The tax side of starting your business

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1 The tax side of Ashley Didone, CPA, CA, LPA, BAcc Collins Barrow KMD LLP 495 Richmond Street, Suite 700 London, ON N6A 5A9 T: F: Collins Barrow KMD LLP 6 Front Street Strathroy, ON N7G 1X4 T: F:

2 Starting your business Starting your business is a very exciting time with lots to think about. The following is a summary of things to consider each step of the way. Let s take the stress out of the tax side of starting a business! At this point you have taken your business plan and put it into action. As you are starting up it is important to start thinking about exciting things like: record keeping, registering for payroll or HST, income taxes and more! Defining your capital assets Take a look around your workspace; do you see a computer, desk, chair? These assets and others that you are using for your business can be used to reduce your tax! Take an inventory of everything that you are using in your business that was purchased previously. Beside each of these items include the fair value (ie. what would you pay for the same item if it was purchased today). You have now made your initial list of assets in your business. From here on out keep track of all new asset purchases that are used in your business. When determining if your purchase is capital in nature, ask yourself: does this purchase provide benefits to my business for more than one year? If the answer to this question is yes, each year on your tax return you can deduct a portion of these assets at CRA established rates. This deduction is called capital cost allowance (CCA). Home office deduction If you have an office in your home for business and meet the qualifying criteria you can deduct a portion of your total utilities, mortgage interest and property taxes or rent. Each time you get one of these personal invoices, put them aside in a folder for easy locating at tax time. CAPITAL COST ALLOWANCE (CCA) CCA is a way to deduct the cost of your assets over a number of years based on the rates allowed by the government It is possible to claim CCA on assets that you might already own and are now using in your business computer, printer, shelving, desk, etc. Transfer to business at fair value Assets are written off over a number of years to reflect the decline in their fair value DO YOU HAVE AN OFFICE IN YOUR HOME THAT YOU USE ON A REGULAR BASIS FOR BUSINESS PURPOSES? You can deduct a percentage of the house expenses related to the office Expenses to include are utilities, property taxes, rent, mortgage interest If registered for HST; be sure to claim your HST paid on these expenses as an input tax credit (ITC)! 2

3 Can I write off my vehicle? Another perk of running your own business is that you can deduct a percentage of your vehicle expenses related to business travel. Vehicle expenses can include gas, repairs and maintenance, license, insurance, lease payments 1, CCA of your vehicle 1 and interest payments 1 on a vehicle loan. It is important to keep copies of all your receipts to substantiate these expenses. To claim these deductions you need to keep track of your personal versus business kilometers. Use of a mileage log is very helpful. I recommend keeping a small notebook in your car and recording all of your business trips as you make them. Also note your starting kilometers and ending kilometers on your odometer for the year in your book; this will give you the total kilometers driven in the year. Only the business portion of total kilometers driven in a year is deductible. ARE YOU CLAIMING YOUR AUTO EXPENSES RELATED TO BUSINESS? You can deduct a percentage for your vehicles expenses related to business travel Expenses to include are gas, repairs and maintenance, license, insurance, lease payments, CCA, interest Keep your parking receipts from business trips to write off in your business 1. Subject to a maximum set by Canada Revenue Agency What other items can I write off as a business owner? Generally speaking any expense you are paying to earn business income is deductible. It is very important to keep all receipts to substantiate each business expense. The following is a list of common business expenses that you should consider: Advertising Product samples used in business Promotional products and giveaways Memberships, dues and subscription fees Delivery or freight paid for goods used in business Insurance Legal and accounting fees Business related travel expenses; including transportation and accomodation for out of town trips Allowable convention expenses Parking and 407 ETR fees for business travel Allowable portion of business meals and entertainment (typically 50%) Office supplies Salaries and wages Personal Assistant Telephone and internet 3

4 How do I manage my business transactions? If you haven t done so already it would be prudent to set up a separate bank account and credit card for your business transactions. These accounts do not have to be business accounts in bank terms, but separate accounts from the ones that you use for personal income and expenses. This will allow a clear separation of what is business and what is personal. What happens when you are out and forgot your business credit or debit card? It is ok to charge a business expense to your personal card. The important thing is to remember that you made a business expense personally so you can record it and get the tax write off. When you get home make note of this expense to ensure it is not forgotten as a business deduction. Alternatively keep a separate folder for business expenses paid personally to ensure they are captured when you file your tax return. Record keeping You have now set up your bank account and credit card, things are happening in those accounts, but HOW DO I KEEP TRACK?? There are many different methods of keeping records. Two of the most common methods for small businesses are using excel workbooks to manually keep track of expenses or using an off the shelf accounting software package. The size of your business and complexity of transactions will determine which method will best suit your needs. If you have payroll, using accounting software with payroll capabilities is strongly suggested, as these programs integrate the current tax tables. It is a good idea to get into the habit of recording all transactions and reconciling your accounts at least monthly to stay on top of your accounting records. Depending on the number of transactions in your business, more frequent recording may be necessary. Keeping up to date records will allow you to have up to date financial information on an ongoing basis. This is helpful to see how your business is doing and make any adjustments to your business model. It can also be useful if you are seeking financing and the bank requests financial information. RECORD KEEPING 101 Best practice: Keep separate bank accounts for personal and business Keep separate credit cards for personal and business Keep copies of all receipts Keep up to date records (excel workbooks, accounting software, etc.) Keep track of business expenses paid personally Keep a mileage log of all business KM s Why: Record keeping allows the ability to track the profitability of the company Allows the ability to make changes to pricing or reduce unnecessary costs Allows the ability to monitor the impact of decisions Allows for communications with financial institutions Compliance with tax legislation TIP: You can download your bank statements and credit cards directly into your accounting package or excel. As a good practice, organize your business receipts and invoices into monthly folders to ensure that all the income and expenses is accounted for on regular basis and all the documents are available if the government were to ask for proof. 4

5 You are growing! As your business is growing it is time to start thinking about some government remittances that might apply to your business (tax instalments, payroll deductions, etc.). It is a good idea to set up recurring calendar reminders to ensure that you are making all your remittance payments to the government on time. If payments are late, interest and penalties can accrue on the balance owing. The penalties and interest paid are not a deductible business expense, so you want to avoid them! Do I need to register for HST? If your taxable sales exceeded $30,000 in the current quarter or over the last twelve months, you will need to register for a HST number and start collecting and remitting HST to the government. Once you are registered you are also eligible to claim back all HST paid on business expenses as an input tax credit (ITC). So what is a taxable sale? Generally any revenue from the sale of goods in Canada (whether made in Canada or imported) and revenue from providing services in Canada is a taxable sale. If you are earning income from another country you should confirm with your tax advisor if the income is considered a taxable sale or zero rated sale, to ensure you are collecting and remitting HST appropriately. WHEN TO REGISTER FOR HST? Are your taxable sales over $30,000 in the last quarter or in the last twelve months? If the answer to this question is yes, then you are required to register for HST. What is a zero-rated supply? Zero-rated means that the taxable supply has a rate of 0%, therefore no HST is collectible. Examples of zero-rated supplies include: basic groceries, agricultural products, prescriptions and exports. What is an ITC? An ITC or Input Tax Credit relates to the HST you paid on purchases. When you file your HST return you are able to get 100% of the HST paid on eligible purchases refunded as an ITC. Does it make sense to register before you are required to? If your sales are zero-rated you are still able to get a refund of 100% of the HST you paid on all eligible purchases if you are registered. If you are not registered you cannot claim back any of the HST you are paying. If you expect your taxable income to exceed $30,000 in the future it might be advantageous to register now to get back 100% of your HST paid on purchases. Keeping in mind that once registered you must collect and remit HST on all sales, even if you are under the $30,000 threshold. 5

6 Do I need to register for payroll? Are you thinking about hiring any staff to help run your business? You need to register for a payroll account business number prior to your first payroll. Once you are set up for payroll you will need to collect and remit taxes on behalf of your employees. This is typically done monthly but can be more frequent based on the size of your payroll. As an employer the business is required to match each employee s CPP contributions and also match 1.4 times each employee s EI contributions. The employer portion of the payroll taxes are deductible business expenses. Filing my Tax Return As a self-employed business owner you have until June 15th to file your return; following the year you are reporting on. However if you owe tax your payment is due by April 30th! In Canada you are taxed on your worldwide income at graduated rates. That means the more you make the more they take! As you are growing you should also start thinking about putting money away for the personal taxes you will owe on April 30th. To make matters even more complicated, once you have taxes owing greater than $3,000 (i.e. you have net business income over approximately $15,000) you will also be required to start making instalments for your next year s tax liability. This is a prepayment to the government for an estimation of your taxes owing in the next year. For example, you owe $5,000 on April 30th. If previously you weren t required to make instalment payments, you will need to make an additional payment of $2,500 in September and $2,500 in December of that same year. Therefore you are paying $10,000 in taxes in one year. As the example above illustrates, the first year you are required to pay instalments you will be paying two years tax liabilities in one year. Proper cash flow planning will help to ensure taxes are paid on time. There are a lot of government remittances to keep on top of for any business, therefore it is important to keep an organized calendar of payment due dates. Organization and cash flow planning are key! NOTE: You must register for a payroll account number prior to your first payroll. Canada Pension Plan (CPP) The contribution for an employee is 4.95% 1, subject to an annual maximum. The employer portion is the same. Basic exemption is $3,500. Employment Insurance (EI) The contribution for an employee is 1.88% 1, subject to an annual maximum. The employer portion is 1.4 times the employee portion. 1. Rates quoted are based on Federal rates in effect for 2016 Other Considerations: Depending on your business you may have to also remit payments to the Workplace Safety Insurance Board (WSIB). TIP: Use calendar reminders for important dates so government remittance payments are not forgotten. 6

7 Is it time to incorporate? From a tax perspective, if you do not need to use all of your annual income to pay debts then incorporating might make sense. Qualifying small business corporations in Canada will pay 15% 1 tax on the first $500,000 of net income. If you are able to leave some of your annual income in the business, there is a possible tax savings. The initial set up of a corporation will involve legal and accounting fees. Going forward there will be accounting fees to prepare and file your corporate tax return each year. This corporate tax return is required to be filed in addition to your personal tax return. It is important to keep these additional costs in mind when considering incorporating. Once incorporated and your personal business is transferred to the corporation; you personally will not be taxed on the income the business generates. You will now be taxed on any money that is withdrawn from the corporation, in the form of salary or dividends. Your trusted accountant can advise you on the advantages of incorporation specific to your business and guide you through the incorporation process. 1. Tax rates quoted are based on the Ontario and Federal combined rates for INCORPORATION makes sense if you can retain income in the business CONSIDER: Qualifying small business corporations are taxed at 15% 1 on the first $500,000 of income (vs % 1 top marginal rate personally)! Advantages of Incorporation: Income splitting Income tax savings Legal advantages Succession planning Capital gains exemption NET INCOME = REVENUE EXPENSES 7

8 Next Steps The tax side of can be overwhelming with lots of things to consider. Your accountant should become your most trusted business advisor and should help you get the most out of your business. Ashley Didone, CPA, CA, LPA, BAcc Partner ext