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 9: Record Keeping

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!

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!

Steps to Incorporation, Part 2

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!

Structuring your Corporation part 3

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 18 years 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

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.

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.

Why Incorporate?

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

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:

1. 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.
2. 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)
3. 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

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.