MRSB accounting technician Bev MacLaren reminds readers of the importance of keeping those reciepts and records for when you'll need them - and you will need them
Have you heard of the Six Year Rule? The Canada Revenue Agency (CRA) requires you to keep copies of all business records and your personal income tax records for six years from the end of the last tax year they relate to. If you file your taxes late, it is six years from the date of filing. And the Six Year Rule is only a minimum; there are of course times when documents will need to be kept longer. You should refer to the CRA rules for specific circumstances.
Anyone who wants to destroy tax documents before the six year retention period must first complete form T137, Request for Destruction of Books and Records with CRA (yes, they have a form for that) and check with your province as each has its own form. What happens if you destroy records without gaining permission and get caught? According to CRA, you can be prosecuted for doing so.
Apart from tax forms, what should you keep in the way of receipts and documents, and for how long? You should hold on to personal records such as utility bills, property tax statements, bank statements, credit card statements and so forth for a year. Items like insurance policies, loan papers and contracts should be kept for the term of the document. You should never destroy birth certificates or wills. I recently learned myself that, if you purchase an item with a lifetime warranty, it is best to keep the receipt!
Keep your records organized and in a cool, dry place. A plastic tote is a good investment to keep out dampness and critters. If your documents have been destroyed in a disaster you should call the CRA; they have a telephone number just for this situation, which shows you just how important it is to keep documents safe.
For more details see the CRA website: http://www.cra-arc.gc.ca/tx/bsnss/tpcs/kprc/rtntnl-eng.html
MRSB partner Lloyd Compton, CPA, CA, CBV explains what you can do to make sure your business is ready for sale in 2, 5 or even 10 years and how valuing your business NOW can help you increase the proceeds from its sale down the road.
I believe a business valuation is as important for a business owner as your bookkeeping and financial statements. Just as you watch gross margins and monthly income statements to identify problems that will impact your profit, understanding your business value can help you manage this value and will also influence how much of it you get to keep following a sale. For most owners, there may be specific actions you can take that will increase value. Take the example of selling a house: a little elbow grease will not only make it more attractive to potential buyers, but you also get a nicer house to live in until it sells.
Business valuation is not a math exercise where entering the right combination of numbers and figures will result in the correct answer. Each business has its own strengths and weaknesses relative to other businesses. Each of these strengths and weaknesses affect the inherent risk of your company, compared to other companies or compared to other investment alternatives for a potential buyer. The components of company-specific risk can either be detractors of value or drivers of value. So how do you look at your company now with a view to influencing what it will be worth later on?
Take stock of what you have, and what you have but don't need
Take a good hard look at what your existing assets are and ask whether they directly contribute to the income of the business. You may be able to remove or sell certain assets such as excess land or redundant equipment without affecting the income earning ability of the business. Similarly, do you have any intellectual property or promising technology that you need to secure the rights to?
Now look at your liabilities. You may be able to improve the future cash flows of the business by consolidating debt and locking in lower interest rates, even if there is a penalty for early debt retirement. What about unresolved lawsuits? It may be worth it to settle these or bring them to a head prior to listing. Uncertainty is risk and risk will affect your business value. In a nutshell, tidy up your balance sheet. Like most things in the world, simpler is better.
Get reacquainted with your industry and your competition
You undoubtedly have a very good grasp on your business, your industry and your market. However, we all become complacent over time. You may not view your business, industry outlook or your company's position in the market in the same way you might if you were a prospective buyer. Is the industry a stable one? Is the market declining, mature or growing? How much competition is there and what are your company's strengths and weaknesses versus the competition? What changes are taking place, such as globalization or technology advances, and are you keeping up? How are your relationships with your customers, suppliers and bankers?
As business owners, we tend to focus more on our strengths or our 'value proposition'. But focusing on our weaknesses gives us something to work on, where we can take actions that will positively affect our value down the road, and gives us a better company in the interim. Buyers want businesses with stable earnings but will pay a premium for companies with stable earnings and growth opportunities. For many buyers, the growth opportunity is more important than stability of earnings.
Find new sources of revenue and minimize expenses
For several years leading up to your exit, you should look for ways to steadily increase revenue and reduce unnecessary expenses. Admittedly, this is an incredibly obvious statement. However, paying special attention to recurring sources of revenue will increase your value. Buyers will pay more for annuity revenues than for sales that they will have to work to generate themselves.
No one likes to pay tax. Some owners like to run every possible expense through the business to save corporate income tax. Most common are wages to family members in excess of the true market value of the service that they provide for the business. While this may be a means of employing someone and saving tax, it can be a fly in the ointment when it comes time to value the business or sell. While this can be adjusted for in a valuation exercise, keeping the income statement 'clean' removes any doubt on the part of a buyer and eliminates one major item that needs to be explained, justified and negotiated.
Let your employees shine
If you find that you or one of your co-owners tends to be the beacon to which all business flocks, this is a problem from a value perspective. Allowing one person to 'be' the business can set up an untenable situation for future sale. Consider training other staff to do what you do so that operations will look just as attractive to potential buyers, with or without its current shining star. Go on vacation and see if the business can survive or thrive in your absence. A strategic plan can also be an excellent way of coming together as a team to discuss and set future goals for the business and how individuals within the business can take on added responsibility in implementing change.
Perhaps the main message in all of this is that, by understanding the factors that impact the value of a business, and by looking at your business now as a buyer might, you will be able to make improvements well in advance of negotiations for a sale. As an added bonus, just like a nicer house to live in, you will enjoy a stronger, healthier business until it sells.
Earlier this year, MRSB decided we would take on a major charity to support throughout the year. We unanimously chose the Children's Wish Foundation, a wonderful organization that raises money so that sick children can have their greatest wish granted (a backyard playground, a trip to Disneyworld or meeting a favourite celebrity are all popular choices!).
From August 14th until September 17th, the MRSB team will be hosting an online silect auction to raise funds for Children's Wish. By simply visiting our Facebook page during this time you can view available items and place your bid using the comments feature. The schedule of donated items includes Island photgraphy, baby items, pottery, school supplies and a handcrafted child's vanity.
100% of the proceeds from our auction will support Children's Wish. The more bids we get, the more funds can go toward helping a child's wish come true.
Our Tax Services team gives the nitty-gritty on how your annual financial obligations change once you become your own boss
Tired of working for someone else? Think you could make more money doing what you’re doing now but as an owner? Many people get the urge to become their own boss, but before you take the plunge, there are some important changes to consider.
Running your own business, whether as a shopkeeper or a graphic designer, means you need to be more than an employee doing just one job. Now you will need to be the bookkeeper, accounts receivable collections officer, HR consultant, business manager…the list goes on. At least until you become big enough that you can hire people to do these jobs for you.
From a financial perspective, one of the biggest changes you will face when starting out as a self-employed individual is how the Canada Revenue Agency (CRA) treats you. Things will be different for you in the tax and accounting world, and it’s better to prepare for these changes up front than to be unpleasantly surprised when tax season comes.
Great (income) expectations
Everyone who works for someone else in Canada files their income tax return based on employment income. When you are self-employed you pay taxes based on your own business profits. Per the CRA website, “Business income includes income from any activity you carry out for or with reasonable expectation of profit.” The last part of that sentence is the big kicker. You are obviously in business for a profit, but the main reason for this definition of business income is to avoid people who have hobbies and who sell small amounts of their goods at a financial loss. For example, someone who likes to create art as a hobby at home and sells the odd item to friends is a hobbyist and wouldn’t claim taxes as an operational business. Even if this year they sell 20 more pairs of mittens than last year, it still isn’t enough to classify as business income. But this is not a hobby for you; you are investing all of your time and energy into your business, and you surely plan to make a profit. So when it comes to paying taxes on these profits, the lowest tax bracket for Prince Edward Island residents is 24.8%. Keep this in mind before you spend all of your newly-earned money!
When working for someone else you typically do not claim expenses because for the most part the employer pays for everything. Of course there are exceptions, including use of your own vehicle or using your home as an office space, even though your wage is paid by the company. In these cases, employers sign a T2200, which is a declaration of conditions of employment for the employee and allows him or her to claim expenses that are required as part of their job.
When you are self-employed you can claim all expenses, like a home office or supplies, without having to get the T2200 form signed. While some expenses are clearly business related, such as advertising, others fall into a sort of grey area. Perhaps you use a room in your house to meet with clients occasionally; maybe you use your SUV for both business and personal use. What if you take a business trip to California but extend your stay so you can visit family? The CRA has guidelines for business owners to help determine what they can deduct as an expense and it is important that you follow the rules in case an auditor
decide to drop in for a visit! Visit the CRA website for more information: http://www.cra-arc.gc.ca/tx/bsnss/tpcs/slprtnr/bsnssxpnss/menu-eng.html
As an employee you are typically not expected to track income or expenses; that’s your employer’s job. As your own boss, however, you are required to do this yourself or to hire someone to do it for you.
You will need to track incomes and expenses, both for yourself and any employees, so that everything is accurate come tax time. If you do have staff working for you, you will be in charge of tracking their hours worked, remitting payroll deductions and preparing annual T4 slips for them at the end of the year.
The better your record-keeping, the smoother your operations will run. By keeping a handle on all business records you will be able to assess your profitability in a timely manner, instead of scrambling to find the right information when something goes wrong. And if the CRA ever decides to audit your business or a part of it, you will thank yourself immensely for being well organized.
Once your sole proprietorship starts growing it may be time to hire an employee or two. Employees incur additional costs, even outside of their wages or salaries. The two main costs to you as owner are the employer portion of the Canada Pension Plan (CPP) and the employer portion of the Employment Insurance (EI). As an employer you are required to pay CPP and EI benefits based on how much the employee makes during the year.
Other payroll costs to take into consideration are worker’s compensation, health and dental benefits and pensions plans. These costs should be considered in your business plan or budget, as they can add up over time and have a large impact on your bottom line during the course of a year. In a nutshell: only hire employees when you really can’t do without them!
Harmonized Sales Tax (HST)
If your business becomes large enough you must register for an HST account, which means you must collect HST on sales of goods and services that you provide to customers. You are also able to claim the HST on purchases you yourself make for the company. There are two options for becoming an HST registrant:
- You voluntarily register for HST when you start your business. Many people do this so that they can claim all HST on purchases while starting their business;
- You register for HST if and when your gross sales exceed $30,000 in any 12 month period. Once you hit that $30,000 revenue mark you are deemed to be registered for HST and must begin charging it on all customer sales. CRA has a great example of how the 12 month period works for beginners: http://www.cra-arc.gc.ca/tx/bsnss/sm/gsthst-tpstvh/rgstr-eng.html
Deciding whether to register for HST right away or wait depends on what kind of sales cycle you have, what you’re selling and how quickly you expect to reach $30,000/year threshold.
Be ready for the income tax bill
Remember when we said that, as an employee, the CPP, EI and income tax are taken off your pay before you get your pay cheque? This means that at tax time, you generally shouldn’t owe any money, or very little, at the end of the year. You might have even received a refund!
You must pay into CPP whether you are an employee or self-employed. If you are an employee in Canada your employer covers half the CPP cost and you pay the rest. However, as an owner you are technically both employer and employee, so you must cover 100% of the cost. The amount you will pay is based on your business profits after expenses. If you make more than $53,600 (in 2015) net income, you would pay an additional $4,960 at tax time for CPP alone. In PEI, if you make over $3,500 you must pay into CPP.
Another additional tax cost that you’ll have to worry about as your own boss is the income tax on your profits. In Prince Edward Island, if your net income as an employee is $53,600, the combined federal and provincial amount owing would be $11,000 (before any applicable credits or deductions). Your employer would typically deduct this from your pay bi-weekly/monthly, but when you work for yourself, no taxes are automatically withheld, so it’s up to you to pay what you owe.
The importance of planning for your new tax obligations as a self-employed individual are fairly straightforward; fail to do so and you may feel the consequences in the form of a painful tax bill, and no one needs a surprise bill at the end of the year, seeing as you’ll be facing many new expenses as an owner already! So be smart about it: set aside some of your income each month for taxes so that when April rolls around, you are ready, and still have some cash in your pocket.