Category Archives for "Small Business"

Tidbits – I’ve incorporated, now what?

By Randall Orser | Small Business

revampingIncorporation is a big step in the progress of your business, and there are new things to consider. A corporation is now a separate entity from you, and everything is new again. You now have to re-register for all those programs, such as GST/HST. It’s a brand new ball game.

Were you a proprietorship before incorporating? If so, you must close your proprietorship and all corresponding accounts. You can pick the day before the date of incorporation or a date sometime after that.

Year End

The first thing you need to do is decide on is a year-end for your new corporation. Please, please do not choose December 31st. That date absolutely sucks for any tax planning on what to give the owners wages and/or dividends for the year. There’s not enough time to figure out wages and the corresponding deductions, as any deductions are due by the 15th of January. That means you have to figure out wages and deductions within two weeks after the year-end. That’s impossible. Talk to your accountant as to what you year-end should be. Popular year-ends are the months of July to September.

You can look at when your busy time starts and maybe end your year-end just before that date. Usually one picks the end of the month for a year-end cut-off. You can have a short year for your first incorporated year.

Reporting Requirements

There are more stringent reporting requirements now that you’re incorporated. You must keep a minute book of the share activity, resolutions, year-end information, etc. You must also file an annual report every year with your province. Unless you’ve filed as a federal corporation then you must file one with the federal government, and with your provincial government.

You must now file two income tax returns, one for the corporation (called a T2) and you’re personal return (called a T1). Your bookkeeping also go a bit more complicated, as you must keep a real set of books. As a proprietorship you could get away with just sorting everything by category and adding it up at the end of the year. With a corporation, the government expects you to have a set off books using some kind of accounting software. I also find that banks, with which your corporation has loans, also require financial statements either monthly or quarterly.

Bank Account

You must open a new bank account for the corporation. You can use your existing bank or go to a new bank. Don’t let your bank just convert your proprietorship account to the corporation, as this creates havoc for the accounting.

Don’t forget to add any ‘doing business as’ names to your bank account. If you’re bank won’t add another name, change banks. I’m with VanCity and I have three dba’s.

Government Programs

You must register your corporation for the applicable programs. You’ll need a GST/HST account, provincial or retail sales tax account, workers’ compensation account, importer account, payroll account etc. Some provinces automatically alert Canada Revenue Agency (CRA) about new incorporations and you’ll get a letter from CRA stating your corporation account number. This number is the business number (9 digits) followed by RC0001 (123 456 789 RC0001). This will be the same number for all your federal government accounts, such as GST/HST. In BC, this number will be used for opening a PST account.

I find it easiest & fastest to call CRA and open up your GST/HST, payroll accounts, etc. Ensure you have your business number and other incorporation information handy when you call.

Other Matters

Do you have assets that were in a proprietorship/partnership? If so, you must transfer those to the corporation. You would transfer these into the corporation at the fair market value at the time they are transferred. You won’t have to charge the corporation GST/HST as you can transfer taxable supplies into the corporation GST/HST free by filing GST44 — Election Concerning the Acquisition of a Business or Part of a Business

You can also transfer assets into the new corporation provincial or retail sales tax free, as you already paid the tax on them and are not technically ‘selling’ them to the corporation. Check with your provincial tax authority.

If there is more than one shareholder, you must have a shareholder agreement. This is absolutely imperative. This agreement covers ownership and voting rights, control and management of the company, making a provision for the resolution of any dispute between shareholders, protecting the competitive interests of the company, what happens upon the death of a shareholder, etc. I have seen many corporations go to hell when there’s no shareholders’ agreement in place. And, in the end, if a shareholder dies or there’s some other dispute, would you rather buyout the shares, or be stuck with a shareholder you don’t want.

What Is Considered Barter?

By Randall Orser | Small Business

Payment for Doctor's ServicesThe subject of barter came up at a networking meeting I was attending and I thought it would be an interesting subject for Tidbits. Barter is where you exchange your product or services for someone else’s. For example, you sell widgets and happen to need a website, and fortunately, there is a website person that needs your widgets. In this case you trade your widgets for a new website.

Of course, Canada Revenue Agency has their take on barter too:

In its simplest form, bartering consists of trading by exchanging one commodity for another. Recently, however, the practice of bartering for goods and services has evolved into a sophisticated computer-controlled system of commerce proliferated by franchised, member-only barter clubs, where credit units possessing a notional monetary unit value have become a medium of exchange.

A barter transaction is effected when any two persons agree to a reciprocal exchange of goods or services and carry out that exchange usually without using money. In a barter transaction between persons who are dealing with each other at arm’s length, it is a fundamental principle that each of those persons considers that the value of whatever is received is at least equal to the value of whatever is given up in exchange therefor.

Your best scenario is to trade invoices: you invoice the website developer for your widgets, and they invoice you for the website. If the amounts are not quite the same, that’s okay, either of you just pays the difference.

CRA considers barter transactions to fall within the scope of the Income Tax Act. Therefore, barter transactions result in income or expense for your business. This applies if you happen to barter capital equipment you’re not using for another piece of equipment too.

The barter transaction could also result in a personal draw, if you buy something that is not for the business. For example, you sell your widgets for the use of a cabin for a vacation. In this case, the cabin vacation is personal, and, therefore you cannot claim it as an expense. However, you will have to claim the sale of the widgets as income.

I bet you’re now wondering about sales taxes, do I charge GST/HST or PST? Yes, you must treat a barter transaction as a regular transaction and charge the appropriate sales taxes. For example, you sell your widgets to the website developer and you agree on a $500 exchange, we’ll say this takes place in British Columbia. You must charge the website developer the GST/HST (5%) & PST (7%), which is $60.00 for a total of $560.00. The website developer would charge you just the GST/HST (5%) $25 equals $525.00.

Wait, there’s a difference here of $35.00 as you must charge higher taxes than the website developer. You could have to have the website developer pay the $35.00. Or, the website developer could just charge you $560.00 and break out the GST/HST (5%) and his invoice would be $533.33 plus $26.67 GST/HST. This could happen even if you’re trading service for service, as some services must charge PST (here in BC).

There could be the situation where you are bartering with someone in another province. You would charge them sales taxes based on location and they would do the same to you. For example, if you are in Ontario and the other business is in British Columbia, then you would charge them GST/HST (5%) & PST (7%) and the BC business would charge GST/HST of 13%. [Note: you could just charge GST/HST if you’re not registered for the PST in BC and you don’t sell to BC very often and the BC business would self-assess the PST].

From the example above, you’re in Ontario and the website developer is in British Columbia. You would charge $500 plus GST/HST & PST = $560.00 and the website developer would charge $565.00, a difference of $5.00. The website developer could just write off this difference or one of you could adjust the invoice to match the other. If you’re not registered for the BC PST, then you’d just charge $525 and we’re stuck with a difference of $40.00. In this case, it’s best to adjust your invoice up to the $565 of the website developer.

Barter can be a great way to help your business along in tough times, or when you’re first starting out. However, as with anything, too much of a good thing can hurt you. If you take too much barter, you may find your cash flow suffers greatly, and in some cases it’s caused a business to go under. I recommend you take no more than 10% per year for barter transactions.

Do I have A Business?

By Randall Orser | Small Business

bowlingYou may find you must register for the PST, but not the GST/HST due to your sales volume. Of course, You’ve been doing something on the side, such as mowing lawns or doing home repairs for people or you’ve got something you love to make and sell it at craft fairs or flea markets on the weekend. You really enjoy making the extra money and are having fun. You’re only cutting a few lawns in the neighbourhood or making wedding cakes a few times per month, so what’s the big deal. You’re thinking those flea market finds you find and then fix up and sell later are no big deal and really it’s all for fun.

Well, you may actually have a business, as Canada Revenue Agency (CRA) says a business is an activity that you intend to carry on for profit and there is evidence to support that intention. Now, if you have absolutely no expectation to ever make a profit and every year will be a loss, CRA could disallow this as a business.

A business includes: a profession, a calling, a trade, a manufacture, an undertaking of any kind, and an adventure or concern in the nature of trade. Your venture more than likely falls somewhere within these inclusions.

You have to look at what you’re doing, and if you expect to make money doing it, then you have a business and need to file your taxes accordingly. You need to keep track of your revenue and expenses for the year and report those on your personal income tax return. You may not have to register a business name, as you can just operate under your personal name.

You must know the date when the business can be considered to have started. Generally, CRA considers your business to have started when it begins some significant activity that is a regular part of the business or that is necessary to get the business going. CRA look at each case on the merit of its own facts.

For example, you decide to start a merchandising business and you buy enough goods for resale to start the business. At this point, CRA would consider the business to have started. You can usually deduct expenses you have incurred to earn the business income from that date. You could still deduct the expenses even if, despite all your efforts, the business ended.

You also need to look at whether or not you need to register for the GST/HST (your worldwide sales are over $30,000) or for your provincial sales tax (PST), here in British Columbia you don’t have to register if your sales are under $10,000the type of business may determine whether or not these small supplier exemptions even apply.

There’s also the situation where someone starts with one of those multi-level marketing (MLM) companies and basically buys product on auto-ship every month. The product that you use personally cannot be written off as an expense. I know, you’re going to say ‘but it’s for research’ well that may work for the first couple of months, but after that ‘no’. Also, if you’re not really trying to sell the product, then how can you justify the expense in the first place?

One thing that CRA has been looking at the last few years is someone working full time, and running a business too; however, that business only has losses and never makes money. In this case, don’t be too surprised to get a call from CRA wanting to ‘review’ your business.

You may be running a business and not even realize it. You may think it’s nothing, just a few bucks a month, but CRA may not see it that way. And, anyway, who’ll find out? CRA may, doing just a routine audit on your personal taxes. When in doubt seek professional help and talk to someone about your ‘hobby’.

When Do I Register for the PST?

By Randall Orser | Small Business

Cash registerIn it’s infinite wisdom, the province of British Columbia reverted back to a provincial sales tax (PST) on April 1st, 2013. And now the fun begins as when do you register for the PST? Of course, you want to check with your province for it’s particular rules. I believe Saskatchewan and Manitoba at the moment are the only other provinces with a provincial PST. We’ll talk about registering for the PST in British Columbia.

You should register if in the ordinary course of your business:

  • Sell taxable goods like alcoholic beverages, motor vehicles, boats, building materials, household or office furniture
  • Lease taxable goods like motor vehicles, tools and equipment, aircraft and art work
  • Provide services to taxable goods like:
    • Repairing or maintaining automobiles, knives, watches, TVs
    • Applying protective treatments like fabric protection
  • Sell software
  • Provide legal services or telecommunication services
  • Provide four or more units of accommodation

You don’t need to register if you do any of the following:

  • you sell only non-taxable or exempt goods like food for human consumption, bicycles or children’s clothing
  • you provide only non-taxable or exempt services like transportation or dry cleaning services
  • you’re a wholesaler

There is a $10,000 threshold for registering for the PST so, if your sales are below $10,000 then you do not have to register for the PST. However, if you’re already charging GST/HST and you sell a PST taxable service you should register for the PST as well.

You will need to register for the PST even though your service is not taxable, however, you sell a taxable product,

If your business is located outside the province of British Columbia and you solicit to sell taxable products/services to BC residents then you will need to register, collect and remit the PST on those sales. This includes items delivered into BC, even though the head office may be outside BC. If you’re an online seller, the BC government doesn’t consider you to be soliciting to BC residents as long as your website doesn’t specifically target BC residents. Of course, if you were an online seller located in BC this wouldn’t be the case. However, the Consumer Taxation Branch says this, “if you have a website and also solicit sales in British Columbia by other means, such as through targeted Internet advertisements, promotional flyers or newspaper advertisements, you are soliciting sales in the province”.

If you’re still unsure about whether or not to register, you can contact Consumer Taxation Branch at CTBTaxQuestions@gov.bc.ca.

How Does Payroll Work?

By Randall Orser | Small Business

Wages growthYou’ve come to the realization that you need help and have decided to hire an employee. We won’t get into employee vs. subcontractor here, as we did that in a prior post. We’ll discuss your role as the employer, and what you have to do with the deductions you take off the employee’s wages.

As an employer, you must make deductions on amount you pay to your employees. After you’ve made these deductions, you have to remit them, plus your share, to Canada Revenue Agency (CRA). You must file those deductions either electronically via online banking, at the bank or mail using the form PD7A.

Where Do You Start?

If this is your first employee, then you must sign up for a payroll account with CRA. If you already have a business number then your payroll account number is your nine-digit business number followed by RP0001 (RP designates this as a payroll account). You have to register for a payroll account before the first remittance due date. Your first remittance due date is the 15th day of the month following the month in which you began withholding deductions from your employee’s pay. If you didn’t open an account before hiring employees, you still need to calculate deductions and remit them by the due date.  If you fail to deduct or you remit late, you may be assessed a penalty.

The easiest way to open a payroll account is to call CRA at 1-800-959-5525. Have your business number, company information and your information handy when you call.

Paying Employees

For every new employee you hire, you are supposed to get them to fill out a TD1Personal Tax Credits Return. The TD1 is used to determine the amount of tax to be deducted from an employee’s employment income. The TD1 also gets the employee’s personal information, such as Social Insurance Number, birthdate, etc.

There are two forms, one for Federal and the other for the Province/Territory where employed. You do not have to send this TD1 to CRA, though you should keep a copy in the employee’s file. The employee only needs to fill out a TD1 again, if there is a change to their entitlements to their personal tax credits amounts.

If your employee has more than one employer or payer at the same time and has already claimed personal tax credit amounts on another TD1 form, he or she cannot claim them again. If his or her total income from all sources will be more than the personal tax credits claimed on another TD1 form, he or she must check the box on the back of the TD1 form ‘More than one employer or payer at the same time’, enter “0″ on line 13 on the front page and should not complete lines 2 to 12.

Now you have to decide how often you will pay your employee(s). The standard pay periods are bi-weekly (every 2 weeks) and semi-monthly (twice per month either the 1st & 15th or 15th & End-of-month). You need to check your provinces employment standards as to how often you pay employees. In British Columbia, you must pay employees twice per month, a pay period cannot be longer than 16 days, and employees must be paid within 8 days after the pay period ends. If you wish to pay an advance to an employee during the month, you are required to make deductions from that advance.

The best pay period, in my opinion, is every two weeks for hourly employees as then you can cut off on a Saturday and then pay the following week (usually Friday). Semi-monthly pay periods work best for salaried employees

Making Deductions

The deductions you must make from an employees pay are Canada Pension Plan (CPP), Employment Insurance (EI), and income tax. CPP is currently 4.95% of wages after a $3500 exemption and up to a maximum $2356.20. The employer portion is the same as the employees $2356.20. Employment Insurance is 1.88% to a maximum of $891.12. The employer portion is 1.4 times the employee portion to $1247.57 maximum. Income tax will be based on the employee’s basic personal exemptions, CPP & EI, and other factors.

You must give the employee a pay slip, which states:

  • Hours worked and the rate/hour; unless salaried
  • Deductions taken off and the amount; CPP, EI, Income Tax
  • Taxable benefits added to income
  • Year-to-date amounts

Do not put the employees Social Insurance Number on the cheque or paystub.

Making Your Remittance

Generally, you’re remittance is due by the 15th of the month following their withholding. Some larger employers must make remittances more often, but you, more than likely, fit into the 15th category.

CRA prefers if you file your payroll remittance electronically, and will probably make it mandatory in a few years. If you file via online banking, you have to set-up CRA as a payee and then you would follow the directions as per your bank to submit and pay. If you are sending a cheque or paying at the bank you need a PD7A, fill out the form with the total CPP, EI & Income tax deducted, the total remittance, the gross payroll (before deductions), number of employees and the period (Month/Year).

Example:

Mary, located in British Columbia, has one employee paying her $1,250 twice a month. The amounts are: CPP $54.66, EI $23.50 & Tax $136.16 for a total of $214.32 and a net of $1035.68. Here’s Mary’s remittance the following month:

Gross Payroll             $2,500.00       ($1,250 x 2)

CPP                                   218.64      ($54.66 x 2 (2 payrolls) = $109.32 x 2 (employer portion)

EI                                       112.80      ($23.50 x 2.4 (employer portion) = $56.40 x 2 (2 payrolls)

TAX                                   272.32      ($136.16 x 2 payrolls)

Total Remittance       $    603.76

Mary must make this remittance every month as long as the employee is working for her.

Payroll is a serious business and the monies deducted are considered in trust for the employee, so you must make sure that you remit them on time and every time. You will be held personally liable for any amounts you do not pay the CRA, even if you are an incorporated company. I find it best to use software or CRA’s online payroll calculator, that way you ensure you’re making the correct deductions.

Five Signs Your Business Model and Plan Needs Revamping

By Randall Orser | Small Business

revampingImagine a situation where business is great, sales volumes are steadily increasing, your market share is growing and customers just can’t seem to get enough of your company’s latest and greatest product offering. Your company is the envy of the market, the proverbial market leader and an innovator in its field. Then, rather suddenly, everything seems to change. Everything seems to be going wrong. Your costs have increased, your sales have decreased, you’ve lost market share and you’ve hit one roadblock after another. However, did this really happen all at once and simply catch you by surprise, or is it something that has been building over time? In essence, did you simply ignore the warning signs when everything around you was screaming that it was time to redefine, revamp and reinvigorate your business plan? Unfortunately, far too many companies ignore the warning signs until it’s too late. So, what are these warning signs and what must your company do to avoid the damage they can inflict?

1.      Your Company’s Goals and Objectives Change

One of the surest signs your business model needs restructuring is when you, your management team, and your employees, all start veering away from your company’s stated goals and objectives. Often it’s the result of following where your market leads your business. After all, it may simply be a sign of an ever-changing business environment. However, when your marketplace changes, and you must change along with it to remain competitive, then take the time to revisit your company’s goals and objectives within your overall business model. Make sure your business plan accounts for the new realities within your market. It will help provide a clear path forward on pursuing these newly established objectives and provide every employee and manager with common long-term goals.

2.      Your Cost Structure Increases and Revenues Decrease

If there is one essential rule of business it most certainly has to be that profit must be protected at all times. In fact, profit is essential. It’s the reason why your company is in business. While most would assume that an increase in costs, and a decrease in sales, would immediately be recognized and dealt with, reality is entirely different. What ends up happening is that both occur gradually over time. Rarely do sales volumes plummet overnight, unless of course a major contract is lost. Instead, costs seem to slowly increase, while sales numbers slowly decrease. In most cases, the increases and decreases are gradual and not immediately obvious. This is ultimately why companies must continue to assess their overhead by analyzing their direct and indirect expenses, while at the same time tracking their profit margins on sales. Again, these warning signs are gradual in nature, but by the time they’ve taken hold of your company, it’s far too late to adopt any short-term solutions. It’s been a while in the making and it will take your business time to adjust.

3.      You Grow Too Quickly

Granted, it’s difficult to find issues with business growth, especially in today’s economy. However, growing too quickly can have serious consequences, especially if your business plan and model isn’t easily scalable to your new growth. It’s not hard to imagine the consequences of a business that takes on more than it can handle. Sales, marketing and customer service can suffer under the weight of increased customer expectations. Manufacturing can suddenly have issues with quality and production throughput. Inventory and supply chain management can suddenly encounter higher costs of inventory ownership as they struggle to find vendors and creditors able to deal with the extra workload. If not prepared, that increase workload can damage your company’s reputation.

4.      You Ignore Critical Benchmarks

Another sure sign of trouble is when your enterprise ignores key performance indicators (KPI) or continually misses one vital benchmark after another. Your company may have defined these benchmarks early in its history. In fact, your original business plan likely included several key vital benchmarks, ones you deemed essential to securing your long-term future. They were seen as pivotal milestones and periods of reflection, ones where your company could assess the success or failure of individual strategies. Once your company starts ignoring these benchmarks, and glossing over deadlines, it moves towards a period of indifference, one marked by constant rescheduling and missed opportunities. Don’t allow this to happen. Sit down with your management team when you find your enterprise is missing important deadlines. This period is essential in order to redefine your business plan and model going forward. It’s an opportunity to revise your schedule and find ways to make those benchmarks important again.

5.      You Start Losing Your Biggest Customers

Losing a series of large customers has both immediate and definitive long-term consequences. This is often due to the 80-20 “Pareto Principle” or rule. It states that 80% of a company’s sales come from the top 20% of customers. Losing any of these large customers means a sudden and drastic decline in revenue. Unfortunately, a number of enterprises rationalize these losses, especially when they are seemingly ahead of their growth curve. However, losing one customer may seem simple to overcome, but losing multiple large customers isn’t. Therefore, be aware of where your biggest customers are and why they may be willing to move to your competition. If left unchecked, you can suddenly find yourself losing more than you thought possible.

When thinking of the impact of these five aforementioned outcomes, think back to how you originally came up with your business plan. You understood that success wasn’t guaranteed. You were well aware of the failure rates for new enterprises. As such, you laid out a plan that protected your interests, one that defined specific goals and objectives, defined your enterprise’s cost structure, outlined a plan for sustainable growth and finally, defined specific benchmarks and key performance indicators. Pay attention to those original plans before the fifth and most ominous sign occurs; losing big customers has dire consequences. Before that happens, revisit your business plan and revamp your business model to account for your new market reality.

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