A Straightforward Explanation of a Company’s Balance Sheet

By Randall Orser | Small Business

Balance Sheet Word Cloud Concept in red caps TNA company’s balance sheet is one of its three main financial reporting methods. The other two include the company’s income statement and its cash flow statement. However, if ever there was one way to describe a balance sheet, it would have to be that a company’s balance sheet is simply a snapshot in time and must always be in “balance”. What exactly does this mean? Well, it means that both sides of the ledger must be equal to one another. It is a single moment in the company’s history that summarizes the company’s assets, liabilities and owner’s equity. In fact, to make sure the balance sheet is in balance, it must follow one simple rule; the company’s assets must equal its liabilities and owner’s equity. We’ll review this simple rule and show how a company must ensure that its balance sheet is a true representation of its assets, liabilities and owner’s equity.

The Balance Sheet Rule: Assets = Liabilities + Owner’s Equity

Understanding assets, liabilities and owner’s equity

In order to understand the balance sheet, it’s important to define these three aforementioned criteria. A company’s assets include its cash, inventory, equipment and machinery in addition to any real estate holdings. It is found on the left side of the balance sheet. A company’s liabilities are a summary of what it owes to in notes payable and a summary of owner’s equity. The liabilities are always found on the right side of the balance sheet. We’ll take a systematic approach to defining all three of these criteria within the balance sheet by approaching it from the mindset of a company that is just getting started. Along the way, we’ll fill in the gaps in the following table and outline exactly how the balance sheet must always be in balance.

Assets Liabilities
cash notes payable
inventory owner’s equity original investment
equipment and machinery
total assets: total liabilities:

Your first week of operation!

Let’s assume you’ve decided to pursue a new business venture. You have $1,000.00 of your own money to invest in your business. However, you need more. Therefore, you secure an initial loan from a private investor. That initial loan totals $5,000.00 and is money you can use to get your business off the ground. However, that loan isn’t cheap by any means. That investor will easily charge you interest to borrow the money. After all, they’re in it to make money as well! Therefore, you now have $6,000.00, which is made up of $1,000.00 of your own money and a $5,000.00 loan. This $6,000.00 in cash should go on the left hand side of your ledger under “assets”. However, you also have a loan that should go under the notes payable section of your liabilities side, in addition to your own original investment of $1,000.00 that should go under the owner’s equity portion. These changes have been included below and are in blue. The balance sheet is now in balance. Looking at the table below, it’s easy to see how the balance in the balance sheet is maintained. You have cash holdings of $6,000.00 and liabilities of $6,000.00. We’ll consider this balance sheet a representation of your first week of operating a business.

Week 1: Balance Sheet

Assets Liabilities
cash $6,000.00 notes payable $5,000.00
inventory owner’s equity

  • original investment $1,000.00
equipment and machinery
total assets: $6,000.00 total liabilities: $6,000.00

Your second week of operation

In your second week, you move forward with purchasing inventory and equipment in order to get your business off the ground. When thinking of inventory, think of supplies for your business. It’s the same thing. You decide to purchase raw materials that total $4,000.00 in order to make your product. You also purchase a computer system for your new business that costs $1,000.00.

These aforementioned amounts come directly from cash in assets. This means you must place the above amounts under the inventory and equipment portion of the assets side of the ledger. Since you’ve spent this money, you must deduct it from your cash. Therefore, you now have $1,000.00 in cash, $4,000.00 tied up in inventory and $1,000.00 in equipment.

Does the liabilities portion of the balance sheet change? No. You still owe your original loan and still have your original investment of $1,000.00. All you’ve done in this step is account for the inventory and equipment you’ve purchased. The table below is a representation of the balance sheet for the second week of operation.

Week 2: Balance Sheet

Assets Liabilities
cash $1,000.00 notes payable $5,000.00
inventory: $4,000.00 owner’s equity

  • original investment $1,000.00
equipment and machinery: $1,000.00
total assets: $6,000.00 total liabilities: $6,000.00

Your third week: making a sale!

Up to this point, you’ve simply allocated your expenditures in terms of inventory and equipment. Now you’re ready to start making some sales. In this case, you need to determine your product’s “COGS”, which is simply an acronym for “cost of goods sold”. Your new company is able to make 100 units of your new product from the inventory you’ve purchased. Therefore, your COGS are $40.00 per unit which is simply the $4000.00 of inventory divided by the 100 units that can be made from that inventory.

After doing some market research, you determine that you should be able to sell each product for $55.00. Your gross profit is simply your sales total of $55.00 minus the $40.00, giving you a gross profit of $15.00 for each unit sold. In the first week of operation, you manage to sell 60 units for a sales total of $3,300.00 (60 units multiplied by $55.00 per unit). Your total costs are 60 units multiplied by the $40.00 in COGS, which is $2,400.00. This means you’ve generated a gross profit of $900.00, which is simply the sales revenue of $3,300.00 sales minus your total costs of $2,400.00.

For this transaction, we have to add the $3,300.00 of sales revenue into the cash portion of the balance sheet. Our new total in cash is now $4,300.00. Our inventory has been reduced by $2,400.00, which now leaves us with a total of $1,600.00 in inventory. Unfortunately, if we were to stop here, the assets would be larger than the liabilities, and that simply can’t be the case. Remember, both sides must equal each other and must be balanced. So, we add a new category to the liabilities of the ledger portion to include the gross profit we generated for the sale of 60 units in your first week of operation. This new category must go under the owner’s equity portion of the liabilities side. Here is a representation of the entire transaction.

Week 3: Balance Sheet

Assets Liabilities
cash $4,300.00 notes payable $5,000.00
inventory: $1,600.00 owner’s equity

  • original investment $1,000.00
  • earnings: $900.00
equipment and machinery: $1,000.00
total assets: $6,900.00 total liabilities: $6,900.00

From this point on, you’ll continue to invest in your business. Perhaps in your fourth week of operations you’ll start advertising or marketing your product to new prospects. If so, those expenses will come directly from your cash holdings on the asset side and be deducted from your earnings portion on the liabilities side. Over time you’ll want to pay off your loan under your liabilities. Each time you do, you’ll reduce the left side of the ledger by the same amount. Remember the rule with respect to the balance sheet: The right side must always equal the left.

Starting Your Own Business – What It’s Not!

By Randall Orser | Small Business

Piggy bank and success concept TN

Although starting a business may be a dream for many people, the reality can be a jarring contrast. If you’re considering your own business, a hard look at what it really entails can help you to prepare yourself and your family for the sometimes-unexpected twists and turns of a new business.

It’s Not Lucrative–At First

Anyone considering starting a business should take considerable time researching and calculating the expenses required for an adequate start-up. Your idea may require purchasing equipment, renting a business facility, buying inventory, and investing in a major advertising campaign or hiring a sales team. If you have a hefty bank account of savings, you may not require financing of your new business. However, most people must go to the bank and secure a business loan or line of credit to provide funds for the initial expenses. Many people use the equity in their homes as collateral to secure a loan. Others borrow funds from family members. Others rely on financing combined with the income from a working spouse to get them through the early months until they are able to secure a regular income. However, as the year’s pass and your business become established, you will find that you are able to garner a good income from the profits and a number of benefits.

It’s Not Easy Hours

Starting a business requires a complete commitment of time and energy to put together the diverse elements that makes any business succeed. In the early years, a business essentially takes over your life. You will find that you, your spouse and even your children begin to breathe, eat and sleep the business’s many details. You can expect to put in long hours organizing your business physically, financially and legally. You may have to consult with professionals about tax and legal matters. You may have to find and train your new employees. It is likely you will spend long hours designing a marketing plan to find new customers. You will spend time on human resource and insurance concerns. You will attend local conferences and business events to get your business known. You may have deal with small surprises you didn’t expect. In the process, you will come to know your business and yourself better, but it will often feel like you have become a work machine. But soon, your business will take on a life of its own, and you will be able to enjoy the rewards of a job well done and financial benefits of careful organization and planning.

It’s Not Fun For the Family

Although you may have visions of your spouse and children cheerfully working to help the business grow, be aware that they may not appreciate the time and energy spent on growing your business. You may spend long hours away from them planning for your business’s future. You may be distracted and stressed when you’re at home. Your spouse may have work and activities of his or her own, and they may resent time spent on your business. In truth, it is sometimes easier for families when parents work a regular 9-to-5 schedule with plenty of paid time off. A business sometimes requires working weekends and holidays to keep up with a growing customer base. Vacations can be interrupted and family events missed. However, as the business grows, it is likely that you will have a manager or other person in charge to allow you and your family to get away more often.

It Doesn’t Allow You To Do Whatever You Want

Many people start a business expecting it to free them from the constant monitoring from supervisors or bosses. Having your own business entails a different type of “accountability.” Taking care of your customers becomes a major concern. Finding and keeping good employees becomes an ongoing effort. Government regulations, taxes and legal matters become more pressing concerns. You will never quite be free of these types of oversight, but you will learn to integrate them into your business decisions.

Although, the demands of starting one’s own business can be daunting, millions of people embark on this great adventure every year. If you have the enthusiasm to implement your dream of owning your own business, and have the drive to do whatever it takes to grow it, you are highly likely to find success in your venture. Of course, don’t forget all the government regulations, taxes, etc. you must be up on, or at lease hire the right person to keep you up on them.

How should I organize my receipts?

By Randall Orser | Small Business

Euro banknotes and piggy bank TNOrganizing your receipts is important when working with a bookkeeper, accountant, or tax preparer. And, of course, when Canada Revenue Agency (CRA) comes calling wanting to look at your receipts. For the former, having your receipts organized makes entering the information go much smoother, and could result in a cost saving on their fees. For CRA, your ability to find a receipt easily and fast ensures that your audit goes without a hitch, and CRA is happy you provided the information in a very timely manner. As someone once said, ‘Do you want the four hour audit, or the four day one?’ How you organize your receipts determines that.

Bookkeeping

The best way to organize your receipts for bookkeeping is by month, based on your fiscal year. The reason is that when we’re entering your receipts we reconcile by the month, therefore, having everything by the month makes it easy to ensure we have everything. Now once everything is entered how you file those receipts depends on the size of your business.

For most sole proprietorships, filing by category (as per the Statement of Business Activities on your personal tax return) will work just fine. That is by office, meals, travel, telephone/internet (or communications), advertising/marketing, etc. CRA when they do a review or audit will look at the lines on the Statement of Business Activities and want to look at the receipts that pertain to that line item. Bank statements, as well as credit card statements, would be filed together so they are quickly accessible.

If you’re a larger sole proprietorship, or corporation, then you are probably better off filing your receipts based on the purchaser rather than the expense category. If you get your telephone/internet from Telus then have a file for Telus, or Shaw or Rogers. Have a file for each major vendor with which you do business. I do find it helpful to have a file for Meals and Automobile as these two categories get looked at the most; rather than having them under a vendor category.

For bank and credit card statements you can attach the smaller receipts to the statement, so they don’t get lost. Go by the statement dates for attaching receipts not just the month.

Also keep files for each leases, contracts, etc. so you can find them when they come up for renewal, or just to know when they are coming up for renewal.

Employees

You should have a separate file for each employee. This file can contain their employment contract, TD1s, signing up for benefits plans, contact information (including emergency contact information), time sheets, paystubs, T4s, annual or other reviews, disciplinary actions taken (and letters written about such to the employee), etc. Document everything you do with an employee so that you are covered if you have to let them go, or they quit, and some kind of action needs to be taken or has been taken.

Taxes

For your personal taxes, you can keep all your slips together along with a copy of your return. I’d keep each year in it’s own envelope (we have our ‘Tax Stuff’ envelopes) or folder, and attach all donations, medical expenses, etc. together, along with your T-slips (T3, T4, T5, etc.). For the sole proprietor, I’d keep a copy of your income statement and balance sheet for that year in this file too.

For corporations, I’d have a file that keeps all your year-end documents together: the corporate tax return, the year-end financial statements, along with the adjusting entries and the adjusted year-end trial balance. Don’t forget to enter your year-end adjusting entries so your data file matches what was filed with CRA.

Hopefully you never have CRA come calling. However, you will find that as long as you keep everything organized anytime CRA comes calling you won’t be in a panic about finding items as they are at your fingertips. With an organized filing system, you can find things quickly when you need them.

What tax credits are available for apprentices?

By Randall Orser | Personal Income Tax

Breaking the Bank TNYou, or a loved one, have decided to embark on a career in the trades, which is great. Fortunately, there are tax breaks for those who go into the trades as apprentices. Of course, you have to prove your apprentice and be registered with the federal or provincial government, and it leads to a certification or designation in that trade.

Tools Expense

You may be able to deduct the cost of eligible tools you bought in the tax year to earn employment income as a tradesperson and as an eligible apprentice mechanic. This cost includes any GST, and provincial sales tax (PST), or HST you paid. You may also be able to get a rebate of the GST/HST you paid.

An eligible tool is a tool (including associated equipment such as a toolbox) that:

  • You bought to use in your job as a tradesperson and was not used for any purpose before you bought it;
  • Your employer certified as being necessary for you to provide as a condition of, and for use in, your job as a tradesperson; and
  • Is not an electronic communication device (like a cell phone) or electronic data processing equipment (unless the device or equipment can be used only for the purpose of measuring, locating, or calculating).

Your employer has to complete and sign Form T2200, Declaration of Conditions of Employment. Have your employer complete question 11 of Part B of the form to certify that the tools being claimed were bought and provided by you as a condition of your employment as a tradesperson. Attach to Form T2200 a list of the tools you are claiming, as well as the related receipts. You do not have to include Form T2200, your receipts, or your list of tools with your return, but you should keep them in case we ask to see them.

Even though you may have already claimed the tradesperson’s deduction for tools, you may also be able to deduct a part of the cost of eligible tools you bought in 2013 to earn employment income as an eligible apprentice mechanic. You are an eligible apprentice mechanic if you:

  • Are registered in a program established under the laws of Canada or of a province or territory that leads to a designation under those laws as a mechanic licensed to repair self-propelled motorized vehicles (such as automobiles, aircraft, boats, or snowmobiles); and
  • Are employed as an apprentice mechanic.

As an eligible apprentice mechanic, you must first calculate the tradesperson’s tools deduction, if any, that you qualify for. You may qualify for that deduction if you bought eligible tools for your job in 2013.

Tax Credits

The provinces and territories also have their own tax credits for apprentices. British Columbia is one such province. In BC you can file a T1014 British Columbia Training Tax Credit (Individuals). You can claim this credit if you were a resident of British Columbia on December 31, 2013, and you completed an eligible program administered through the British Columbia Industry Training Authority or you passed a challenge exam and received a Certificate of Qualification from the British Columbia Industry Training Authority, in the tax year. Eligible programs and completion requirements are defined by Regulation.

Check with your province, your industry training authority, and Canada Revenue Agency, to see what tax credits are available to you.

Employment Insurance for business owners, is it worth it?

By Randall Orser | Personal Income Tax

Young stylish businessmanThe government in its infinite wisdom (or maybe because it’s so broke) decided to allow self-employed persons to apply for the employment insurance benefit. The benefits you would get are limited to maternity, parental, sickness, compassionate care, and care of critically ill children.

Sorry, but you can’t lay yourself off and collect benefits. Oh, and you have to wait 12 months before you can ever claim any benefits. So, if you’re pregnant now, you’re too late.

What are the Eligibility requirements?

You can enter into an agreement, or register, with the Canada Employment Insurance Commission through Service Canada if you:

  • Operate your own business, or if you work for a corporation but cannot access EI benefits because you control more than 40% of the corporation’s voting shares;
  • Either a Canadian citizen or a permanent resident of Canada.

You will qualify for EI special benefits if:

  • You have reduced the amount of time devoted to your business by more than 40% because:
    • Your child was born;
    • You are caring for your newborn or adopted child or children;
    • You are ill, injured, or in quarantine;
    • You need to provide care or support to a gravely ill family member; or
    • You need to provide care or support to your critically ill or injured child
  • You have earned a minimum amount of self-employed earnings during the calendar year preceding the year you submit a claim. This amount may change from year to year. If you want to apply for benefits in 2014, for example, you would need to earn at least $6,515 in 2013; and
  • For EI sickness claims – you have provided a medical certificate as proof that you are unable to work because of illness, injury, or quarantine; or
    • For compassionate care benefit claims – you have provided medical proof showing that a gravely ill family member who is at risk of dying within 26 weeks needs your care or support;
    • For EI maternity or parental benefit claims – you have provided the expected date of birth of the child and the actual birth date once it has occurred, or the official placement date in the case of adoption; or
    • For parents of critically ill children claims – you have provided a medical certificate completed by a specialist medical doctor stating that your care or your critically ill or injured child requires support.

As you can see it’s quite a bit of work to actually get the benefits and you have to have income to get any kind of benefit. So, if you’re business isn’t making a profit, you’ll be hard pressed to ever collect any employment benefits.

Is it worth doing Employment Insurance (EI)?

I don’t believe in the end it’s worth the hassle to do employment insurance. There are much better ways to deal with a crisis, such as critical illness insurance, disability insurance and other avenues. With the EI program, you’re just contributing into the pool, and it goes out for everyone in that pool to use. You may never use, or if you do there’s a limit to how long and how much you get paid. In the end, you need to setup a savings/insurance program for those times when you’re going to be off work.

I received a gift from my employer and it was added to my income and taxed, why?

By Randall Orser | Personal Income Tax

employee gift--tidbits 2014-03-19 TNWe all like to receive a gift from someone we know, and let’s face it we all feel special when we do. As an employee, when you receive something from your employer, you know you’re doing a good job and are being recognized for it, or it could be for a special occasion, such as a birthday. Sadly, the government doesn’t see it that way and considers any gift received as being in the course of employment, even a birthday gift.

Gifts and Awards

A gift or award that you get as an employee is a taxable benefit from employment, whether it is cash, near-cash, or non-cash. However, CRA does have a policy that exempts non-cash gifts and awards in some cases.

Cash and near-cash gifts or awards are always a taxable benefit for you, the employee. A near-cash item is one that can be easily converted to cash such as a gift certificate, gift card, gold nuggets, securities, or stocks.

A gift has to be for a special occasion such as a religious holiday, a birthday, a wedding, or the birth of a child.

An award has to be for an employment-related accomplishment such as outstanding service, employees’ suggestions, or meeting or exceeding safety standards. It is recognition of an your overall contribution to the workplace, not recognition of job performance. Generally, a valid, non-taxable award has clearly defined criteria, a nomination and evaluation process, and a limited number of recipients.

An award given to your employees for performance-related reasons (such as performing well in the job he or she were hired to do, exceeding production standards, completing a project ahead of schedule or under budget, putting in extra time to complete a project, covering for a sick manager/colleague) is considered a reward and is a taxable benefit for the employee.

There are other things that can be considered a taxable benefit:

  • Social events and hospitality functions.
  • Loyalty and other points programs.
  • Gifts and awards given through prize draws and social committees that are not controlled and funded by the employer.
  • Gifts and awards given where there is no employer/employee relationship, such as awards from a manufacturer or promotional items to employees of a retailer.

You Can Get Non-Cash Gifts That Are Not Taxable

Your employer may give you an unlimited number of non-cash gifts and awards with a combined total value of $500 or less annually. If the fair market value (FMV) of the gifts and awards you are given is greater than $500, the amount over $500 must be included in the employee’s income. For example, if you give gifts and awards with a total value of $650, there is a taxable benefit of $150 ($650-$500).

You will be happy to know that items of small or trivial value will not be considered a taxable benefit. These items are not included when calculating the total value of gifts and awards given in the year for the purpose of the exemption.

Examples of items for small or trivial value include:

  • Coffee or tea;
  • T-shirts with employer’s logos;
  • Mugs;
  • Plaques or trophies.

More than likely the taxable benefit you received has fallen into one of the areas above. If you don’t remember receiving a gift or award, talk to your employer and get them to clarify exactly for what is the taxable benefit.

I have to renovate my home to accommodate my disability, is there a tax credit for that?

By Randall Orser | Personal Income Tax

Shower BenchThere comes a time when age may not allow you to get around as well as you used to, or something tragic happens that limits your mobility or ability to live in your current home. Whatever the reason you can write off expenses to make your home more accessible. These construction/renovation expenses are classed under medical expenses and deducted accordingly. These expenses are classified as medical expenses and claimed on Line 330. You may also claim these expenses for a dependent that lives with you.

Renovation or construction expenses

You can write off the amounts paid for changes to give a person access to (or greater mobility or functioning within) your home, when that person has severe and prolonged mobility impairment or lacks normal physical development.

Costs for renovating or altering an existing dwelling or the incremental costs in building your principal place of residence may be incurred. These costs can be claimed minus any related rebates such as for goods and services tax/harmonized sales tax (GST/HST).

Renovation or construction expenses have to be reasonable (as per Canada Revenue Agency) and meet the following conditions:

  • They would not typically be expected to increase the value of the dwelling; and
  • Persons who have normal physical development or who do not have severe and prolonged mobility impairment would not normally incur them.

Make sure you get a breakdown of the costs. Costs could include:

  • Buying and installing outdoor or indoor ramps if you cannot use stairs;
  • Enlarging halls and doorways to give you access to the various rooms of your dwelling; and
  • Lowering kitchen or bathroom cabinets so you can use them.

While these incurred costs to renovate or alter a dwelling to accommodate the use of a wheelchair may qualify as medical expenses under the conditions described above, these types of expenses related to other types of impairment may also qualify. In all cases, you must keep receipts and any other related documents to support your claim. Also, you must be able to show that your particular circumstances and the expenses incurred meet all of the conditions mentioned above.

Examples of common renovation or construction expenses that would generally not be considered eligible medical expenses, because they would be expected to increase the value of the dwelling or because they would normally be incurred by persons who have normal physical development or who do not have a severe and prolonged mobility impairment, include:

  • Hardwood flooring;
  • Hot tubs; and
  • Pools.

The types of renovations or alterations that could be eligible are not restricted to the above examples. Claims would be considered on a case-by-case basis. It is a question of fact whether your or a particular renovation or alteration will qualify. Of course, the onus is on your to prove that the conditions to qualify for this medical expense have been met.

A Former Employee Refuses to Give his SIN, What do I do?

By Randall Orser | Personal Income Tax

Businessman showing document or contract, isolatedI have actually run into this a couple of time over the past few years. You hire someone, they work for a few days and when you start asking for their Social Insurance Number (SIN) and other information, they stall and then quit before you can get the information. Now you have no information on someone who worked for a few days. Another scenario is you hire them, make it through the first payroll, then they happen to just quit, and you have no information other than their name and some information on their resume.

What do you do in this situation?

For the scenario where you haven’t paid the employee, then make sure you make note of their hours up to the day they quit. If the employee does come back, then you will have to issue a paycheque. However, make sure the employee fills out a Federal and Provincial TD1 before you give it to them. I’d even go as far as ensuring the SIN is a valid SIN by asking to see their SIN card. If you suspect they may be misleading you then you can call Service Canada to verify the SIN.

For the employee whom you’ve had one payroll, if they’ve only had that one payroll then you only have to worry about the T4. Now, you have no information on this person other than a name and maybe a phone number. You still have to file the T4 with what personal information you have. You’ll get a call from Canada Revenue Agency (CRA), and you’ll have to explain that the person quit before giving you any information, and they now refuse to give it to you. If you have a phone number and/or address for the employee give those to CRA.

The first thing you should do when hiring an employee is have them fill out a TD1, which gives you their basic information and the exemptions for determining taxes. Better is having some kind of employee information sheet that all new hires fill out. On this sheet you ask for their full legal name, address, phone number, email, SIN, birthdate, emergency contact information and any other pertinent information for your company/industry.

In either of the situations above: document, document, document. Make note of every conversation you have with the employee asking for this pertinent information, and every phone call you make to ask for it. Write down the date, time and what was said. Also, keep any written (including email) conversations you have with this employee. This way no one can come back and say you didn’t try to get this information out of the employee.

In the end, hiring an employee is a major act in any businesses life. Take it very seriously, as most of the laws are in the employees favour not the employers.

Oh, and one thing that I’ve read and truly believe is to ‘hire slow, and fire fast’!

Do I really have to make installment payments?

By Randall Orser | Personal Income Tax

Salvadanaio vuotoMany taxpayers hate giving their money early to the government, and so don’t make any kind of installments. Canada Revenue Agency (CRA) has realized this and now requires that taxpayers, and corporations, make installments on their various accounts. Generally, you have to make installments when your tax balance owing is more then $3,000 (except in Quebec where it’s $1,800) for the prior tax year.

Personal Taxes

You have to pay tax by installments for the same reason that most people have tax withheld from their income throughout the year. If you earn income that has no tax withheld or does not have enough tax withheld for more than one year, you may have to pay tax by installments. This can happen if you earn rental, investment, or self-employment income, certain pension payments, or income from more than one job. The $3,000 amount applies to your personal taxes, so if you owe more than that during the prior tax year, you will have to make installments.

If you are on pensions and you’re income is more than $20,000, then you should get something taken off each of the different pensions, such as OAS and CPP by calling Service Canada. For other pensions, call the pension office for that pension.

Also, if CRA has sent you an installment reminder letter, you must make the installments as per this letter, unless you believe your income will be less and you can arrange to make smaller, or no installments. If you believe your income will be more, then you can increase your installments based on what you believe will be your current income.

Business Taxes

Along with your personal taxes, your business related taxes, such as your GST/HST or corporate taxes might require installments. It’s usually only these two accounts that need to do installments, as they are the ones that would be filed annually.

GST/HST is only paid by installments when you are an annual filer. You pay installments when you’re prior year balance owing was over $3,000. Again, if you think you’re going to owe less you can reduce your installments. Or increase them, if you think you’ll owe more than the prior year.

For sole proprietorships, you must pay your installments in April, July, October, and January of the following year. This is where doing your books quarterly at a minimum comes in. You can figure out what you owe for that quarter and remit that as your installment payment. In the following year when you file your annual return you’ll end up owing nothing.

For GST/HST, Corporations would follow their fiscal year and pay on a quarterly basis. For example, if your year-end were August 31st, then you’d pay quarterly installments in September, December, March, and June.

For a corporation’s income taxes, the installments are due monthly by the end of the month. Penalties and interest will apply on any missed or late installments or if you made no installment payments at all.

What if you don’t make your installment payments as required?

CRA charges installment interest if all of the following conditions apply:

  • They send you an installment reminder in 2014 that shows an amount to pay;
  • You are required to make installment payments in 2014; and
  • You did not make installment payments, or you made payments that were late or less than the required amount.

CRA calculates the interest on each installment that you should have paid using the payment option that calculates the least amount of interest up to the balance due date. Then they calculate the interest on each installment you did pay for the year, starting from the later of the date the payment was made or January 1 up to the balance due date. They charge the difference between these two amounts if the difference is more than $25.

Installment interest is compounded daily at the prescribed interest rate.

You may have to pay a penalty if your installment payments are late or less than the required amount. CRA applies this penalty only if your installment interest charges for 2014 are more than $1,000.

To calculate the penalty, CRA determines which of the following amounts is higher:

  • $1,000; or
  • One-quarter of the installment interest that you would have had to pay if you had not made installment payments for 2014.

Then, they subtract the higher amount from your actual installment interest charges for 2014. Finally, they divide the difference by two and the result is your penalty.

Making sure that you pay your installment payments on time is very important these days. As well as knowing whether or not you have to make installment payments at all. If you’re unsure whether to make installment payments, talk to your accountant, bookkeeper or tax preparer.

Does my business have to follow International Financial Reporting Standards (IFRS)?

By Randall Orser | Small Business

a man hand graphCurrently Canadian business must follow Generally Accepted Accounting Principals or GAAP. You may have been hearing over the past couple of years talk about International Financial Reporting Standards or IFRS, and talk of businesses in Canada converting to this reporting standard. Do you as a small business have to convert out IFRS? That’s what we’ll talk about here.

What is IFRS?

International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB) that is becoming the global standard for the preparation of public company financial statements.

The IASB is an independent accounting standard-setting body, based in London. It consists of 15 members from nine countries, including the United States. The IASB began operations in 2001 when it succeeded the International Accounting Standards Committee. It is funded by contributions from major accounting firms, private financial institutions and industrial companies, central and development banks, national funding regimes, and other international and professional organizations throughout the world.

A financial statement should reflect a true and fair view of the business affairs of the organization. As statements are used by various constituents of the society / regulators, they need to reflect a true view of the financial position of the organization, and they are very helpful to check the financial position of the business for a specific period.

IFRS authorize three basic accounting models:

I. Current Cost Accounting, under Physical Capital Maintenance at all levels of inflation and deflation under the Historical Cost paradigm as well as the Capital Maintenance in Units of Constant Purchasing Power paradigm.

II. Financial Capital Maintenance in Nominal Monetary Units, i.e., globally implemented Historical cost accounting during low inflation and deflation only under the traditional Historical Cost paradigm.

III. Financial Capital Maintenance in Units of Constant Purchasing Power – CMUCPP – in terms of a Daily Consumer Price Index or daily rate at all levels of inflation and deflation under the Capital Maintenance in Units of Constant Purchasing Power paradigm.

Sounds complicated, doesn’t it. It is much more involved than GAAP for sure. It will take time for enterprises to convert to IFRS.

Currently, financial statements reflect, historically, a moment in time rather than what may, or may not, happen with the company. IFRS allows for the probable future economic benefit will flow to or from an entity to be recognized in the financial statements.

Do I have to implement IFRS in my business?

In Canada, The use of IFRS became a requirement for Canadian publicly accountable profit-oriented enterprises for financial periods beginning on or after 1 January 2011. This includes public companies and other “profit-oriented enterprises that are responsible to large or diverse groups of shareholders.”

So, unless you’re a public company you do not have to follow IFRS. This may change over time. Should I ever convert to IFRS? I would say no, not unless you have to for regulatory reasons or you wish to sometime in the future take your company public. Converting to IFRS can be a costly and time-consuming practice and requires the skills of an accountant who’s worked in the IFRS arena.