business profits with some or all of its employees. The E.P.S.P. does not require registration. Amounts are paid to a trustee to be held and invested for the benefit of the employees who are members of the plan. The idea is to invest the funds for growth and future distribution. However, many EPSPs have not been investing the funds, but instead just flowing through the profits to the employees as a way to avoid CPP on the employee’s earnings. The government is currently looking at changing the rules as they don’t want to see EPSPs used to simply avoid CPP (and EI).

That being said, avoiding CPP can be a good thing particularly if you’ve maxed out your lifetime contributions. To find out if you have maximized your CPP contributions, you must contact Service Canada. Avoiding CPP is better achieved by paying dividends. Dividends can only go to the shareholders of the corporation (which may also be employees), so you must structure your affairs accordingly.

Next week, we’ll discuss the benefits of EPSP’s.

Understanding the KiddieTax, Part 3

2011-11-22T09:13:00.000-07:00

The 2011 Federal Budget has introduced a new legislation whereby after March 22, 2011 such capital gains will now be subject to the “Kiddie Tax.” However, other capital gains realized by a minor (for example, from a publicly traded portfolio of assets or shares of a private corporation disposed of to an arm’s length person) will continue to not be subject to the “Kiddie Tax.” As such, capital gains realized and taxable in the hands of a minor either directly or indirectly is still a common and effective income splitting tool in many cases.

Also, partnerships and trusts that provide services to arm’s length parties are also not subject to the “Kiddie Tax”. Let’s say that a mom, dad, the kids and a trust all form a partnership. The partnership’s purpose is to sell food and drink (something a whole family could do). When the partnership receives profits it can allocate these profits to the partners, which include the minors. Typically no “Kiddie Tax” would be applied in this instance.

There are other ways to avoid this “Kiddie Tax” as well, such as simply paying the minor for work rendered. When your children work for you it can be legitimately be their income and taxed in their hands at a much lower rate.

The “Kiddie Tax” definitely makes the family income splitting more difficult, however there are ways to effectively split income. Careful planning with professionals must be done before implementing any plan. On top of the current rules making it more complex, the changes in income tax laws each year make it even more difficult. Thus, if you are looking for ways to income split, don’t hesitate to contact us as we would be glad to plan with you! Our professionals along with our strategic alliance of tax lawyers can help you plan for all types of tax savings!

This concludes are blog series on the Kiddie Tax. I hope you now have a better understanding of its rules and how it can impact your tax saving strategies!

Understanding the KiddieTax, Part 2

2011-11-17T09:04:00.000-07:00

Another common plan prior to January 1^st, 2000 was to have a partnership whereby the child (or a trust of which the child was a beneficiary) would be a partner and have the partnership receive income from a related entity. For example, the partnership could provide consulting services to a corporation owned by the parents. The income received by the partnership could then be allocated to the partners, including the minor child, thus providing for simple yet effective income splitting.

Now both of these income splitting plans are subject to the “Kiddie Tax” to the extent that the income is received by a minor child. As with most tax rules, many people do not know or understand these rules so it is best to educate yourself (such as you are in reading this blog) and plan with professionals, such us Kustom Design.

One of the typical types of income that is not split income and therefore not subject to the “kiddie tax” is capital gains. Many plans were set up that involved related corporations that were structured to realize capital gains income. These plans mainly involved having shares of the corporation being sold to a related corporation and resulting in a capital gain that is taxable in the child’s hands. Prior to the 2011 Federal Budget, such a plan was often used to the extent that the accountant and/or tax lawyer and their client believed that the general anti-avoidance rule (“GAAR”) would not apply. The Canada Revenue Agency(CRA), however, was not amused and would often times apply the GAAR to such a plan (with many cases still in the system). New legislation was then introduced through the 2011 Federal Budget.

We’ll continue our discussion on this new legislation as well as how the Kiddie Tax applies to partnerships and trusts next week.

Understanding the KiddieTax, Part 1

2011-11-15T09:21:00.000-07:00

On January 1^st, 2000 the “Kiddie Tax” came into the Canadian law books. The main purpose of introducing this new tax was to deter the many Canadians from income splitting with their kids. Before January 1^st, 2000 many Canadians would simply structure their affairs so investment income was realized in their kids hands, thus having a much lower tax rate (many times no tax was realized).

This “Kiddie Tax” applies to certain types of income that is structured in ways so the minor child receives the income. We are speaking of kids under 18 that belong to Canadian resident parents. This “Kiddie Tax” makes it so that instead of the minor child paying income tax at a lower rate (or no tax at all), they end up paying the highest tax rate possible! Planning around this rule is a must when planning income splitting with your kids. Of course the minors may not be able to afford to pay this tax, so the parents end up being liable for the tax as the ultimate liability for “Kiddie Tax” rests with the parents.

The most common type of income to which the “Kiddie Tax” applies is dividend income from corporations and trusts. Before the new “Kiddie Tax” it was regularly part of the plan to structure affairs using a trust that receives dividends and then would flow it out to the minors which would pay little to no tax. Some structures even allowed minors to receive dividends directly from a corporation of which they were a specified class shareholder. Before the “Kiddie Tax” this simple plan was very effective in saving tax as the child could use up their personal tax credits and pay tax in much lower tax brackets. In fact many times there was no tax to pay if the income was kept under certain levels.

We’ll continue our blog series on the Kiddie Tax on Thursday. Please check back!

Improving your Credit & Maximizing your Borrowing, Part 4

2011-11-01T09:04:00.002-06:00

Here are your rights within the Credit Reporting Act:

· To be aware of what your credit says about you; and a list of everyone who has requested it recently.

· Before any one is given access to your credit file, he or she must have your written or verbal consent or notify you by mailing you a notice.

· Your report may only be given to a person seeking information only for the purpose of extending credit or collecting a debt; tenancy inquiry; employment or insurance verification; a direct business requirement.

· The right to be told by a credit reporting agency the substance and sources of information it collects about you.

· The right to know the name, address and phone number of the credit reporting agency responsible for preparing the credit file used to deny you credit.

· If you are denied Credit due to information on your credit file, you are entitled to a free copy of your Credit File if you make a request within 30 days of denial.

· The right to have investigated within a reasonable amount of time, information that you believe is inaccurate or outdated.

· The right to have inaccurate information deleted from your credit record if a credit reporting agency’s investigation finds erroneous information.

· The right to have disputed information on your credit file deleted if the credit reporting agency cannot verify it through investigation.

· The right to include a brief statement that will become a permanent part of your credit record explaining your side of any dispute that cannot be resolved.

· The right to have negative credit-related information, such as unpaid debts, judgments, and bankruptcies removed from your credit file after 6 years.

· The right to sue a credit reporting agency on the condition that it deliberately or negligently violates the law.

There are many things to consider with Credit! The Credit Bureaus are for profit companies, they are not government organizations. Always do what you can to pay less interest and maximize your lending. Sometimes the best time to get credit is when you don’t need it. If you get a line of credit and don’t use it, you pay nothing until you use it! Please don’t hesitate to contact us if you are looking for more info in regards to your credit or obtaining credit.

Improving your Credit & Maximizing your Borrowing, Part 3

2011-10-27T09:26:00.000-06:00

Here are some useful information you should know about Credit Scores. I’ve listed the main areas used in calculating your credit score, top ways to improve your credit score and other tidbits you might want to be aware of.

There are 5 Main Areas used in calculating your credit score:

1. Your payment history – Have you paid your bills on time regularly

2. Amounts you owe – Do you owe a lot, are you close to your credit limits?

3. Length of your credit history – How long have you had credit?

4. Types of Credit Used – Ie. Consumer debt is not treated as well as lines of credit

5. Your New Credit – Have you recently gotten new credit?

Here are the top 5 ways you can improve your credit:

Pay all bills on time.
Keep revolving credit balances low.
Limit your credit.
Be focused when you go for credit.
Manage your credit responsibly and regularly.

Here are some other good things to know about Credit:

· We live in a credit society, vs. the cash based society of our (grand) parents.

· Treat Credit as an asset as it can work for you producing your cash flow.

· It is hard to live in today’s world without credit. (i.e. Rentals / payments / home purchases)

· Extension of Credit is the banks most important function.

· You need to monitor your credit regularly, knowing all changes at all times.

· There are 3 Major Credit Bureaus in Canada: Equifax Canada Inc., Trans Union of Canada Inc. and Northern Credit Bureaus Inc.

· You are entitled to one free credit report per year.

· Lenders require you to have at least 4 open L.O.C.’s to show stable history.

· You should have an overdraft and never bounce any cheques or payments.

Improving your Credit & Maximizing your Borrowing, Part 2

2011-10-25T09:18:00.001-06:00

The main thing that every bank or company uses to determine whether or not you can borrow is your Credit Score. There are other names for the Credit Score, such as FICO Score or beacon score. They are essentially the same thing. However, there is more than 1 Credit Bureau they can get a score from. The main Bureau that everyone uses is Equifax. However, some also use TransUnion or Northern Credit. You can get a good handle on your credit score by using Equifax.

One of the first things you need to know about your credit score is that there are soft checks and hard checks on your credit. When you check your credit, it is a soft check and does not affect your score. However, when an institution or lender checks your credit, it is a hard check and negatively affects your score. So don’t go and just shop around for credit, allowing each potential lender to check your credit as that will bring your score down. Each time it is checked, it will go down so be cautious on who you authorize to check your credit!

To check your credit, you can simply go to www.equifax.ca and get your credit report. If they can’t verify you online, you may need to call and rectify. But once you have an account, you can get your credit any time for a small cost. You can also subscribe to different credit systems where they send you a regular report and notify you if anyone checks your credit. Although you can get a free credit report in the mail each year it doesn’t have a score, so doesn’t tell you all that you need!

One of the main reasons for checking your own credit, other than knowing where you’re at with your credit score, is to see if there are any errors on your credit. Many times people find things on their credit report which shouldn’t be there. Even though they may not be correct, they are still on your credit and could be negatively affecting your score! Errors can be fixed! Equifax has a form that you can submit and they provide instructions on their website as to what to do when you find errors on your credit report.

Improving your Credit & Maximizing your Borrowing, Part 1

2011-10-20T09:02:00.000-06:00

Many people really don’t realize how important their credit actually is. Your Credit is an asset. 1 bad mark on your credit could costs you thousands of extra dollars in interest on a loan, or 10’s of thousands or even 100’s of thousands of dollars on a mortgage. Why pay more? The better your credit the better your rates on loans, mortgages, lines of Credit and more. Did you know that if you have good credit you can even renegotiate your current interest rates! Do your best to keep your credit score as high as possible so you can get the best rates and keep more in your pocket!

When you go to borrow money, there are 3 main things that determine how much you can borrow and at what rate. Here are the 3 areas:

Credit Score
Debt Service Ratio
Your history with the company/bank that you are borrowing from

I will work backwards to cover these 3 areas, starting with your history with the company/bank that you are borrowing from. Each institution that borrows money keeps great record of your history with them, such as how long you’ve been a client, your payment history, how many loans and other products you use and so forth. Many companies/banks take this into account when loaning you money. If you’ve had a great history with them, this will assist you in your borrowing needs if you use that company or bank to borrow money.

Debt Service Ratio is a much more complicated topic. A Debt Service Ratio is a calculation made by a lender to determine if your current income can service your debt(s). Many different lenders require different Debt Service Ratios, so there is no sure way to know that you will pass their Debt Service Ratio unless you ask what it is. Don’t be afraid to ask as many questions as you can when you are considering borrowing. Not only do different institutions have different Debt Service Ratios, but each type of lending can have different Debt Service Ratios. For example borrowing for a vehicle would have a different Debt Service Ratio then borrowing for a home. Debt Service Ratio is typically calculated by dividing your monthly payments on your current loans and general cost of living items by your gross income. Again because each company/bank has different Debt Service Ratios, it is best to ask the questions and how they calculate their Debt Service Ratio. If you can’t meet their debt service ratio, then it may be a waste of time and a mark on your credit when you apply for the credit, so why bother?

We’ll get into our discussion of the Credit Score on my next blog. Please check back!

The Transition from Employed to Self Employed Part 3

2011-09-27T09:08:00.000-06:00

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

2011-09-22T09:00:00.000-06:00

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

2011-09-20T09:00:00.000-06:00

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:

Gradual Transition
Instant Transition
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

2011-09-15T09:02:00.002-06:00

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

2011-09-13T15:05:00.000-06:00

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

2011-09-08T08:55:00.000-06:00

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:

Shareholder Loans: Loans to and from your corporation
Dividends: Payment of profits of the corporation to the shareholders
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!

Charities 101

2011-08-23T09:24:00.000-06:00

A registered charity is an organization established and operated for charitable purposes, and must devote its resources to charitable activities. The charity must be resident in Canada, and cannot use its income to benefit its members. Charities are usually registered as Corporations, or are governed by a trust or a constitution. They may be under a covering of a parent Organization.

The main advantages of charities are:

Ø Charities are able to receive gifts tax free.

Ø Charities provide receipts to donors for tax savings.

Ø Charities are tax exempt

Ø Charities make a great impact in our communities, provinces and our country!

The main disadvantages of charities are:

Ø Charities take time to set up.

Ø It is a large undertaking to set up a Charity, and there are ongoing requirements.

Ø Charities must meet a public benefit test.

Ø You cannot keep profit of the charity.

Ø If you lose charitable status, all assets are taxed, or if break any of the various charitable rules you could face various consequences.

Many people have asked what the difference is between a charity and foundation in Canada. The main difference is that charities are public and foundations are private. Foundations in Canada are charities and mostly operate by the same rules. Foundations are typically used to raise funds privately to distribute to other charities.

Charities should not be confused with non profits. Non profits have much less regulation than charities, however they are treated similarly in that they are typically tax exempt and cannot distribute profit to benefit ownership. The biggest difference between charities and non profits is that non profits are not allowed to issue tax receipts for donations to receive tax credits!

Professional Corporations 101

2011-08-18T09:16:00.000-06:00

A professional corporation is a corporation engaged in providing professional services, where a profession governed by its professional body allows its members to practice through a corporation as opposed to a sole proprietorship or partnership. Examples include Doctors, Dentists, Chiropractors, Lawyers and Accountants. To have a Professional Corporation you must belong to a professional governing body.

The main advantages of professional corporations are:

Ø Having a Professional Corp. allows you to belong to Professional Organizations.

Ø Having a Professional Corp. allows you to be recognized as a Professional.

Ø Many people like to deal with Professionals that are governed by another body for accountability.

The main disadvantages of professional corporations are:

Ø There are more tax filing and other rules for a Professional Corporation than a regular Corporation.

Ø A Professional Corp’s life is ended if the person/people holding the designation passes away or loses their license.

Ø You are under the rules of the Prof. Organization that may not allow you to have shareholders or partners that don’t belong to the organization. (hold credentials). Typically the exemption to this is immediate family members, such as a spouse or children.

Ø The articles of incorporation, in addition to all other requirements, must limit the activities of the corporation to the profession.

If you belong to a professional governing body they may require you to have a professional corporation. Please contact us if you require more information on business structuring or professional corporations.

The last part of the series on structures will be about Charities. Check back next week and we’ll discuss some general information about these organizations!

Partnerships 101

2011-08-16T09:09:00.000-06:00

In this blog we are talking about unincorporated partnerships. Check our other blogs for other forms of corporate partnerships, limited partnerships and more. A partnership is established when two or more people agree to pool their financial, managerial, technical and other resources in order to operate a business for profit. Like a sole proprietorship, a partnership is not taxed as a business that is separate from its owners. The income from the partnership is included as part of the partners’ personal incomes and taxed accordingly.

The main advantages of partnerships are:

Ø Because two or more people will be in business together, they can combine their finances in order to invest more than either could have done individually.

Ø A partnership will most likely be able to borrow more than a sole proprietorship because creditors will have the credit & collateral of two or more people instead of only one to secure their lending.

Ø Partners can pool talents and resources to accomplish more.

The main disadvantages of partnerships are:

Ø Like a sole proprietorship, partners in a partnership are also exposed to unlimited liability incurred by the business, in relation to their % of ownership.

Ø The partnership ends every time a partner leaves, unless provided for in a partnership agreement.

Ø Start-up costs can be as high as, or even higher than, the cost of incorporating, due to the cost of Partnership Agreements.

If you are considering a partnership you may not want to use this typical form of partnership, but instead consider using a corporation or limited partnership. Please contact us if you require more information on business structuring or partnerships.

My next blog will be about Professional Corporations so please visit my blog again!

Limited Partnership 101

2011-08-11T09:14:00.002-06:00

Limited Partnerships are a special form of partnership, often used where investors want the tax treatment that comes from a partnership relationship, without incurring personal liability for all of the partnership debts. Limited Partnerships (LP’s) consist of a General Partner, responsible for managing the business of the LP, and the Limited Partners, the silent investing partners that have no say in the business activities.

The main advantages of limited partnerships are:

Ø Limited partners have limited liability.

Ø Both Income and Losses are flowed through to limited partners.

Ø It is easy to attract investors to an LP.

Ø Allows for experienced general partners to use their expertise in running the business.

Ø Limited partners can leave without LP dissolution.

The main disadvantages of limited partnerships are:

Ø There are more filings, formalities, requirements with limited partnerships.

Ø It can be costly to form a Limited Partnership.

Ø General partners assume personal liability.

Ø Much due diligence is required before investing as you are trusting your money in the hands of the General Partner.

Both General Partners and Limited Partners can be corporations. There are many uses for Limited partnerships, including minimizing and deferring tax. If you have any questions on Limited Partnerships or other structuring questions don’t hesitate to contact us!

We’ll take a look at Partnerships next week!

JOINT VENTRURES 101

2011-08-09T09:19:00.002-06:00

A joint venture is not a structure, but is really a contract. A joint venture exists when two or more people agree to contribute goods, services, labor or capital to one business enterprise. Canada has no specific laws governing joint ventures, outside of contract law. Currently, joint ventures are governed by the contract between the parties involved in the jurisdiction they are agreed to be governed by.

The main advantages of using joint ventures are:

Ø You can make up the rules as to what the joint venture contract will look like.

Ø Joint Ventures are very flexible.

Ø Joint Ventures bring people together to share resources and/or talents.

Ø Joint Ventures can simply end when the deal is done (unlike a partnership or corporation).

The main disadvantages of using joint ventures are:

Ø Contracts can be complicated and costly.

Ø The objectives of the Joint Venture may not be clear, or each JV partner may have different objectives that cause conflict.

Ø Legal Contracts come down to interpretation, and in Joint Ventures there are no major laws governing them.

Joint ventures can be used in conjunction with corporations, trusts and other types of structuring. If you have structuring questions, don’t hesitate to contact us!

On my next blog, we’ll discuss Limited Partnerships. Please check back on Thursday!

Holding Companies 101

2011-08-04T09:49:00.000-06:00

Also called a parent company, a holding company is a company that owns part, all, or a majority of other companies' outstanding stock. (shares) A holding company may or may not be used for holding other assets and leasing them to an operating company.

The main advantages of holding companies are:

Ø A holding company offers the ability to segregate earnings from the main operating company.

Ø With proper planning you can creditor-proof the assets of the business.

Ø Can be used for Income Splitting Purposes.

Ø Generally, if set up properly, you can issue dividends from an operating company up to a holding company on a tax-free basis (Onshore and Offshore)

Ø Easy to move money between Holding company. and Operating companies via dividends and loans, etc.

The main disadvantages of holding companies are:

Ø Requires more cost and time, as you now have more than one corporation.

Ø Requires more planning to be able to effectively use your Holding Company.

Ø Holding Companies don’t qualify for the Lifetime Capital Gains Exemption on qualified small business shares.

Holding companies should be used in conjunction with a family trust where possible. The advantages of having a holding company far outweigh the disadvantages, so if you are considering implementing a holding company in your structure please do contact us. We are here to assist you with all your structuring needs.

Please check back next week and we’ll discuss how Joint Ventures work.

Be part of the KD Team - General Accounting Manager Job Posting

2011-08-03T11:08:00.001-06:00

General Accounting Manager -- Calgary, AB

THE KUSTOM DESIGN TEAM is a team of professional accountants, tax specialists and strategic planners supported by a dedicated staff and strategic alliances.

GUIDED BY A CODE OF HONOR THAT INCLUDES being positive, recognizing personal contributions, being a good steward, doing whatever it takes for the team to succeed and honoring and respecting one another (and more!) we are looking to add an amazing team member as a General Accounting Manager.

RESPONSIBILITIES WILL INCLUDE:

Client support including corporate year end (some bookkeeping), corporate structuring and tax planning, client presentations and customer service
Manage flow of corporate year ends and business package clients
Oversee accounting technicians’ work and provide leadership/mentorship as needed

QUALITIES/SKILLS:

5+ years of accounting experience
3+ years of management/leadership experience
A CGA/CMA or equivalent is preferred
Full cycle accounting knowledge (for small to medium size businesses)
Tax knowledge specific to small and medium size business owners
Demonstrate key leadership attributes such as a passion to serve, humility, challenging status quo and driving to the top
References who support a strong history of superior client service
Strong analytical and organizational skills
Self-starter, highly motivated and a demonstrated ability to work well in a diverse environment
Excellent verbal and non-verbal communication skills

WHY KUSTOM DESIGN:

We’re a small, growing team that allows for flexibility and career development
We live by a code of honour that encourages respect for all and a team approach to solving problems
We develop real, meaningful relationships with our clients

TO APPLY:

If you’re interested in pursuing this amazing opportunity, please send your resume to info@kustomdesign.ca. We thank all those who apply!

Cooperatives 101

2011-08-02T09:46:00.000-06:00

A cooperative is generally described as a business that is organized, owned and democratically controlled by the people who use its products and services, and whose earnings are distributed on the basis of use of the cooperative rather than level of investment. A distinct feature of a cooperative organization is that the role of owners and patrons / users are closely connected.

The main advantages of Cooperatives are:

Ø Cooperatives have many of the same advantages of investor-owned corporations such as limited liability of owners and perpetual existence of the cooperative.

Ø Cooperatives are allowed to deduct patronage refunds to members out of before-tax income.

Ø Control of the business can be kept in the hands of those who use the business.

Ø Profit distribution may be allocated in shares or cash.

The main disadvantages of Cooperatives are:

Ø It may be difficult to raise funds for a Cooperative.

Ø Cooperatives may not provide incentives for members to contribute additional capital.

Ø Extensive Record Keeping and more complex tax and registrations filing is required.

Ø Longer decision making process with more possibility of conflict between members.

Cooperatives are used much less than corporations and trusts, however they do have their place. Cooperatives are very typically large businesses. If you have questions on structuring your business or investments don’t hesitate to contact us.

On my next blog, we’ll take a look at Holding Companies.

Sole Proprietorships 101

2011-07-28T09:28:00.000-06:00

For the next few blogs, I will be discussing briefly each of the business structures available to you should you plan to start up your own business. Let’s first look at Sole Proprietors.

A sole proprietorship is the simplest and most common form of business structure, and it is the oldest form of legal ownership in Canada. It is owned by one person who retains all of the legal rights and bears all of the responsibilities associated with the business.

The business of a sole proprietorship is not considered as a separate entity from the owner.

The main advantages of sole proprietorships are:

Ø It is the simplest and least expensive type of organization to create or dissolve.

Ø The owner retains absolute control over business decisions.

Ø A sole proprietor can deduct business losses from other forms of personal income.

Ø It is simple and inexpensive to maintain.

The main disadvantages of sole proprietorships are:

Ø The owner faces unlimited liability.

Ø With regard to liability and taxation, the owner and the business are one in the same.

Ø You can’t raise funds through sale of Equity.

Ø Upon death of the owner, the business is legally terminated.

Sole Proprietorships can be formed at any time once you have an idea for business and decide to move forward. Please contact us if you require more information on business structuring or sole proprietorships.

We’ll look at how Cooperatives work on my next blog! Please check back!

Passing on a Corporation Part 2

2011-07-15T15:13:00.003-06:00

Here is the 2^nd and last part of our blog series on Passing on a Corporation.

One of the main areas to consider when passing on your corporation is the Fair Market Value (FMV) of the business. All businesses should be transitioned at Fair Market Value at a time that will keep the tax low. As the business gains ground, acquires more assets and becomes more profitable, the Fair Market Value gets higher. So the longer you wait to pass on the shares, the more potential tax consequence there may be. If you know for sure that you are passing on the corporation, and have great trust for the person/people you are passing it on to then why not consider giving them shares while the Fair Market Value is still low. If they owned 50% of the shares for example, you’d be half way dealt with the issue when the time comes. You do not have to make them a director just because you give them shares, meaning you could remain in control! You may even want to give them 49% of the shares, so you keep 51%. There are an unlimited amount of options here, but regardless of your plan, it is important to have a contractual agreement in place such as a Unanimous Shareholder Agreement (USA).

There are so many variables to look at when determining when to give the shares, how to give the shares and so forth. A much more effective way to pass on your corporation is to set up a family trust, have the trust own the corporation (all or most of the shares), and then simply hand down control of the trust when the time comes! This eliminates many of the tax issues you face as the shares would not change hands. Please read more of my blogs on trusts and structuring to understand more of this. One other great thing about doing it this way is in the case where you can clearly see things are not going to work you can simply remain in control of the trust and corporation and the shares still remain in the trust (nothing changes)!

Each business succession plan is unique and takes great consideration and planning. However you will always keep those 4 things in mind when planning the succession: ownership, management, liability and tax. Ensure you plan early, involve everyone early and really work hard with those involved to make the plan come to reality! Call or email us to discuss your corporate, business and tax needs, we look forward to hearing from you!

Passing on a Corporation Part 1

2011-07-13T08:42:00.000-06:00

You may not want to sell or close your corporation or maybe your goal is to pass it on to someone such as your children, other family members, relatives or even friends. If this is the case you are better to start the plan as early as possible. You may not implement the plan until a later date, but it is imperative to have a plan. When talking about passing on the corporation, we are really talking about passing on the shares, which is the ownership of the corporation. When you have ownership of a private corporation you typically have control (directorship), which means you control the assets and the business of the corporation. Because this is included in Estate Planning we are can break it down to 4 areas we are looking at in business succession: ownership, management, liability and taxes!

First and foremost, if you are planning on passing your corporation on to someone or some people such as your children, ensure that they really want to do it and that they have a passion for the product or service the business is selling. Also ensure they are capable of running the business and that they lead a lifestyle that can work with the business. You don’t want them to take over the business and then either get bored with it, run it into the ground, or change it into something you would never approve of if you still owned it! The sooner you get them involved in the business, the sooner you will see the reality of the possibility of passing on the business to them! You may also want to give them incentives towards ownership while working there, and/or you may even want them to have some type of monetary contribution. If they have to put in work and/or monetary contribution they are much more committed then if they were just handed the opportunity on a silver platter!

We’ll continue this blog series on Friday. Please visit us again!

Business Basics: What records do I need to keep?

2011-07-07T15:51:00.001-06:00

Here is the 2^nd part of our blog series:

If you are carrying on a business of any size, be it a sole proprietorship or a large corporation, you must keep record of all documents that provide the ability to calculate payable taxes. Your records must be supported by “source documents” in order to corroborate the amounts in these records, often known as “books.” Source documents may include things such as sales invoices, receipts for purchases, deposit slips, cheques and contracts. A recent article by TaxTips does a great job of outlining some of the must-knows regarding business financial records, so we decided to summarize their article for you on our blog.

For income tax purposes, all your financial records and corresponding source documents must be retained for a minimum of six years after the end of the last tax year for which they pertain. In the case of capital purchases, this can be slightly more complicated because the last tax year to which they relate is probably much later than the actual date of acquisition. If the capital property is disposed, purchase records are still required to calculate the gain or loss at the time of this disposal. Therefore, records pertaining to capital properly should be kept until six years after the capital property was disposed, sold etc. This may be many years after the initial date of purchase.

There are some records that the business of a person (not a corporation) that must be retained for six years after the tax year that the business ceased or ended. These include:

• The general ledger containing the summaries of the year-to-year transactions of the business
• Any contracts or agreements that are necessary to understand the entries in this book
The records that a corporation must keep until the business is dissolved include:

• Minutes of the meetings of directors of a corporation
• Minutes of the meetings of the shareholders of the corporation
• Records of the corporation that contain details regarding the ownership of the shares of capital stock and any transfers of such stock, the GL or other book containing the summaries of the year-to-year transactions of the corporation
• Any special contracts or agreements that are necessary to understand the entries in this book

Article source: http://taxtips.ca/smallbusiness/booksandrecords.htm

About Kustom Design Group

Kustom Design is a group of interconnected companies, each company striving for the same goal: to provide excellent Accounting and Financial products and services to help clients SAVE on taxes, properly manage their finances and ultimately, achieve Financial Freedom and Lasting Wealth.

The Kustom Design Group offers a complete line of products and services in key areas of accounting, finance and tax; from accounting, consulting and strategic planning to financial and tax education. Visit our website for more information about our products and services http://www.kustomdesign.ca/.

Contact Us: http://www.kustomdesign.ca/ | Calgary, AB | (403) 219-0602

Selling your corporation or your business Part 2

2011-06-16T09:55:00.002-06:00

Here is the 2^nd part of our blog series:

When selling your business you should look at your valuation and see if your asking price fits in the range of similar businesses being bought and sold on the market. With the advancement of the internet, it is very easy to search businesses for sale that are similar to yours to see if you are in the ball park asking price. The asking price may or may not be Fair Market Value and that is up to you. However, the closer it is to Fair Market Value (or less), the easier the corporation/business will be to sell. If someone just wants to purchase the assets and not the shares, then your tax consequences are higher so you may want them to pay more. Alternatively, you could give a discount on the sale price if they were to buy the shares vs. the assets. At the end of the day, it is a sale between you and someone else and whatever price and method you come to agreement with is your decision!

However, if you are going to sell the business at Arm’s Length, such as to another Corporation owned by you and/or family members, to a trust, or to a family member, then you must sell/transfer it at Fair Market Value to the Arm’s Length party. Fair Market Value is just a fancy word to determine what it is worth if you sold it on the market today!

Another thing to mention here is that when you sell your business, it is best to close your current business number with CRA and let the new business owner open a new one. This would include GST, Payroll, Corporate Tax, and Import/Export accounts you have open. Along that same line, the minute book must be updated through the sale according to the business sale/purchase contract details. You may want to keep your minute book and have the new business owner create a new one.

One more topic to discuss in selling your business is to remember that you can get creative in your deal. For example, the buyer could give you part cash and part other assets, such as Real Estate, Vehicles, other businesses or anything else that may be of value to you. Also, if the purchaser does not have all the funds to purchase the business at the agreed price, and they can’t get financing, you could finance the balance of the sale over a set period of time. These are just a couple examples of getting creative and the ideas could go on and on. Remember though, it is always best to seek professional advice in doing any business purchases, sales or transfers. We are here to help so don’t hesitate to contact us!

Selling your corporation or your business Part 1

2011-06-15T10:36:00.001-06:00

There is so much to consider in regards to this topic and as usual I will make mention that each person’s/corporation’s scenario is different and the knowledge in this article should be used in conjunction with good planning with professionals. As always, you can ask me questions anytime by contacting me through the contact information listed on the blog or our website www.kustomdesign.ca.

Let’s start by looking at the basics of selling your corporation. We already spoke about the Capital Gains exemption on the sale of qualified small business shares and in the last blog, we even went into what makes the shares of your corporation qualified for this $750,000 lifetime Capital Gains Exemption that you have access to. This is only on the sale of the shares of your corporation, so in essence, this is a sale of the actual entity (corporation). Selling your business this way brings very favorable tax consequences due to the $750,000 Capital Gains Exemption and if the corporation that is sold is owned by a trust then the trust has its own $750,000 Capital Gains exemption as does all the beneficiaries of the trust. So in the case of a corporation owned by a trust being sold, there could be millions of dollars in tax free capital gains eligible to the trust and beneficiaries of the trust where the profits from the business sale would be split.

The other way to sell a corporation is to sell the assets. If there is no gain on the assets from the current value on the books, then there is no tax issue. However, if there is a gain being made on the sale of the assets then there could be tax owing. The other factor in selling the business is Goodwill. This is the value of the business other than the physical assets, such as the branding of the company, the repeat client base and other non physical value of the business. This basically comes down to how much the buyer of the business is willing to pay for all the sweat equity that you’ve done in building the business.

We will continue the 2^nd and last part of this blog series soon! Please check back with us before the end of the week.

Maximizing the use of your corporation Part 4

2011-06-10T09:40:00.000-06:00

Maximizing the use of your corporation isn’t all about tax savings. There are many other things to look at in your corporation such as building a good team and using leverage. Looking at leverage, businesses seem to have to biggest option of creating sweat equity and you can leverage relationships as well as assets and even credit of the company. Businesses can build their own credit rating and use assets, including accounts receivable, to leverage for financing.

One last thing that we will look at in this blog on maximizing your corporation is the Capital Gains Exemption. Every Canadian taxpayer has a $750,000 lifetime Capital Gains Exemption. This exemption is on qualified small business shares, as well as qualified farming and fishing property. Here we will just talk about the qualified small business shares which are the shares of your corporation. So in essence if you sell the shares of your corporation you, and each other shareholder, can make up to $750,000 in capital gains on the sale tax free! If you don’t use this exemption before you pass away it is gone forever! So what is it that makes the shares qualified? Here are the factors:

1. Must be a CCPC (Canadian Controlled Private Corporation)

2. The Corporation’s assets must be used at least 90% for Active Income.

3. At least 50% of the Corporation’s Assets must have been used to carry on active business in CANADA.

4. The shares must have been owned by you or a relative for a 24-month period prior to the sale.

5. The shares can’t be acquired as payment for other shares, stock dividends, or the disposition of a property.

In the case of a trust each of the beneficiaries have the $750,000 Capital Gains Exemption as well as the trust has $750,000 of it’s own Capital Gains exemption on the sale of small business shares. So it is very beneficial to have the a trust own the shares of the corporation(s). This leads us into the final part of our series on corporations “Selling, closing, or passing on your corporation” See you next blog!

Maximizing the use of your corporation Part 3

2011-06-09T09:52:00.000-06:00

In the last couple blogs we’ve been discussing some of the ways you can maximize the use of your corporation. At this time I’d like to remind you that although we’ve covered a lot of information on corporations in this large blog series, we cannot cover it all via blog. If you have questions on what I am covering or anything I am not covering do not hesitate to contact me. Also remember that educational articles, such as this one, should be used in conjunction with good planning!

The next thing to discuss in maximizing the use of your corporation is further lesson on dividends. We have been discussing dividends in this blog series, as well as other blogs, and you can see by now how beneficial it can be to use dividends to save tax. Remember that corporations can issue dividends to shareholders as long as the corporation has positive retained earnings (sum of profits less dividends declared since the corporation’s inception). One of the main concepts in tax is to get the lowest overall tax paid between all family members and entities owned and controlled by the family. So now if we combine that concept with dividends you are looking at big tax savings. The ideas combined here are to keep all family members at the lowest tax brackets possible using tax favorable types of income. (dividends in this case). Some of the main options to look at in this maximization of tax savings are to add other family members as shareholders of the corporation(s) or to ensure all your family members are beneficiaries of the family trust if you have one. Either way you are now able to split dividends amongst family members giving you more options for income splitting and tax savings, with no additional liability. In the case of the trust you can also split capital gains among beneficiaries.

Another thing to talk about in looking at dividends from your corporation is Capital Dividends. Capital Dividends are issued tax free by the corporation and received tax free by the shareholders. Capital dividends arise out of Capital Gains in a corporation. When a corporation has a capital gain it only pays tax on 50% of the gain, which is the same as when an individual has a capital gain. So in essence Capital Dividends are issued out of the 50% non taxable profit arising out of a capital gain in a corporation. Again, Capital Dividends are non taxable!

Maximizing the use of your corporation Part 2

2011-06-03T09:55:00.000-06:00

Here is part 2 of our blog series, “Maximizing the use of your corporation.” This part is about the strategies you can use to minimize taxes in your passive income.

Passive income is taxed much higher in a corporation than active income, so strategy and planning is key to minimize taxes in passive income investing through corporations. Some examples of strategies that can be used in your plan include:

1. Using Trusts (See my blogs on Trusts for many options and benefits)

2. Having a Consulting Corporation that you work for and consulting with the investment/passive income corporation. Here your Consulting Corporation bills (active income) the Investment income corporation, thus lowering the passive income and raising the active income.

3. Using Capital Dividends. These are Dividends based on the 50% of Capital Gains in a corporation that is not taxable. Not only is the 50% of the Capital Gain not taxed in the corporation, the Capital Dividends are also not taxable in the recipient’s hands.

4. Creating enough work from your Passive income corporation to have multiple people working for you. Best off to have at least 6 full time people(As per prior precedent setting court cases), or get a ruling from CRA.

You are probably by now beginning to see that there are so many options available to you in your planning, structuring and implementation of your corporate structure. The use of Holding Companies, Trusts and other entities in your structure can be very effective in maximizing your corporation. There are ways to limit types of income to more favorable types of income, change the type of income you are receiving or distributing, flow capital gains through to beneficiaries (trusts), minimize tax on active and passive income, make tax on capital gains zero and much, much more! Yes, you heard me right! Email me if you have a question!

Maximizing the use of your corporation Part 1

2011-06-01T11:20:00.000-06:00

There are many factors to discuss in the topic of “Maximizing the use of your corporation”. Educational articles should never replace good planning! Knowledge is empowering but Wisdom to apply the knowledge is key! Always combine planning with education. Our goal at Kustom Design is to give you the best of both of these in the areas of tax, accounting and finance!

One area to look at in maximizing the use of your corporation is the Small Business Deduction. The Small Business Deduction is how a corporation typically pays much lower tax than individuals. However, there is a limit (Small Business Deduction Limit). Currently the Small Business Deduction is claimable by most Corporations in Canada and has a limit of up to $500,000 net income. In laymen’s terms you can earn up to $500,000 Net Active Business Income in a corporation before you pay large tax rates. Currently in Alberta you only pay 14% total Corporate Tax (Federal & Provincial) on net income up to $500,000 in your corporation. Once you make over $500,000 net in an Alberta corporation you could be looking at your tax rate going from 14% to upwards of 39%. So our goal is of course to pay the lowest tax for as long as possible. We have many options, which could include:

1. Structuring multiple corporations (non related) to split profits

2. Using trusts in your structure

3. Paying bonuses and other forms of remuneration to owners, employees etc.

There are always ways to save tax as you will see with Kustom Design!

In talking about the Small Business Deduction we also discussed net active business income. Gross income is the full amount of income you take in to your business and net income is after all of your expenses, leaving the net income or net profit/loss. In the case of the Small Business Deduction we are talking about net active income. So now that we understand the word net, we must also understand active income. The 2 main income categories are active and passive income. Active income typically means you or someone else has to work for the money. Passive income typically means that you are making money whether you work or not. Passive income is great and residual passive income is the best! In the case of the Small Business Deduction we are talking about active income. So that deduction will not apply to passive income, such as investment income, Capital Gains and rental income.

Working with your Corporation Part 10: Due Dates & Client Communication

2011-05-19T09:46:00.000-06:00

Here are the due dates of filings and returns that you must take a note of.

Personal

Personal Income Tax Return (T1) – Due April 30^th

Personal Income Tax Return for the Self-employed – Due June 15^th

Income Tax Owing – Due April 30^th

Tax Plan Finalized and executed – Before December 31st

Corporate / Business

Corporate Tax Return (T2) – Due 3 months after Corporation’s Year End, if owing tax, in no tax is owed then 6 months after the Corporations’ Year End.

Corporate Taxes Paid – Due 3 months after Corporation’s Year End Date

Annual Financial Statements – Done with Year End

Annual Return – File annually with the Provincial Government to keep Corporation active

T Slip Filings (ie. T4’s & T5’s) – Due end of February following the calendar year

GST Filings – See GST forms sent by CRA for due dates

Payroll Remittances – 15^th of following month

One other area I’d like to mention that is important to your day to day operations is tracking your client/customer sales, communication, complaints etc. Your clients and/or customers are your source of revenue. Relationships make or break a business. If you are not adequately tracking your communication with your clients, such as quotes, job details, services issues, accounts receivable and more, you are losing revenue! Determine which technology would best suit your current operation and use it regularly. Software for smaller businesses such as Microsoft Office, Quickbooks Client Manager, Act and other free CRMs can be a simple solution for the first years of your business. Whatever system you use to track your clients and/or customers, just ensure that you use it regularly so as to build relationships and not to lose revenue!

There is a lot more to consider in running your business as every business is different. Again, we refer to the fact that you should have a business plan that looks at all the areas of your business. Do not hesitate to email us with questions or book an appointment with us at Kustom Design to look at your needs and answer your questions!

Working with your Corporation Part 9: Record Keeping

2011-05-17T10:14:00.000-06:00

We would like to make this very important comment: “Good Record Keeping is a must!” Good record keeping is a must for 2 main reasons:

a. You should always know where your business stands financially

b. You will need all documentation and paper trails if/when you get audited

Create yourself a simple filing system that matches our bookkeeping intake checklist (Found on our website under our downloads section). Use inboxes, folders or a filing system that works for you and your routine. It should be as simple as putting all paperwork and receipts into the right inbox or folder daily. If you are on a monthly package with Kustom Design, we have envelopes with the checklist on them that are available to give us your paperwork (records) every month.

Important Note on Record Keeping: Good Record Keeping also allows for good bookkeeping which in turn brings accuracy and savings! Also if and when you are audited, your records need to be in great order, because if CRA finds a mess and has to reassess then they may keep coming back year after year!

We also mentioned in an earlier blog that it is important to file and pay taxes on time when they are due. Here are some guidelines in this area:

Our goal is to always have you pay lower taxes. In planning with Kustom Design we can typically help our clients pay little to no tax. However, you must plan ahead! When taxes are due, they must be paid on time, otherwise interest does accrue. Also, if you don’t file your returns on time, penalty and interest can occur. Because the government is in deficit, many of the penalty rates have been raised considerably, so always file on time. Payroll, Corporate tax and other penalties and interest can put businesses into such a financial strain that some never get out from beneath the debt load. Here are the main returns that must be filed on time:

1. Personal Tax Return

2. Corporate Tax Returns

3. Payroll Remittance Filing

4. T Slip and Summary filing

5. GST Remittance Filing

IMPORTANT NOTE REGARDING PAYING TAX: If you do not put away funds for Corporate Taxes and GST, chances are you will not be able to pay the taxes when they are due. We recommend putting 15-20% of all revenues aside in a tax savings account.

In the next section, we have the due dates of each of these filings and returns for you. Always file on time to at least avoid penalties, and avoid interest where possible!

Working with your Corporation Part 8: Vehicle Expenses

2011-05-12T09:55:00.000-06:00

When running your business you may require a vehicle to travel back and forth from offices or workplaces, pick up supplies, meet with clients and much more. Vehicle expenses are a very typical deduction for most businesses. Vehicle expenses may be reported in 2 ways: by mileage or by actual cost of vehicle expenses. If you own the vehicle personally you should keep a mileage log to determine the amount of kilometers you traveled for business and then the company could reimburse you the prescribed rate per kilometer. Because these prescribed mileage rates change it is good to inquire as to the current rates for reimbursement of mileage. If the company owns the vehicle and you are using it for personal use then a mileage log must be kept for this method as well to determine which portion of the vehicle expenses are for business versus what is for personal. The same rules apply whether you own or lease the vehicle.

Notes on vehicle ownership: It is important to differentiate who owns the vehicle, you or the company. To determine this we must look at who the bill of sale is to (who purchased the vehicle). Insurance should also be in the name of the owner of the vehicle. Remember that you can sell a vehicle to the company, however this should be done at Fair Market Value and using an actual bill of sale.

Notes on keeping a mileage log: It is important to keep a separate log for each vehicle which is driven for both business and personal. The log should record the date of each business trip, destination, reason for the trip and the kilometres driven. Also, make sure to record the odometer reading at the beginning and end of each year to determine the total kilometres driven in the fiscal year. If you have a smart phone, such as an Iphone or Blackberry you can get a tracking app that can even work with your phone’s GPS for ease of tracking.

Once you have maintained a log for a full 12-month period, the CRA has indicated that they would “afford considerable weight” to a log maintained for a “sample period” as evidence of the business use for a full year, if it meets the required criteria.

If you want to avoid a mileage log you need to have a vehicle that is used for personal and a different vehicle that is used for business.

Working with your Corporation Part 7: Accounts Payable & Receivable

2011-05-10T09:58:00.000-06:00

In this 7^th part of our blog series on working with your corporation, we will discuss some important things you would need to know about managing your Accounts Payable and Accounts Receivable.

Accounts Payable

Accounts payable is simple, but you do need a tracking system and a filing system. If you are only going to have a small amount of payables, you do not require a digital tracking system, just a way to ensure your bills are paid on time. If you have larger amounts of regular accounts payable, you will need a digital tracking system such as Quick Books or other software. .

Important Note on Accounts Payable: Always do your best to keep current with all vendors to ensure good relationship and good credit. Whatever your terms are, pay them by the due date. Also, remember that when you have extended credit terms, such as net 30, you can utilize this credit and pay just before or on the due date and maximize your cash flow!

Accounts Receivable

If your business gets paid when the job gets done, or you are selling a product without credit terms then you may not ever have any Accounts Receivable. However, most business do end up with some accounts receivable. Have a way to track your accounts receivable and always collect as soon as possible. Do not let people that owe you money drift off. Contact them and/or send them statements regularly if need be and ensure you get paid!

Important Note on Accounts Receivable: Uncollected Receivables have closed businesses due to lack of cash flow. Make it a priority in your business to collect all revenue as soon as possible!

In our next post, part 8 of our blog series, we will discuss Vehicle Operations in detail. You will know what constitutes vehicle ownership as well as how to keep a mileage log.

Working with your Corporation Part 6: Banking

2011-05-05T09:38:00.000-06:00

Another important aspect of working with your corporation that you must be familiar with is banking.

Your banking relationship is important. You will be depositing funds, writing cheques and paying for expenses regularly. We’ve already covered paying for expenses and paying yourself, but there are some other things to consider in banking such as being on the right bank service package. Bank Service Charges add up and it is important to be on the right package for the number of transactions you will be using. Utilize Direct Deposit when it is free or relatively low cost as this will save you time and money. Most banks have direct deposit/EFT systems.

*Important Note on Banking: When making bank deposits, you must keep records of what you are depositing and where it is coming from. If these are cheques and cash you are depositing, you should keep a bank deposit book that will track what all the deposits are. If it is electronically deposited funds, get a record of the transactions, such as a merchant account statement. If and when you are audited and you cannot prove where all funds that came into the company came from, CRA may determine that all funds that went into the company are income, when in fact some may be shareholder loans or from other sources. Also, if you ever do directly withdraw funds from your Corporation for any reason, ensure to have a record of where it went or CRA may determine that these amounts are personal income to you. The problem with CRA making either of these determinations is not only the extra tax and audit fees you will pay, but also the penalty and interest because of the timing when CRA would reassess!

Check back for the next segment of our blog series focused on Accounts Payable and Accounts Receivable.

Working with your Corporation Part 5: Paying for Expenses

2011-05-03T10:48:00.000-06:00

This is part 5 of our blog series, “Working with your Corporation.” Let’s now look into how you can pay for expenses.

Paying for Expenses

You will typically pay for expenses in 1 of 4 ways:

a. Cash

b. Cheque

c. Debit Card

d. Credit Card

Here is a basic rule to follow: IF YOU PAY FOR AN EXPENSE, ALWAYS GET A RECEIPT OR INVOICE. You probably say, “I have record of the expense on my bank/credit card statement”. Yes, statements are extremely important for bookkeeping and accurate records. However, statements MAY NOT withstand a CRA audit as they require receipts and invoices with details.

*Important Note for paying expenses: Always pay for Business Expenses from the business, and pay for personal expenses personally. This is extremely important for bookkeeping, accounting and CRA reporting. Keeping your business and personal expenses paid separately and properly will not only ensure accurate records, it will also save you money on your bookkeeping and Corporate Year End! Keep it simple. You should have a business Debit and/or Credit Card and a personal Debit and/or Credit Card in your wallet and when you are paying for things ensure you use the correct card by determining if it is a business or personal expense you are paying for.

If you cannot get a business credit card, just get a sub account on your personal credit card account that you can use to pay for businesses expenses, keeping the record separate from personal. Your bank can give you a separate credit card with a sub account that can be tracked separately on your statements. Always let your business pay for its own expenses even when the company does not have the funds to pay. In this case, personally write a cheque or transfer funds to the company and let the business pay for the expense. Remember, this is a shareholder loan! In the case of multiple owners, you may want to use reimbursement sheets so expenses can be approved by all partners.

Working with your Corporation Part 4: Paying yourself

2011-04-27T10:01:00.000-06:00

These are some of the main areas you must consider in ensuring the financial areas, of your business stay current in your corporation. We will go further into some of the day to day operations and tracking of specific items in your corporate business in the next few blogs. Let’s start with how you can pay yourself.

Paying yourself:

In paying yourself from your Corporation, you should first determine what your personal closed circle is on a monthly basis. Your Closed Circle comes down to how much do you require on a monthly basis for your family/households’ Obligations, Necessities and Wants? Once you’ve determined this amount, you simply pay yourself that amount from the Corporation monthly. As your company grows, there will be more income to deal with, and we will be there to work with you to structure other movements of cash flow and capital. We will also discuss some of these options in our future blogs. When paying yourself from your corporation, you will typically do it in 2 ways:

a. Write yourself a cheque from the Corporation and deposit it in your personal account.

b. Transfer funds from the Corporation to your personal account.

This is the way to pay yourself from a basic Corporate Structure (Just 1 corporation). When you add holding companies and Trusts, the cash movement may be different. For example, if you have a family trust, the Corporation would move funds to the Trust and then the Trust would move funds to your personal account.

*Important Notes on paying yourself:

a. Always put “draw” on the memo of the cheque or funds transfer.

b. When transferring funds always print out the transaction for bookkeeping purposes.

c. When both spouses are shareholders of the Corporation, have the Corporation write the cheques or transfers in both names and deposit it into your jointly held bank account. This is important for income splitting, which saves tax.

Working with your Corporation Part 3: Payroll & Year Ends

2011-04-25T11:22:00.002-06:00

Here are some key details you need to know on payroll, year ends and corporate returns when you are working with your corporation:

Payroll remitting:

Payroll is typically remitted monthly, specifically on the 15^th of the following month. Payroll remittances consist of Federal and Provincial taxes withheld from the employees, CPP – Employee and Employer portion, and EI – Employee and Employer Portion. There are alternatives to payroll, so do inquire with us at Kustom Design. If you do have payroll, never get behind as the penalty and interest can kill your business.

Corporate Year Ends:

Corporations get to pick which month they’d like for their year end. It is good to pick a month that works for the owner and the accountant and is best for deferring tax. For example, if you own a business that requires inventory counts at year end, you would want the year end to be a month where you are not busy so you have time to do the inventory count and don’t lose important revenues.

An example of deferring tax would be if your business makes most of its money in the summer, you’d want a year end that is just before the summer, so each year the taxes on the busy summer months aren’t paid until a whole year later (tax deferral). Kustom Design can help you pick a beneficial Year End Date.

Annual Returns (for Corporations):

In Alberta, we are required to file an annual return with the Provincial Government to let them know the Corporation is still active, who the current shareholders and directors are and the current address. The cost is not a lot for this filing. However, if you do not file the annual return for your corporation, it can be dissolved which brings many negative consequences and costs. Kustom Design can handle your Annual return filings each year, and it can be included in your package!

Working with your Corporation Part 2: Bookkeeping & GST

2011-04-21T10:19:00.000-06:00

In this blog, we’ll go through some guidelines you should know about Bookkeeping and GST remitting.

Bookkeeping:

Businesses must be looked after on a regular basis. Bookkeeping should be done regularly, preferably no less than monthly. Kustom Design has packages that include bookkeeping. However, you may also choose to do your own bookkeeping. Many realize that is not a wise use of time when they could pay a small fee for monthly bookkeeping and utilize those hours marketing their business, or running their core business. It is good, however, to at least understand the process of bookkeeping. It is also very important to look at basic financials of your business each month to see if you are headed in the right direction or not. Training and seminars on Bookkeeping are offered by Kustom Design for this purpose - to provide business owners with the basic knowledge of the bookkeeping process. Whether you choose to do your own bookkeeping or have Kustom Design do your bookkeeping, we are here to help you!

GST remitting:

GST is required for a business when the business’ gross income is over $30,000 in a year, whether a sole proprietorship or a Corporation. The business can also voluntarily register for GST. GST can be remitted annually, quarterly or monthly for larger businesses. This must be decided when you first apply for the GST number. It is best to file annually and make installments quarterly, if necessary. The GST owing is simply calculated by the GST collected minus the GST paid on expenses (unless you are on quick method). Kustom Design includes GST remitting with all 3 of our accounting packages.

Important Note on GST: Always keep your GST filings up to date! If you fall behind CRA may Notionally Assess you, which means they pick an amount that you owe, and they will then collect it from you, even if it means freezing your bank accounts and trying to collect from your clients!

Next week, we’ll discuss payroll remitting, corporate year ends and annual returns.

Working with your Corporation Part 1: Introduction

2011-04-19T15:50:00.000-06:00

In our last blogs, we discussed the steps to incorporation. Once you are incorporated, now what? Now, it is time to run business, and there are some key things that you want to have in place. At this point, you should have your corporation registered, your bank accounts set up and any required licensing registered. Over the next few blogs, we will discuss some of the keys things you should know in working with your corporation. We will talk about how you can keep up with your financial tracking and reporting, how you can pay yourself, how you can pay for your expenses and other important topics that will help you get on the right foot in working with your corporation.

Hopefully in your business plan, you’ve considered what things you can do yourself and what you will have to hire out. The following are the key areas of the business that you must look at: Management, Marketing, Sales, Financial & Accounting, Customer Service, I.T. and Administration.

Right from the beginning of your business, you must have a plan to ensure you have a way to track the finances of the business, including Cash Flow, budget monitoring, Accounts Receivable and Accounts Payable. Since you have a Corporation, proper and regular bookkeeping must be done in accounting software such as Quick Books. This could be you the business owner doing it, a bookkeeper or an accounting firm such as Kustom Design Professional Services Corp. This is different than a Sole Proprietorship where you can simply get away with adding up your income and expenses at the end of the year (although regular tracking is still recommended for Sole Proprietorships). You must also have a plan for reporting to CRA and the Provincial authority on time each year.

We will continue our blog series on “Working with your Corporation” in my next post. Please check back for some helpful pointers on bookkeeping and GST remitting.

Steps to Incorporation, Part 3

2011-04-12T11:22:00.000-06:00

Here is the last part of our blog series. Enjoy!

At this point it is time to physically complete the registration of a new corporation. If you haven’t yet completed a NUANS, you would do so at this point. If your corporation is a numbered company, then no NUANS is needed. Registration should not typically be done directly through a registry as you don’t get a completed minute book from most registries. Even if you are able to receive a completed minute book, you should still be working with a professional to ensure the minute book has everything you need in accordance with the structure you’ve decided on. Having a minute book is very important as we’ll discuss in a later blog of this series.

You also need to determine if your corporation needs a Corporate Seal, which is really an impression stamp that is used as a type of signature for your corporation. This may be used for signing documents for loans, lines of credits, mortgages and other debt instruments. It can also be used for signing documents when you are purchasing assets such as Real Estate.

Now that you have your Corporation registered, there are only a few more steps to get it fully operational. These are quite simple steps. You will need to ensure you have the correct components of your Business Number registered with CRA (Canada Revenue Agency). The main 4 components that you may need are Corporate Tax (required with a Corporation), GST (Goods & Service Tax), Payroll, and Import/Export. These are explained in our business start up guide and in Kustom Design’s blogs on our website.

You will also need to set up bank accounts for the corporation. It is always good to set up a chequing and a savings account as you should put money aside for taxes when you earn income (Corporate tax and GST). There are of course other considerations in starting your business such as licensing and insurance. To see all the things you should look at doing when you start your business Kustom Design has a Business Start up Checklist, so please do inquire!

Steps to Incorporation, Part 2

2011-04-05T09:51:00.000-06:00

Here’s part 2 of our blog series on Steps to Incorporation:

Once you’ve determined whether the corporation will be federal or provincial, it is time to pick your name. You must confirm that the name is available and is not already being used. To do this you can do a quick search (in most provinces) and you will then know if the name is available or not. Sometimes you may find that there is a name being used that is very similar to the name you chose. if that is the case you may not want to move forward with that name as you could run into issues down the road, such as confusion to the public or even lawsuits from the corporation that has the similar name. You can simply look at variations of your name to get around this issue, or you may have to look at a completely different name. Also keep in mind when deciding on a name that you most likely will need a website so it is good to check what domains are available that you can use with your business name. Once you’ve determined your name is available for the corporation, you can hold on to it for a period of time if you are not ready to incorporate. This is important, otherwise someone else could take the name before you incorporate it. To do this you simply get a NUANS through the registry, or Kustom Design can do this for you.

Next you need to confirm your structuring. Although you should have been planning for this structure right from the beginning, now is the time to finalize it. If you have not read my blog on Structuring your Corporation, then go now and read through that blog in detail. Keep in mind that it is important to determine who the shareholders, directors and officers will be. If you have a family trust and/or a holding company then you should not own an operating company personally, the trust and/or holding corporation should own the operating company. If you are partnering with other people than you should definitely look at getting a Unanimous Shareholder’s Agreement (U.S.A.) as discussed in a prior blog of this series.

Last part of this blog series will be posted soon! Please check back!

Steps to Incorporation, Part 1

2011-03-31T09:38:00.000-06:00

We’ve been discussing Corporations in great depth over this blog series and many are asking “How do I start a Corporation?” This is what we will cover in this blog series: Steps to Incorporation. As always, this is just a guideline and you should always consult with your professional to ensure you are taking all the steps you need to for your corporation as each corporation and business is unique.

The first step, once you’ve decided to incorporate, is to determine if the corporation is to be a Federal Corporation or a Provincial Corporation. This really depends on where you will be conducting your business from. If you are just operating within a province then of course you just need to incorporate in that province. However, if you want to conduct business in multiple Provincial Jurisdictions then you may want to look at the possibility of setting up a Federal Corporation (Charter). If you are just operating in a couple or a few provinces you can incorporate in your province and then file for extra provincial registrations for the other province(s) you will conduct business in (instead of incorporating Federally). Having too many extra provincial registrations can become cumbersome, so if you are conducting business in many provinces then you should definitely look at a federal corporation. Keep in mind here that when we talk about conducting business in more than one province, we are not just talking about having a few clients or customers that purchase your product or service outside of your province. When we talk about conducting business we are talking about where you are actually doing the business. For example you may have offices in multiple provinces, or you may travel back and forth regularly to do business in other provinces. This is completely different from just having some out of province clients or customers. If you only have a few out of province clients or customers, then you do not need to extra provincially register, nor would you need a federal corporation.

We’ll continue our blog series on Steps to Incorporation next week!

Structuring your Corporation part 3

2011-03-28T14:26:00.000-06:00

Another question that comes up often is “should I make my kids a shareholder of the corporation?” Although there could be benefits of making your kids a shareholder, it is a very serious consideration and you must look at the potential issues you may face in doing so. The main reasons why people want to make their kids a shareholder are, first, to give part of the ownership to the kids giving them a sense of ownership and potential option to be able to pass on the business to them easier. Second is for income split using dividends. To receive dividends they will be 18years of age, and if you make them a different class of shareholder they can receive dividends in the amount you choose each year (based on profit). The main potential issue that you have to consider here is how well you know your son(s) or daughter(s), how well you will know them in the future, and how well you know their spouse(s) or future spouse(s). Kids do go estranged and sometimes marry a spouse that could cause potential issues. What I’m saying here is you have to consider who these owners (shareholders) and their spouses will be in the future as they may have a say in your corporation!

To get around this issue and to look at further structuring efficiently, we begin to look at trusts and holding companies. We will not go too deep into these here in this blog, but please do look for my other blogs on trusts that go more in depth! By setting up a trust that owns the corporation’s shares you can income split to all the beneficiaries of the trust at whatever percent you want without any of the beneficiaries becoming an owner of the corporation! Having a trust own your corporation not only benefits you with ultimate splitting of dividends, but could also allow you greater benefit if you ever sell the shares of the corporation and much more! Add a holding company into the structure by having the holding company owned fully by the trust, and in turn having the holding company owning some shares of your operating company. This allows for you to issue tax free dividends to the holding company. Once these dividends are issued into the holding company tax free you can do what you like with them, including holding on to them until a later date, lending them out, or paying dividends to your trust and ultimately the beneficiaries (you and your family)!

Again we are just covering some basic guidelines, tips and strategies that are very effective. There are unlimited options and possibilities when it comes to structuring so please don’t hesitate to email us or give us a call!

Structuring your Corporation part 2

2011-03-25T10:40:00.000-06:00

Here’s the second part of my blog series on “Structuring your Corporation.”

Another note here on splitting the profits from a corporation between spouses is to give both spouses different classes of shares, for example one spouse could have class A shares and the other could have class B shares. This allows for different amounts of dividends allowed for distribution between spouses for tax planning effectiveness. If both spouses have the same class of shares, they have to take the same amount of dividends. It is always advantageous in tax planning for 2 spouses to be able to have control on how much income they receive, and using different classes of shares allows you full control as to “who gets how much income” when it comes to dividends!

This of course differs from multiple people, who are not married, partnering in a corporation. In the case of an actual partnership with other shareholders you may want to have the same class of shares so that each partner gets the same amount of dividends as they are declared! Here is also where other classes of shares may come in. As mentioned there are various classes of shares that can be issued from a corporation so planning is essential. Don’t do this on your own, or go to a registry agent to structure your corporation, seek professional help. Kustom Design can assist you in getting your footing when it comes to structuring and we can then further assist you in working with the right legal professionals to finalize and implement the best structure for you!

If you are in a corporation that has multiple shareholders partnering, you definitely want to consider having a Unanimous Shareholder Agreement (U.S.A.) drawn up by a lawyer. Partnerships have to be given a lot of consideration and must have agreement from day 1 when the structure is formed. It is best to spell everything out in writing through a contract, and to consider potential outcomes such as death of partner, one partner becoming unable to work, one partner buying out the other partner, and so forth.

Please check back to read part 3 of this blog series.

Structuring your Corporation part 1

2011-03-23T10:26:00.000-06:00

There is so much to consider in structuring a corporation and this blog will definitely not be able to cover all the considerations and options for structuring, nor should this blog be misconstrued as legal advice. That said, in this blog series I will give you a lot of very useful information and tips on structuring corporations. Because this blog series is on corporations, we will not be going into any great detail on the various other entities and contracts you can use in your structure, such as trusts and Limited Partnerships.

There are virtually unlimited options when it comes to structuring your corporation as there are many different classes of shares within multiple categories. The different classes of shares are in letters, such as class A shares, class B shares, class C shares, class D shares etc. The 3 main categories of shares are:

Voting Shares – Used for the main shareholders with voting rights
Non Voting Shares – Used for other shareholders with no voting rights
Preferred Shares – Shares with preferred treatment, typically used for attracting investors or in restructuring existing corporations

Let’s start with some basics that you should know in structuring a corporation. First you should always consider making both you and your spouse a shareholder in your corporation if you are married. In making both spouses a shareholder you are opening up the door for income splitting the profits of the corporation through dividends. Being a shareholder does not mean liability is taken, in fact it is typically the director that would take all liability of the incorporation as we’ve discussed in a prior blog. So both spouses can be shareholders and receive benefit, while only one spouse could be a director taking the liability on. It is always good to keep one spouse sheltered from liability.

We’ll continue our blog series on “Structuring your Corporation” on my next blog post.

When to Incorporate? Part 2

2011-03-18T10:15:00.001-06:00

Here is the 2^nd and last installment of the “When to incorporate” blog series.

On the previous blog, you will notice that when we spoke of the $30,000 of tax free dividends, we stated the fact “if this is your only source of income” If you have other sources of income the $30,000 (approx.) is not tax free, but you will pay some tax at a lower rate. The reason why you always pay a lower tax rate on dividends from Canadian corporations is because of the dividend tax credit that you get when claiming dividends on your personal tax return. If you have other sources of income, particularly large amounts of income, you may want to incorporate earlier. As discussed, when you set up a corporation you are forming a new entity. This is a separate entity from you and therefore the income of the corporation does not go on your personal taxes unless you receive or claim income from the corporation. This differs greatly from a sole proprietorship where you and the business are one in the same for income and liability purposes. So again, if you have other sources of income you may want to incorporate for tax savings before you are netting $35,000 so as to keep corporate income separate from your personal income that may be in a higher tax bracket. When in doubt on this one, come see us and we can run scenarios to see when you will start saving tax with a corporation.

The second and third reasons of “When to Incorporate?” are much simpler, yet can take serious thought and consideration! The second is liability. If you have major liability potential in the product or service you are providing, you may want to incorporate right from the beginning of the business so as to take as the least amount of personal liability. You may also want to look at trusts and holding companies that we will discuss in other blogs. You must always asses your potential liabilities when starting any business.

The third reason is to make your business attractive. As discussed in the last blog if you want to make your business attractive you should look at incorporating. If you are going for it 100% and you expect to do well quickly then you may as should look at the option of incorporating right from the beginning!

Watch for my next blog where we will begin discussing the structuring of a corporation.

When to Incorporate? Part 1

2011-03-16T09:58:00.000-06:00

In my last blog we discussed Why Incorporate? This completely ties into when to incorporate as you will see from this blog. There is no absolute answer to “When to Incorporate?” as everyone’s situation is different, however these are some general guidelines to help you know when it’s right for you to incorporate. Let’s look at the 3 reasons that people incorporate and how they tie into when to incorporate.

The first is tax savings as incorporations that earn active income receive what’s called the Small Business Deduction which allows Corporate Income taxes (Federal & Provincial combined) to be as low as 14% in Alberta (currently). This low tax rate on active income earned in a corporation is static up to $500,000 active net business income. Once you make over $500,000 in a corporation you pay a significantly higher tax rate, but most corporations will never need to go over $500,000 in net income (after expenses). If you see in your projections that your corporation will exceed $500,000 it is essential that you plan in advance to look for ways to avoid this. For example you may structure 2 separate, non-related, corporations to provide 2 separate products or services your one corporation may have provided so each could stay under the $500,000 Small Business Deduction Limit.

Individuals, on the other hand, have what’s called a Graduated Tax system, which means there are tax brackets that make individuals earning more income pay higher rates of tax. There are various levels that trigger the higher rates of tax, and there are even personal tax exemptions that allow you to pay no tax if you have very low income. This is why a lot of people start as sole proprietors because they will pay less personal tax as sole proprietor that earns up to about $30,000 of net income (not including income splitting in Alberta). Once you make about $30,000 in your corporation it changes and you can now save more tax using a corporation. This is because shareholders of the corporation can receive about $30,000 in tax free dividends from a private corporation before paying tax if this is there only source of income. Not only is there no personal tax on the dividends, but also no EI or CPP. This means at around $30,000 you typically only pay the corporate taxes at a lower rate, even if you (the shareholder) has pulled out all of the $30,000 made in profit. There is one more factor to consider: Accounting Costs! Accounting Costs for a corporation are much more than individual costs as there both Federal and Provincial Tax returns that must be done for a corporation and they are much more complex than personal tax returns. Not to mention full accounting must be done for corporations, including assets and liabilities, and financial statements are prepared, along with schedules and minutes for the corporation’s minute book. Although you are saving tax at $30,000 net, if you include the accounting fees against the savings you are looking at incorporating around $35,000 net to save taxes (including accounting fees). This way you will be saving more than you pay the accountant! At Kustom Design our goal is to always save you more than you pay!

Please check back for the next installment of the “When to incorporate” blog series.

Why Incorporate?

2011-03-09T10:02:00.000-07:00

There are many reasons to incorporate, which really break down into 3 areas. The 1^st area is tax savings. Corporations can save taxes in many ways and we will go deeper into the area of tax savings throughout this series of blogs. Corporations can pay as little as 14% total federal and provincial tax on active income up to $500,000 in Alberta. All provinces and territories across Canada have attractive tax savings at different levels using corporations. You can also avoid payroll remittances and extra costs such as EI and CPP with the utilization of dividends. Shareholder loans are a very powerful tool of a corporation and are tax free. You can sell assets to the Corporation at Fair Market Value and receive the amount now or in the future from the corporation tax free. As you will see throughout this series there are many ways to save and defer taxes through a corporation. In the next series we will discuss when to incorporate and part of this will include the timing of incorporation for tax purposes, which in Alberta is about$30,000 - $35,000 net income if this is your only source of income. If you have other sources of income or if you corporation will grow quickly, then you may want to incorporate right from the start. We will discuss this in my next blog.

The 2^nd area of reasons to incorporate has to do with liability protection. When you incorporate you set yourself up for limited liability. Unlike partnerships where partners are usually personally liable for the business acts of their partners, corporate shareholders are typically not personally liable for the acts of the directors, officers or other shareholders of the corporation. The director takes the liability and that is typically only liability for anything that is personally guaranteed by the director, government agency debts or debts that arise from environmental damage. For further liability protection your corporation can be owned by trusts and holding companies. For more on trusts see my blog series on the family trust.

The 3^rd area of reasons to incorporate has to do the fact that incorporation makes your business more attractive. Many businesses seek to do business with corporations over sole proprietorships. If you need capital from investors or the bank you will have much more of a chance of receiving it as a corporation. Also some corporations will not hire sole proprietors for the job as CRA could deem sole proprietors as employees in some situations, which creates a huge CRA payroll debt! Overall corporations are more attractive to do business with.

In my next blogs we will get into the timing of setting up a corporation and structuring your corporation.

Understanding the Basics of a Corporation

2011-03-01T12:30:00.000-07:00

From the last 2 blogs we should now have an understanding of what a corporation is. We will now go further into understanding the basics of a corporation. A corporation is made up of 3 main people or groups of people:

Shareholder(s )– These are the owners of the Corporation. Shareholders get to receive the benefits of owning the corporation, without taking liability. There are various classes of shares that can be owned and we will go into these a little further in this blog, and deeper in a later blog in this series.
Director(s) – This is the person or group of people that have the ultimate control over what the corporation does and all the major decisions. As also mentioned prior, the director(s) is/are the one that take the limited liability (see the last blog for examples of the limited liability)
Officer(s) – The officers of the corporation come with titles such as: President, Vice President, Secretary and Treasurer. These are the people or the person that runs the day to day operations of the corporation. (in simplified terms)

As mentioned prior, to own a Corporation you must own shares. There are different classes of shares in a corporation, such as voting, non voting and preferred shares. Voting shares means that you have a voting right as a shareholder in things such as naming and firing directors. Non voting shares means that you cannot vote. Preferred shares means that you don’t have voting rights, but you may have preferential treatment when it comes to getting paid before common shareholders. Typically preferred shares are for investors. If something was to happen to the Corporation and it was going to go bankrupt, the preferred shareholders will typically get paid out before the common shareholders. We will go further into depth on structuring the corporation in a later blog.

The last point I’d like to cover in this blog is the fact that all corporations should have a minute book. A minute book has the full record of the corporation’s existence and activity, proof of ownership and a lot more. Many people try to save money by incorporating and not getting a minute book. You are not doing yourself a favor as you will pay more in the long run to get the minute book done separately. With no minute book, you have no record of your corporation’s decisions and no proof of ownership which will can come back to bite you later. So make sure that if you incorporate you get a minute book. We do incorporations at Kustom Design so don’t hesitate to ask us questions if you are thinking of incorporation or have an existing corporation.

What is a corporation

2011-02-22T14:17:00.001-07:00

As we stated in the introductory blog, “A corporation is an entity created by a person or a group of people for the purpose of creating a separate legal entity for themselves.” A corporation has similar rights to that of an individual as it may earn income, borrow money, lend money, run business and more. It is like having an artificial entity that you can control.

Just like we get a Birth Certificate when we are born, a Corporation gets a Certificate of Incorporation when it is created or “born”. The Certificate of Incorporation, along with the Articles of Incorporation gives the Corporation its existence. Remember that the laws that the Corporation abides by is determined by the jurisdiction of where the Incorporation was formed.

Corporations typically have a different taxation system than individuals do. Later in this series we will discuss some of the taxation rules of Corporations and how to maximize the tax savings of a corporation.

As also mentioned in the past blog, Corporations offer a limited liability for the person or group of people that set up the corporation. For instance the owner(s) of an incorporation, called the shareholder(s), take no real liability except for any money they have put into the corporation. The Director of a corporation is the one that takes the liability. This is the person that is the “operating mind” of the corporation. Because there is a limited liability, the director is not responsible for all liabilities, only things like Government and CRA debts, environmental damage or any debts of the corporation that were personally guaranteed by the director.

Watch out for my next blog where we will get deeper into understanding the basics of the corporation and get to know the 3 main people or groups of people that make up a corporation.

Introduction to the Blog Series: "Understanding the Corporation"

2011-02-16T10:35:00.001-07:00

A corporation is an entity created by a person or a group of people for the purpose of creating a separate legal entity for themselves. In other words, when a corporation is created it has a separate existence from any individuals, although it is set up and ran by individuals or groups of people. This separate legal existence allows for liability protection, tax savings and estate planning to the extent that the jurisdiction where the corporation is set up allows within its rules and laws. Although Corporations exist in countries all over the world, they are all similar in nature. Also, a lot of provinces states and countries offer different types of corporations for different purposes. For example, in The United States Corporations come in many forms such as Limited Liability Corporations (LLCs), S Corporations, C Corporations and more. In Canada the main Corporations we use are Canadian Controlled Private Corporations (CCPCs), Professional Corporations, Public Corporations, Non Profit and Charitable Corporations. In the scope of this series we will mostly be discussing the CCPCs as these are the Private Corporations that the everyday Canadian uses. The other types of Corporations share similar traits and have similar rules so these blogs do have application to the different types of Corporations, and as usual if you have questions you can contact me.

In this series we will go cover what a corporation is, how to understand the basics of a Corporation, why and when to incorporate, ways to structure corporations, steps on incorporating, working with a corporation, maximizing the use of a corporation and how to sell, dissolve(close) or pass on an incorporation. This is a much needed series that I know will educate and assist many.

Understanding the Taxpayer Bill of Rights Part 3: Commitment to Small Business

2011-02-04T10:40:00.001-07:00

The next section of the Taxpayer Bill of Rights deals with Small Business. We will now review these 5 items on the Taxpayer Bill of Rights.

1.The Canada Revenue Agency (CRA) is committed to administering the tax system in a way that minimizes the costs of compliance for small businesses:

As much as they say they try to minimize the costs of compliance for a small business, it is not an easy task. CRA must balance this with their responsibility to administer and collect. It is not advisable for a small business owner not to have an accountant who can advise them in the area of tax and reporting responsibilities. Although CRA says they want to minimize it, it definitely seems to be heading the other direction!

2. The CRA is committed to working with all governments to streamline service, minimize cost, and reduce the compliance burden:

The best example we can see of this is when the CRA collects taxes and gives the provinces their portion. This is not the case in Alberta. Although we don’t see great evidence of this, we can assume they do work with other governments to streamline things. They do want to collect their taxes quicker, which hopefully makes it simpler for the small business!

3. The CRA is committed to providing service offerings that meet the needs of small businesses:

The CRA offers various online services for electronic filing and accessing information through an online CRA account. As with any electronic service it can bring technical difficulties, however it can still be effective once in place and running smooth, particularly the access to your information online.

4. The CRA is committed to conducting outreach activities that help small businesses comply with the legislation we administer:

This mostly means they put on courses and put out publications for people to understand their opinions and methods. Sometimes this can assist, but never just take it as fact! It is always better to have your own tax advisors, accountants and lawyers that don’t work for the CRA!

5. The CRA is committed to explaining how we conduct our business with small businesses:

In my experience they sometimes do explain very well and other times they don’t. I’ve worked with some auditors who are quite thorough and explanative, while I’ve worked with others who do their thing, won’t really answer your questions, and they just send a Reassessment. It really depends on who you are dealing with as to what explanation you will get!

So as you can see, the Taxpayer Bill of Rights is an important piece of legislation. It is imperative that you know your rights, otherwise how will you know if they are trampling your rights and what to do about it. If you believe that CRA is not staying in honor of any of these Rights, then lodge a complaint and go to the Ombudsman. If we don’t do something to hold them accountable, who will?

CRA also publishes a guide to explain this Taxpayer Bill of Rights from CRA’s side…( http://www.cra-arc.gc.ca/E/pub/tg/rc17/rc17-09e.pdf). If you have any questions on the Taxpayer Bill of Rights or my blogs, please do contact me!

Understanding the Taxpayer Bill of Rights Part 2

2011-02-01T10:16:00.000-07:00

Here’s the continuation of my discussion on the Taxpayer Bill of Rights. We ended the previous blog with the 5^th taxpayers’ right so let’s move on to #6.

6. You have the right to complete, accurate, clear, and timely information:

This is another tough one as there is not a clear definition of what timely information is! This is typically up to the Ombudsman or a judge to decide. Getting it in writing ensures the information should be complete and accurate. The word clear is also an issue here as a lot of things put out by the CRA are not clear to taxpayers!

7. You have the right, as an individual, not to pay income tax amounts in dispute before you have had an impartial review:

This is a very important one! If you have an amount in dispute through the appeal or Notice Of Objection then you do not have to pay it, until or unless it is resolved as owing. However, interest may continue to accrue if the amount in fact has to be paid later. Also, if you are waiting for a refund for something else or another year they cannot hold it due to other amounts in appeal!

8. You have the right to have the law applied consistently:

In all my years doing accounting, I have rarely seen this to be true. If you find this to be an issue, the Ombudsman must be notified in writing with the facts and details.

9. You have the right to lodge a service complaint and to be provided with an explanation of our findings:

Pretty self explanatory. To lodge a complaint follow this link -- http://www.cra-arc.gc.ca/gncy/crsc/menu-eng.html

10. You have the right to have the costs of compliance taken into account when administering tax legislation:

So yes, if you hire accountants, lawyers or advisors you can deduct the cost. Our motto at Kustom Design is that when you hire us, we’ll save you more in tax than you pay us for our accounting fees!

11. You have the right to expect us to be accountable:

Notice the wording on this – we have the right to expect them to be accountable…but do we have the right for them to be accountable? Seems to be trick wording here! If we look at the actual definition of accountability we can see clearly that they are not always accountable. That being said, they usually are as clear as they can be why they have made a decision on tax matter, right or wrong. They also do publish some annual reports to both public and parliament.

12. You have the right to relief from penalties and interest under tax legislation because of extraordinary circumstances:

This is a good one as there is sometimes the possibility to have things like penalty & interest waived, to allow you to file late returns without being penalized, and even to get refunds past 3 years back in some circumstances. The details of applying for this relief can be found here (http://www.cra-arc.gc.ca/gncy/prgrms_srvcs/txpyrrlf/menu-eng.html). If you are denied the first time, you can even file a further request.

13. You have the right to expect us to publish our service standards and report annually:

This one is pretty straight forward. The annual service standard report can be found at www.cra.gc.ca/agency or (http://www.cra-arc.gc.ca/gncy/nnnl/menu-eng.html)

14. You have the right to expect us to warn you about questionable tax schemes in a timely manner:

This one is more for their benefit than yours. They will warn you about things that are good and bad and you won’t know the difference. They actually use this as a tactic to scare people from tax planning as tax planning and using tax programs can significantly reduce their revenues. Keep in mind they are a collection agency and are paid to collect as much money as they can, which includes discouraging people from planning to save tax!

15. You have the right to be represented by a person of your choice.

Many times it is advisable to have a lawyer or accountant represent you when dealing with CRA, particularly when it comes to audits. To give rights to a representative to handle your CRA matters you will need to fill out and submit a RC59 to CRA (http://www.cra-arc.gc.ca/E/pbg/tf/rc59/README.html).