Category Archives for "Small Business"

A Straightforward Explanation of a Company’s Income Statement

By Randall Orser | Small Business

Income Statement word cloud TNWhen companies want to track their financial performance over a given week, month, quarter or year, they turn to the information provided through their income statement. Sometimes referred to as an “operating” statement, a “profit and loss” statement or even an “earnings” statement, this financial reporting structure aims to define a company’s performance in terms of its revenue, the changes in its inventory values, its product’s COGS (cost of goods sold), its gross profit on sales, its expenses, and most importantly, its net profit for the period in question. We’ll review the income statement by taking a straightforward look at the activities of a company during a given month.

The Income Statement

The income statement is but one of the three key financial reporting structures for all enterprises. The others include the balance sheet and cash flow statement. However, while the balance sheet is viewed as a snap shot in time, and the cash flow statement tracks incoming versus outgoing cash from the business, the income statement is seen more as a time based representation of the company’s activities. While the income statement itself can be quite complex, ours will be simplified by focusing on the transactions of a company over a single month. In order to do that, we’ll outline the income statement by defining the relationship between a company’s sales, COGS, gross profit, expenses and net profit.

Sales, COGS, Gross Profit, Expenses and Net Profit

Gross profit is simply sales minus COGS. When thinking of COGS, think of those costs that go directly to making a given product. Determining the company’s net profit simply involves taking the gross profit and deducting the company’s expenses. When thinking of expenses, think of the cost of doing business. Expenses are costs that the business must absorb regardless of how many products it makes.

There is a simple approach to determining COGS and how they can be represented on an income statement. In our income statement, the company’s starting inventory values are added to that month’s new inventory purchases. This total is then subtracted from that same month’s unused inventory values. The calculations to determine COGS, gross profit and net profit are summarized below:

A) COGS = Starting Inventory Value + New Inventory Purchases – Ending Inventory Value

B) Gross Profit = Sales – COGS

C) Net Profit = Gross Profit – Expenses

Our income statement is a summary of the company’s activities for the month of July 2011. The company had revenue of $20,000.00 for the month. At the beginning of July, the company had $1,000.00 left over in unused inventory that wasn’t used or sold in the previous month of June. This is represented by the “starting inventory value” ($1,000.00) in the income statement. In the month of July, the company purchased additional inventory, which is included under the section “new inventory purchases”, the total of which is $10,000.00 ($2,000.00 + $2,000.00 + $4,000.00 + $1,000.00 + $1,000.00). At the end of July, the company had used up all but $3,000.00 of its inventory. This $3,000.00 is the company’s “ending inventory value”.

A) Here is the calculation to determine “COGS”.

COGS = Starting Inventory Value + New Inventory Purchases – Ending Inventory Value

COGS = $1,000.00 + $10,000.00 – $3,000.00

COGS = $8,000.00

B) Here is the calculation to determine gross profit.

Gross Profit = Sales – COGS

Gross Profit = $20,000.00 – $8,000.00

Gross Profit = $12,000.00

C) Here’s the calculation to determine net profit.

Net Profit = Gross Profit – Expenses

Net Profit = $12,000.00 – $3,000.00

Net Profit = $9,000.00

Putting the Income Statement Together

The first step is to define the time period of the income statement. Our example is for a company’s activities during July 2011. The second step includes the company’s revenue for the month, which in our example is $20,000.00 in sales. The third step includes stating the starting inventory values for July. This is inventory that was not used or sold in the previous month of June. Don’t be confused with the beginning inventory value. This is inventory the company wasn’t able to sell during the previous month. The fourth step includes accounting for the new inventory the company purchased in the month of July. Why would a company purchase more inventory when it already has inventory from the previous month? Simply put, companies often have large product portfolios, the likes of which forces them to purchase large amounts of inventory. All companies carry some amount of inventory from one month to the next. The fifth step includes summarizing the unused inventory, or better put, the “ending inventory value” for July. The sixth and seventh steps include determining the COGS and gross profit. The eighth step includes itemizing the company’s monthly expenses. The ninth is to add up the expenses and finally, the tenth step determines the net profit. All ten steps are highlighted in bold  in the income statement below.

Income Statement (1) July 2011
  (2)    Revenue $20,000.00
Starting inventory value  (3) $1,000.00
New inventory purchases  (4)
aluminum $2,000.00
nuts $2,000.00
epoxy $4,000.00
steel $1,000.00
copper $1,000.00
Ending inventory value       (5) $3,000.00
COGS    (6) $8,000.00
Gross Profit  (7) $12,000.00
Expenses   (8)
advertising $1,000.00
equipment maintenance $750.00
insurance $500.00
rent $250.00
office supplies $500.00
Total Expenses (9) $3,000.00
Net Profit   (10) $9,000.00

Notice how the net profit is at the bottom of the income statement? That’s why it’s called the “bottom line”. By no means is this the only way to depict the income statement. For instance, it’s not uncommon for companies to simply sum up their COGS separately. However, the basic premise remains. To determine gross profit, take the sales and subtract COGS. To determine net profit, take the gross profit and deduct the month’s expenses.

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.


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.


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.


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.

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.

Tidbits – What do I do with a Bad Debt?

By Randall Orser | Small Business

bad-debtYou’ve been generous enough to give your customers credit, and now one of those customer’s debt has become uncollectible. You need to determine just how old is the debt, and what are your chances of collecting it. You can definitely write-off any debts that become uncollectible during the year; however, you must take steps to show that you at least tried to collect said debt. For our purposes today, we’re talking about customer invoices, and not loans or other debts.

Bad Debts

Canada Revenue Agency (CRA) considers a debt to be bad when:

(a) The debt was owing to the taxpayer at the end of the taxation year,

(b) The debt became bad during the taxation year, and

(c) The debt was included or is deemed to have been included in the taxpayer’s income for that taxation year or a previous taxation year.

You can’t claim a bad debt where a debt was sold, discounted or assigned absolutely by the taxpayer during the course of the year, even though the taxpayer may remain liable to indemnify the purchaser or assignee if the debt should prove to be uncollectible. If you use a factoring company, where you sell off your accounts receivable (customers who owe you money) then you wouldn’t be able to write off the debt as bad until the factoring company reassigned that debt back to you. This would also apply if you have assigned the debt over to a collection agency. Once the collection agency has determined the debt absolutely uncollectible then you can claim the bad debt as a business expense.

As with anything to do with the CRA, you must have proof, and the same goes for bad debts. You can’t just say that the debt is bad and write it off. You need to show a trail of letters, emails, etc. that prove you have tried to collect the debt (of course, you need to have the actual invoice too).

You determine what bad debts you have at the end of your fiscal year. Look through your customer accounts and decide, which accounts you are not going to be able to collect. Have you really tried to collect the debt? Have you kept an audit trail of your attempts to collect the debt? If you’ve done all that and it still appears not to be collectible then by all means write it off.

Allowance for Doubtful Accounts

You may find at the end of your fiscal year there are some accounts, which you think you may not be able to collect; however, as per the rules you can’t just claim a bad debt because you think it may be uncollectible. In this case you can claim a reserve for doubtful accounts. For example, you have $10,322.50 in invoices that you think you won’t be able to collect. In this case you claim a reserve for this amount, or lower, in the current fiscal year. If you do happen to collect them during the next fiscal year, you just reduce this reserve by the amount of that particular debt.

However, any doubtful account reserve claimed in one taxation year, must be included in income in the next fiscal year, even if the debt wasn’t collected. Basically, you’d take the leftover reserve as income and then write-off the debts completely as bad debt to get rid of the reserve. It’s basically a neutral effect on your bottom line.

You must establish that a reserve for doubtful debts is reasonable in amount, it is necessary to identify the debts that are doubtful of collection having regard for such indications as the period of arrears or default, the financial status and prospects of the debtor, the debtor’s past credit record both with the taxpayer and, if available, with other creditors, the value of any security taken and any other factor that is relevant in judging the debtor’s ability or willingness to pay.

Don’t despair that you have uncollectible accounts, as you get to write those debts off eventually. You do have to be careful though as a debt may be thought to be bad by you, however, CRA may have a different idea. You need to do your due diligence when it comes to customer debts, and that you keep a paperwork trail.

Tidbits – What information do I need from a new hire?

By Randall Orser | Small Business

Hello I am New Nametag Sticker Rookie TraineeYou’ve taken the plunge and brought on your first employee. Congratulations! Now, the fun starts. There is certain information you must get from every new employee before they get their first paycheque. It’s vital to have this information so you can ensure they are authorized to work in Canada, and you take the correct deductions. The two vital pieces of information to obtain are the Social Insurance Number (SIN) and a TD1Personal Tax Credits Return.

Social Insurance Number (SIN)

Every person who is working in Canada must have a Social Insurance Number (SIN) card, and must present this to an employer upon request. Ensure that the name on the card matches the name they have given you (don’t laugh as this has happened to a client), and take a photocopy of the card (front and back) and keep it in their employee file. Also, ensure you make a correct note of the SIN in your accounting files, or payroll service provider has the correct number. This is important for future when the employee goes on employment insurance, retires, or for his RRSP contributions each year.

What if the employee refuses to give you his or her SIN or to apply for one? You should be able to show that you made a reasonable effort to get it. What is a reasonable effort? After asking your employee for his SIN many times, you decide to contact him in writing to request his SIN. Record the dates you asked him, and keep a copy of the written request and any other related correspondence. If after all this the employee still refuses to give you a SIN, then I’d terminate them. You must also file an ROE and a T4 for this person, and indicate, when you file either form, that the employee refused to give his SIN. An employee who refuses to give his or her SIN may also be subject to a penalty of $100 for each failure.

If the employee doesn’t have a SIN, then you have to tell the employee how to get a one. Refer them to their Service Canada Office within three days of the day they start work and ask them to provide you with proof of application as well as to show you their SIN card once they receive it. Again, photocopy the application and put it in their file along with a copy of the SIN card once it arrives.

Even if you cannot get your employee’s SIN, you are still responsible for calculating deductions and filing an information return by the due dates.  If you fail to deduct or file your information return, Canada Revenue Agency (CRA) may assess penalties.

TD1 Personal Tax Credits Return

TD1, Personal Tax Credits Return, is a form used to determine the amount of tax to be deducted from an individual’s employment income or other income, such as pension income. There are federal and provincial/territorial TD1 forms. Individuals complete the forms and give them to their employer or payer who should keep the completed forms with their records. Do not send CRA a copy.

Who should complete this form? Individuals who have a new employer or payer have to complete the federal TD1 and, if more than the basic personal amount is claimed, the provincial or territorial TD1. Individuals do not have to complete a new TD1 every year unless there is a change in their entitlements to their federal, provincial or territorial personal tax credit amounts. If a change occurs, they must complete a new form no later than seven days after the change.

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, enter “0″ on line 13 ‘Total Claim Amount’ on the front page and should not complete lines 2 to 12.

Ensure that the employee fills out the form completely and accurately, and signs the form. The employee can use the TD1 to request additional tax be taken off, especially if they have other income.

Once you have these two important pieces of information, you’re good to go and can now start paying your employee. Remember, if there are ever any changes to ensure the employee tells you, that you get the required copies, and get everything in writing.

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’.