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

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.  

The Transition from Employed to Self Employed Part 1

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

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

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

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

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

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

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

Tips on Audit Proofing your Business Part 4

We are now getting close to wrapping up this series and you can see the theme is “be able to prove every expenditure and deposit”  The fact of the matter is that if you can’t prove expenses or deposits, CRA can just deem what they want whether it is true or not!  So you must always keep good back up documentation for every transaction, not just statements but receipts as well!  Keep a good record of all deposits, using a deposit book as well!

In my last blog we began to talk about Employee vs. subcontractors.  Employees must go on payroll and T4’s must be issued for employees.  Subcontractors do not go on the payroll, however a T4A should be filed at the end of the year (due the following February) stating how much was paid to the subcontractor.  

Let’s look a little closer at payroll.  Getting in trouble with payroll can close your business down.  The penalties and interest on late payroll remitting can cripple a business as the rates are so high!  To ensure you stay out of payroll trouble you can simply not have any employees, just subcontractors, or if you do have employees then ensure you always have accurate payroll remittance numbers and make your remittance on time!  You can use the Software produced by CRA, go on their website, or use approved accounting software to calculate your payroll remittances.  Payroll remittances are made on the 15^th of the following month.  So for example September’s payroll remittance is made on the 15^th of October, unless you have other arrangements in writing with CRA.

Subcontractors will remit their own taxes as they have their own business just like you do.  As mentioned they should have a Corporation with a GST number and they should invoice you in exchange for payment.  The invoice is your source document for proof in case you get audited.  In my last blog we listed the main factors CRA looks at to ensure that you have hired a real subcontractor and they are not an employee under the guise of a subcontractor.  If you want to hire and you don’t want employees due to the extra headaches and costs, then speak to us.  Even if it doesn’t look like the subcontractor can meet the criteria, we can help you set things up to ensure they are legitimate contractors.  Go to www.jobworksinc.ca for more info.