Maximizing the use of your corporation Part 1

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

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 6: Banking

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.

Steps to Incorporation, Part 3

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!

When to Incorporate? Part 2

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.