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Starting Your Small Business (Part 1 of 4)

Do you think it’s time to strike out on your own and start your small business? It’s one thing to have an idea, and it’s another thing to put that plan into motion and start your business. For most entrepreneurs, taking the first steps to creating your business can be one of the most challenging processes along the way. Read the top questions we ask individuals when they are considering starting their small business.


1. What Kind Of Business Are You Starting?

The very first step you take before you start your small business is to decide how committed you are to it.  Are you prepared to quit your full time job and devote your full time attention to it?  If you want to start slowly (and that’s ok!) and work on your business part-time, it really changes the commentary that follows. Assuming you’re going to make this business your full time job, one of the first things you’ll need to decide is how you are going to structure it. Should you incorporate your small business or start off as a sole proprietor? Click here to read a thorough explanation of the pros and cons being a sole proprietor or incorporating as a small business. Do you still have questions? Contact Kent Accounting for a one-on-one consultation, to make sure you start your new venture on the right foot.

2. Getting Off the Ground

What Are You Willing To Risk: When I first started my business, it was humbling to reach into my personal bank account, withdraw $50,000… and then spend it on cards, furniture, website, etc.  You’d be amazed at how fast $50,000 disappears when starting a business. More than once I had thought about the other things I could have purchased with that money. Furthermore, most businesses require anywhere from $150k – $300k of startup funding to pay for key equipment, leasehold improvements and other necessary business items.  If you’re going to borrow that money from a bank, they will want a personal guarantee (i.e. they take everything you have, including your home, if you don’t pay them back). Are you certain you’re willing to risk it all? Be certain before you move forward.

Do you need additional investors for capital to get started? If you do, you’ll need a well-written contract or agreement in place before you accept funds, and you’ll want a solid plan for accountability regarding how you’ll use those resources. Kent Accounting can make sure you maximize the investments your partners are making. Talk to us today about how to organize the financial aspects of your business plan.

Business Development: Every business owner is first and foremost a salesperson. Can you sell your product/service? Do you know who will buy your product/service? Sales and marketing should be covered in detail in your business plan, which is discussed more in the next point. I separate it here to draw attention to the importance of clients. A business is nothing without its clients.

Write a Business Plan: There are a million clichés about why having a plan makes sense, but I’ll keep it simpler than that — any business that I have come across that was struggling had no actionable business plan. While a plan in and of itself doesn’t guarantee success, it is my opinion that the absence of a plan dramatically increases your odds of failure and/or creating a business you don’t actually want. The latter is the more concerning; I have met many entrepreneurs who work 60+ hours a week in their business and they are not happy with what they get out of the business (i.e. crappy clients, poor pay, etc). Furthermore, they are trapped in their business due to large debts that have personal guarantees attached to them. I will be writing a separate blog on what to put into your business plan.

Quality Control: How can you ensure you are delivering the services you are offering in a timely and professional manner? How can you ensure that the services you’re offering are the high standard you’re setting for yourself? What hiccups or roadblocks can you foresee in accomplishing that?

Customer Service: Who’s doing the basics, like answering the phone calls, responding to emails and checking the mail each day? These might seem like small parts of your daily routine, but once your business gets off the ground and you start getting busier, these customer service jobs might get lost in the bustle. Be sure you have a team member in place from the start to handle your incoming inquiries and basic day-to-day operations. For more information on how to set up your small business, contact Kent Accounting.

What Kind Of Licensing Do You Need: Your business could need a municipal, provincial, or federal license (or all three). For example, if you’re looking to provide health and beauty services, care for children, or serve food, a municipal license is a must. Spend time researching and understanding if your business requires specific licenses, certifications or permits to operate.

Liability Insurance: Keep your assets and property safe from any potential damages or obligations that could occur from your business. If there is an accident, or someone gets hurt on your jobsite, liability insurance will help keep your business and personal assets protected.

If you read the above and feel a little overwhelmed, then you’re in good company. I think that any entrepreneur who is being honest would tell you that starting a business is not easy and involves a great amount of uncertainty. That said, it is also one of the most rewarding experiences a person can experience. At Kent Accounting, we help folks get going and operate highly successful businesses. Would you like to chat? We offer everyone a free hour of time, so give us a call and we’ll help you any way we can.

 


Disclaimer: Tax and legal rules change frequently and can depend on your individual circumstances. The above is not to be relied upon as legal nor tax advice and is meant for information purposes only. Please consult a legal and/or tax professional.

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Starting Your Business – Federal Tax Accounts

If you are considering starting your own business, now is certainly an exciting time to be joining the hundreds of thousands of Canadians who are currently business owners. One of the first steps is deciding how you want to run your business and understanding the accounts you’ll need to set up. Today’s blog will cover a few important choices you’re going to have to make!


Deciding on a Legal Structure

Before we begin discussing tax accounts, you’ll need to choose a legal structure for your business; make sure to get properly informed on the various options. There are many ways to structure your business — the two most common are as a sole proprietor or as an incorporated business.

Sole Proprietor: As a sole proprietor, you are your business, from a tax point of view. Business income/expenses are reported on your personal income tax return; there is no ability to defer income tax. If your company loses money, those losses can typically be used as deductions against your other sources of income (i.e. you get a tax refund). Note that there are rules to follow here, so make sure you know what they are. (The rules are too lengthy to describe here.)

Incorporated business: As an incorporated business, you and your business are two separate legal entities. This results in a variety of distinctions, two of the most important ones being that you have to file a separate tax return for the company, and that you add a legal buffer between you and the work your company does. As your business earns money, you may leave money in the business or take the additional funds as salary or a dividend. (See our blog on dividends vs. salary.) Any business losses remain in the company to offset future earnings, but if you never earn a profit, these losses are ‘trapped’ in the company.

Business Number

Your next crucial step is an easy one. Regardless of whether you choose to operate as a sole proprietor or as an incorporated entity, you will need a Business Number (which operates like a social insurance number for your business). You can get one easily by phoning the CRA (1.800.959.5525). Make sure you have your business name, address, nature of your business, account types (which we will discuss below), phone number and Articles of Incorporation (if applicable) in front of you before you call. Want to double check you have everything you need before you call the CRA? Set up a time with Kent Accounting so we can ensure you’re completely prepared.

GST Account

Almost every business requires a GST number, although there are a few exceptions. Unfortunately, the rules are quite complicated so it’s hard to give simple pointers here — you’ll need to either read the rules or contact a professional. To find out whether your business needs a GST number, call Kent Accounting and book a consultation. As a rule of thumb, you are required to collect GST once your business makes $30,000 worth of sales in a single year, and since many new business operators don’t know how much they will make or when, it is best practice to register for a GST number as soon as you begin operations. At the time of this blog post, Alberta has GST and not PST/HST. However, other provinces have PST and HST; if you plan to sell in other provinces, ensure you understand the rules on collecting and remitting. Like any federal tax, GST returns must be filed annually. Filing deadlines depend on when you register for your GST number and what revenue volume you anticipate. If you fail to file your return and make the GST payment on time, it will cost you interest and penalties.

Corporate Income Tax Account

This applies to those small business owners who have decided to incorporate their business. As you’ll be filing a separate annual tax return for your business, it will need its own income tax number, and these taxes must be filed both provincially and federally. Your corporate income taxes are due within six months of your fiscal year end, and a failure to file and pay can flag you for an audit.

Payroll Tax Account

Issuing payroll cheques has taxation requirements, starting with registering for a payroll account. Registering for your payroll account (or closing your payroll account) is as simple as contacting the CRA, and we suggest registering before you hire any employees, so it is ready to go when you start bringing on staff.

A word of caution: be organized with payroll. If you don’t know what you’re doing, STOP and either read the rules or contact a professional. The CRA is very punitive with payroll errors and/or late remittances; it is common to incur financial penalties as a result. One point we cannot stress enough is to not to be late with your remittance — payroll withholdings are the CRA’s money, and they want it in a timely fashion. Remittances are generally due on the 15th of the month, following the payroll payment. If your payroll exceeds certain thresholds, the remitting frequency will be accelerated. The first time you are late with a payment, it’s a 10% penalty. The second offense is a 20% penalty. If your payment is due on the 15th and you make it on the 16th, it’s considered late, and the CRA will not ‘give you a break.’ Finally, payroll accounts require that you issue T4s to all your staff. If payroll seems overwhelming, contact Kent Accounting to find out more about our payroll services.

Import/Export Account

If your business includes importing and exporting goods across the border, then you’ll need to set up an Import/Export Account. If you are planning on using a customs broker, you might not need an Import/Export Account. Not all goods are allowed into Canada, so make sure you determine their eligibility before putting significant efforts into your business. And finally, there are duties and tariffs associated with importing and exporting goods — know the tariffs and duties before you get started. Failure to adequately consider these costs in your pricing could cause real challenges.


Disclaimer: Tax and legal rules change frequently and can depend on your individual circumstances. The above is not to be relied upon as legal nor tax advice and is meant for information purposes only. Please consult a legal and/or tax professional.

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Paying Yourself: Salaries vs. Dividends – Part Two

The Pros and Cons of Salaries

Today’s blog is the second of a two part series on paying yourself as a Small Business Owner — should you pay yourself a salary or in dividends?

In part one of this two-part blog, I examined the benefits and drawbacks of compensating yourself with a salary; this second analysis will provide a breakdown of dividends. Click here to read part one!


So what are the ins-and-outs when, as a small business owner, you decide to pay yourself via dividend?  Here are some of the pro’s:

It’s simple: when you need money, just write yourself a cheque.  There are no source deductions to make and no reports to send to the government.

Lowest tax in the short term: with dividends, you do not pay into the Canadian Pension Plan (CPP). CPP contributions in 2017 are $2,564 for the employee and an additional $2,564 matched by your employer (i.e. your company), so your annual tax savings here is $5,128…a nice little weekend get away!

Depending on how you think about CPP, this can be a good thing or a bad thing. Generally speaking, if you don’t pay into the CPP program, you don’t get any pay outs once you retire. Some folks think that CPP won’t be around when they retire in 30 years, so they don’t want to pay into it.  Our opinion is that CPP is here to stay and provides a good safety net if your business unexpectedly fails.  Paying $5,128 per year into an investment portfolio for 45 years (the average working life of a person) and then being entitled to receive roughly $1,200 per month until you pass away is a very reasonable return on your investment.  Are you sure that you can do better than this investing the money yourself?  Not paying CCP premiums is the primary reason that the tax rate differs between salaries and dividends.  When CPP is ignored, the tax rate is nearly equivalent between salaries vs. dividends.

You can pay inactive persons: income splitting is a powerful tax management strategy.  Currently, you can pay shareholders (i.e. your spouse, your brother, anyone that owns shares in your company) a dividend even if they don’t provide any services to your company.  This allows you to direct income to lower income earning people and save a significant amount of tax.  Note, our liberal government is currently working to end this benefit.

Flexibility: we can easily change how much income we declare to you by having you repay any excess monies you withdrew from the company.  This can be helpful to manage your income tax rate in any given year.

There is always a downside. Here are some of the cons associated with dividends:

Surprise tax bills: depending on how much you withdraw from the company, you may have a tax bill the following April.  Your taxes could be as little as 0% or as high as 50%…it all depends on how much you withdraw.  MAKE SURE you talk with a qualified accountant before withdrawing more than $50,000 from your business.  Clients and accountants both hate surprise tax bills.

RRSP’s: you will not have access to the RRSP program.  RRSP’s are super important…in our opinion they are one of the best tax deductions available. We wrote a whole blog just on them for that reason (read it here).

Higher tax rate in the long term: generally speaking, you will end up paying more tax in the long run if you utilize dividends consistently over your lifetime, primarily due to the RRSP component described above. Please note that this depends on your personal tax circumstances and is not a universal truth.

Summing it all up, we generally take a mixed approach to the salary vs. dividend question.  This way we get the benefits from both salaries and dividends, while minimizing the downside.  While we would love to give you some specific instructions here, the “right” answer for you really depends on how much money you’re going to need over the long term from your business. Are you wondering what the best combination is for you? We offer everyone a free hour to discuss any questions that you may have. Contact us here.


Disclaimer: Tax and legal rules change frequently and can depend on your individual circumstances. The above is not to be relied upon as legal nor tax advice and is meant for information purposes only. Please consult a legal and/or tax professional.

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Paying Yourself: Salaries vs. Dividends – Part One

The Pros and Cons of Salaries

Today’s blog is the first of a two part series on paying yourself as a Small Business Owner — should you pay yourself a salary or in dividends?

You’ve started your own business and you’re finally starting to make some money — your suppliers and staff are being paid, as well as your bills, which means it’s time to take some money out for yourself. So, is there a difference between the money you earned while working for someone else and the money you’ll earn working for yourself? Not really — but there is a difference in how you collect that money. Today we’re talking about the pros and cons of taking a salary as a small business owner.

In terms of how often you get paid, there is no difference at all! Set yourself up to receive a pay cheque as often as your other employees do (for simplicity’s sake) such as bi-weekly, monthly or perhaps quarterly.

When it comes to writing the cheque, what’s easier? With a salary, you will have to manage payroll, which can be time-consuming and for many small business owners, a little overwhelming. Talk to Kent Accounting about our Payroll Service Bundles and take one more thing off your to-do list. As for overall money management, when paying yourself is a part of your monthly rhythm, it’s a lot easier to control and monitor how much you’re spending and how often you’re taking money out, as opposed to those who take money out of their business ad hoc.

In the short-term, taking a salary will mean you will pay a slightly higher tax rate. You’ll pay CPP (Canadian Pension Plan) and income tax off of every cheque (generally speaking, business owners and their immediate family members are exempt from EI). As a small business owner, remember not to be late with remitting your source deductions to the CRA, as there are penalties every time you are late (10% the first time you’re late, 20% the second time you’re late).  To avoid remittance penalties, contact Kent Accounting and let us manage your payroll services and your source deductions.


However, salaries give you some great tax advantages in the long-term — namely, the right to receive a pension when you retire and access to RRSP room.

CPP: by contributing to CPP, you gain eligibility to receive CPP payments starting as early as age 60. While the payout amount varies from person to person, many Canadians over 60 years receive approximately $1,200 per month. CPP is a savings safety net that ensures all Canadians can have a comfortable retirement.

RRSP:  salary also allows you room to contribute to your RRSPs (up to 18% of your calculated total yearly salary) with a maximum, in 2016, of $26,010.  When you contribute to an RRSP, you get a refund on any tax paid on the income you earned.  Many of our clients receive 30% or more back for each $1 they contribute… so a $10,000 RRSP contribution could get you a $3,000 refund. That refund would pay for a nice vacation for you!

Note that the refund amount depends on your total income for the year. Further, investments in an RRSP grow tax-free. Not sure what that means in terms of dollars and cents? It’s such an important topic I wrote a separate blog about it (click here to read it). RRSPs are considered by many to be the best tax deduction available to Canadians.

There are some rigid rules to salaries that can’t be discounted. With salaries, you can only provide pay cheques to people who have provided services for your company, so your salary is yours alone. Also, once you’ve reported your total salary to the CRA, there’s almost no flexibility in changing how much you earned for any given year, and that lack of flexibility can be challenging for some.

We strongly encourage you to discuss your remuneration with a qualified small business accountant.  Want to talk to us about it?  Contact us here.

 


Disclaimer: Tax and legal rules change frequently and can depend on your individual circumstances. The above is not to be relied upon as legal nor tax advice and is meant for information purposes only. Please consult a legal and/or tax professional.

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Understanding Your Personal Debt Load

Almost every Canadian household has some form of debt or another. And while taking on debt has become a part of Canadian life, it’s important to have a thorough understanding of your debt situation, and where it is taking you. Many of us have debt products thrown at us (every month I get blank cheques in the mail from credit card companies telling me to spend, spend, spend!) and knowing what to do takes education and discipline.

I like to keep things simple, in my mind there are two broad categories of debt – Good Debt and Bad Debt.


Good Debt: Includes a reasonable mortgage, investment debt and student loan debt. Of course, there are limits; here are some notes on each one:

  • Mortgage Debt: This should be less than 3X your annual salary. So if you/your family earn $100k per year, your max mortgage should be $300k. Note there are some minor exceptions here, but this is the rule of thumb I follow myself.
  • Investment Debt: Borrowing money for stable investments, especially when invested in an RRSP, can make a lot of sense. Note that you should be paying this loan back by the end of the current year.
  • Student Loan Debt: Borrowing for your education is good, provided the program has employment potential and you can pay off the amount borrowed in roughly 5 years.

Bad Debt: We all know when we are spending above our means…if you can’t buy it with cash, should you really be buying it at all? Bad debt includes the following:

  • Consumer Debt: T.V.s, vacations, clothes, kids’ toys, and any other item that is not a necessity (i.e. food, shelter or water).
  • Too Much Mortgage Debt: Any mortgage over 3X your annual salary is leaving you very exposed to interest rate changes. I know several people with an $800k or higher mortgage… If interest rates go to 6%, it literally doubles the required monthly payment. Can you afford your mortgage to double? I will be doing a separate blog on interest rates in the coming weeks.
  • Frivolous Student Loan Debt: If you are uncertain your education will get you a job, do not borrow money to fund it. Now, I am not saying a Fine Arts Degree isn’t a good education, but I am saying don’t borrow money to do it. I have met countless 30-somethings still paying off an education they didn’t really want/didn’t really use and, of course, they now wish they never went to school. Universities and colleges are in the business of graduating students and not necessarily in the business of helping you get gainful employment.

Our current spending culture is a “now” culture — we want instant gratification to satisfy our cravings. This impulsive and unprepared spending can lead to bankruptcy, especially if you are faced with a sudden change in income. Being disciplined is hard (I struggle with it from time to time as well!).

When reviewing your debt, here are a few things to ask yourself:

  • How much do you annually spend on interest? Take a deep breath, sit down and add it up. If you pay more than $10,000 of annual interest, that is an absolute sign that you have acquired too much debt. Imagine what you could do with another $10,000 of cash?
  • Are you paying your credit card bill off entirely, every month? If not, then why are you spending more than you earn? That is a good sign that you are acquiring too much material debt.
  • Keeping track of your net worth year over year can also give you an idea of your debt. Your net worth is your assets, less liabilities — year over year. Is your net worth getting bigger or smaller?

Those are all ways to give yourself a quick and healthy self-review of your debt so that you can better take control of your debt and, ultimately, your financial future. Interests rates usually only go one way — up. A 1% change in interest rates can create a significant bump in your monthly payments, as outlined in the chart below.

$500k mortgage, 25 years at 3% = $2,366 monthly payment

$500k mortgage, 25 years at 4% = $2,630 monthly payment

$500k mortgage, 25 years at 5% = $2,908 monthly payment

Could you handle a $300 – $600 increase in your mortgage overnight? Canada is a country that has been spoiled by low interest rates for more than a decade. Many experts are predicting an interest rate bump of 2% within in the coming years. You need to have a financial plan that clearly shows what your income, expense, investment and debt horizons look like so that you can determine if your spending is taking you down a path that is unwise.

It is critically important that you gain a handle on when you will become debt free. Entering retirement age with any debt will significantly limit your ability to have a comfortable retirement. In my opinion, a healthy retirement starts with roughly $2,000,000 in an investment account and no debts at all. Of course, there are always exceptions; give me a call and we can discuss your personal situation.


Disclaimer: Tax and legal rules change frequently and can depend on your individual circumstances. The above is not to be relied upon as legal nor tax advice and is meant for information purposes only. Please consult a legal and/or tax professional.

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The Pros and Cons of being an Incorporated Business versus a Sole Proprietor

Your business is growing — in fact, it’s booming! For many entrepreneurs in your position, this big picture question might be in the back of your mind. Should you incorporate or run your business as a sole proprietor? There are pros and cons to each choice, and making the decision can be challenging. Understanding each option thoroughly before you make the decision is critical – read through our brief overview below and contact Kent Accounting today for a more thorough analysis on the future of your business!

As with everything in life, there are pros and cons no matter what path you choose.


INCORPORATION – PROS

  1. Limited Legal Liability: Operating a small business can be risky. Despite our best efforts, mistakes do happen — not to mention simple risks like a slip-and-fall on your business’ premises. When incorporated, Canadian law will treat your company as its own ‘person,’ which means that when there is a legal issue, that issue is directed at your company, not necessarily at you as an individual (see disclaimer at the bottom of this post). Incorporation provides an added layer of security against claims and adds peace of mind.
  2. Tax Planning: Incorporated businesses can take advantage of tax planning. Tax planning is such an important concept that I wrote an entire blog about it (click here to read it). Long story short, a proper tax plan can save you tens of thousands of dollars every year.
  3. Increased Professional Image: Businesses often prefer to deal with other businesses — as opposed to sole proprietors — as there is an added brand value to seeing a fully established (i.e. incorporated) business. Essentially, there are brand development and business development benefits that can help your business grow faster than as a sole proprietor.

Kent Accounting understands all the growing pains of incorporating your business — contact our team for a consultation.


INCORPORATION – CONS

  1. Cost: There is a cost associated with incorporating your small business, including filing a tax return every year, which carries an average annual cost of $1,000.
  2. Paperwork: As a corporation, there is more legal paperwork that must be filed each year (such as an annual return, a corporate tax return, etc.) so costs and time spent with your legal representation will also grow.
  3. Losses Remain in Your Business: On the off chance that you lose money for your first year or two, these losses are ‘trapped’ in your company (i.e. you can’t apply them to other sources of personal income). But you can carry those losses forward into future years to deduct against future profits.

Don’t incorporate your business without understanding whether it’s the right time — the Kent Accounting team will help you see the full scope of your position.


SOLE PROPRIETOR – PROS

  1.  Simplicity: To start your small business as a sole proprietor, there is very little for you to prepare; you really just start doing it (note: there are items like business licensing and insurance that you would need to attend to). All you need are the basic tools to get going — a website, a phone number and business cards. As a sole proprietor, make sure to register for a GST number so that you can collect and pay GST. Registering your trade name is also an option for sole proprietors, and this can be done at any provincial registry (the same place you get your driver’s license).
  2. You Can Incorporate Later: There’s no harm in waiting to incorporate — you can always incorporate after you’ve grown your business to a place where you have the funds to pay the additional costs, and when you reach a point where your clients would rather work with you as a business.
  3. Business Losses Offset Other Income: If you have losses from your new venture, you can apply those losses against other sources of income. This can be beneficial in the early days of your business when it’s likely that you will have expenses greater than revenues.

SOLE PROPRIETOR – CONS

  1. Personal Assets are at Risk: There are risks if things go awry. As a sole proprietor, all of your personal assets (i.e. your home) are at risk. With risk, there is reward, but the financial and personal consequences can be great if someone gets hurt or killed on your job site.
  2. No Tax Planning: As a sole proprietor, there are no tax planning options, which can result in a higher bill at tax time.

As an entrepreneur, there are a few additional elements to consider when you’re building your business that are best addressed sooner rather than later! Regardless of the path you choose, get insurance! And make sure it’s large enough to handle potential claims — we would recommend $2,000,000 as a minimum amount.

For a better understanding of what insurance coverage you should be looking for, contact Kent Accounting to set up a consultation.

Our founder, Kent Greaves, CPA, CA, offers this additional advice: “If you know you’re going to make a profit in the next 24 months, and your business has any real amount of risk (note: I have yet to come across a business that doesn’t have any risk) and you know (for sure!) that you want to be a small business owner and you are going to ‘do what it takes,’ then just incorporate. The tax planning, risk mitigation and brand pros are significant relative to the cost of filing a tax return. Most incorporated small businesses pay less than $3,000 per year for their filing requirements.”


Disclaimer: Tax and legal rules change frequently and can depend on your individual circumstances. The above is not to be relied upon as legal nor tax advice and is meant for information purposes only. Please consult a legal and/or tax professional.

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What is Tax Planning?

Tax Planning is far more than just saving up for your taxes, or keeping your fingers crossed you’ll receive a tax refund so you can buy that coveted something. Tax Planning is about being fiscally strategic, and using the rules in the Income Tax Act to pay the least amount of tax possible while maintaining compliance with the law. For most people, the single largest expenditure in their life will be income tax. Take for example a person earning $125,000 per year. Based on 2016’s tax rates and some reasonable assumptions, they would pay $33,962 of tax in one year.  Take that over a working career of 30 years, and that’s $1,018,860 of personal income taxes…yikes! Proper (and legal!) tax planning can significantly reduce the amount of tax you pay.


Diving into tax planning takes knowledge and organization – the overall goal is to manage your effective rate of tax, and to keep that rate as low as possible. We have created a chart to help you understand where your effective rate of tax currently sits to give you a baseline to work from. Using the chart, find your income in the column called “Personal Income – Wages” and see what your effective rate of tax is (the column on the far right). A healthy tax plan has an effective rate of tax around 20%.

To improve your effective rate of tax, at Kent Accounting & Tax, we start by using the basic concept to defer, deduct and divide income where possible.

Defer: Do you have the ability to defer income so that it is earned over many years, as opposed to in a single year?

Deduct: Have you been using all of your deduction opportunities, like RRSP’s, capital gain exemptions, small business deductions or others?

Divide: Have you considered dividing your income between trustworthy family members (for example, if you earn $200,000 a year in your small business, can you share that income between yourself and your spouse, so that you both make $100,000 a year and have lower overall taxes?)

At Kent Accounting, we ask questions that lead to solutions – contact us today for more advice on how to optimize your tax planning opportunities.

While there are many straight forward tax planning opportunities, it’s not as easy as shifting figures from one column to another. The law on tax planning is complex and difficult to understand Make sure you’re making the right moves for tax planning – book a consultation with Kent Accounting.

You may think that you have followed the letter of the law when creating your tax plan, but even the CRA can get confused. Even more frustrating is that the CRA rules change on an annual basis, and as accountants, it’s our job to stay educated and up to date on changes. Incorrectly assessed taxes can lead to issues with your tax planning, making it even more important to work with a qualified accountant. Let Kent Accounting take care of the minutia of tax planning.

The more time you invest in building a strong tax planning strategy, the lower your effective tax rate can be and the more you can save.  If you pay 20% tax instead of 25% tax over the term of your career, the amount of money left on the table is staggering. If you were to save $25,000 per year, from age 35 to 55, and invest those savings at 6%, you would have $974,818 of extra money to spend in retirement. To get started on your Tax Planning Strategy, contact Kent Accounting & Tax today.

 


Disclaimer: tax rules change frequently and can depend on your individual circumstances.  The above is not to be relied upon as tax advice and is meant for information purposes only.  Please consult a tax professional.

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Using RRSP’s and TFSA’s as Long-Term Savings Options

What opportunities do Canadians have to make their extra money go the furthest for them? Saving for the future is one of the best decisions an individual can make, but there is more than one way to make your money work for you. When investing in the stock market, there are countless ways to do this; in this article, we will discuss the three most common ways to hold stocks: Registered Retirement Savings Plan (RRSP), Tax Free Savings Account (TFSA), and an unregistered account (sometimes called an “Open” account).


At Kent Accounting, when we talk to clients about how to maximize their money, we often talk about TFSA’s and RRSP’s, as well as Open accounts.  In the opinion of Kent Accounting, the strongest tax deduction available for Canadians is through investing in an RRSP.  RRSP’s provide immediate tax relief, continued tax-free growth, as well as peace of mind and financial security for the future.  Like many Canadians, you may not realize that the largest expenditure you will make in your life is not real estate investments, but in fact, your taxes. There are a number of types of savings accounts that can help alleviate your yearly tax bill and help you save for retirement, and today we’ll be exploring two of the most popular.

One of the most common and well-known savings opportunities is a Registered Retirement Savings Plans (RRSP). For every dollar that you contribute to an RRSP, the government will credit you at the highest tax rate you are currently paying. For example, at a salary of $70,000 per year, you would receive $305 back for every $1,000 RRSP contribution you make, making RRSP contributions a great way to manage the amount of tax you will be paying. Note that the refund amount fluctuates as you contribute more/less or earn more/less, so be sure to discuss this with your small business accountant.

The Government of Canada provides you with RRSP room equal to 18% of your earned income each year.  In 2016, the maximum an individual could contribute to an RRSP was $26,010. If in years past, savings goals have lead you to put your money elsewhere, not to worry – any unused RRSP room from previous years is rolled over and accumulated, meaning you might have more opportunity to invest in your RRSP’s than you realize.

There are some drawbacks with RRSP’s that are important to consider. While you do not pay any tax on the growth of RRSP’s, you do pay tax on withdrawals, and from a tax perspective, it is far wiser to withdraw from your RRSP during your low-income years (retirement). When you withdraw from your RRSP, not only are you taxed, but you also lose any accumulated “room” in your total investment pool, meaning you cannot replace those monies in the future.

At 71, all Canadians must convert their RRSP’s to Registered Retirement Income Funds, which provide you with yearly income. Here’s an example of what your retirement plan could look like if you take advantage of your RRSP opportunities.

If at age 35, you begin to contribute $5,000 a year to your RRSP, by your 71st birthday, you would have $1,070,259 (assuming 7% rate of return and all tax refunds reinvested). If you invested in a regular investment account, on your 71st birthday, this same yearly investment would amount to $509,195 (assuming the same rate of return as the RRSP). That is $561,064 more in your RRSP account, which is more than double the return on investment.

Roughly half of Canadians do not contribute to their RRSP’s, which is a huge missed opportunity, both regarding the ability to save for a happy and fiscally healthy retirement and the opportunity for yearly tax savings over the course of your life.

RRSP’s are a great way to save, but they aren’t your only option. A Tax Free Savings Account (TFSA) is an account that has a set amount of room per year (in 2017, that set amount is $5,500, but year over year, that amount does fluctuate). While unlike an RRSP, you do not receive any tax deductions when contributing, you are not taxed on the growth of your investment, and you have the flexibility to contribute and withdraw at any time.

Using the same savings example as above, let’s look at how contributing to a TFSA as a retirement savings plan can benefit you.

If you invest $5,000 per year from your 35th birthday until your 71st birthday, you will have saved $829,752 (assuming 7% rate of return), whereas in a regular investment account on your 71st birthday you would have $509,195 (assuming the same rate of return as the TFSA). Contributing to a TFSA account allows your savings to earn you an additional $320,557.

Regarding withdrawing funds over the course of your life, you do have that flexibility, and you do not lose the accumulated room to contribute to your TFSA account – if you withdraw, you simply have a set amount of time to put the funds back.


So how can you decide which account is right for you? Determining your primary objective or goal for your savings will often point you in the right direction.

If your goal is to save on your yearly taxes and save for your retirement, then maxing out your annual RRSPs is likely the best course of action. If you have the opportunity to borrow funds to max out those dollars, it can be worth it. Contact Kent Accounting to discuss your best borrowing opportunities to maximize your RRSP’s.

If your goal is to save, but you’d still like to access your funds with plans to put the money back into the account, then opt for a TFSA. Call Kent Accounting to discuss your potential losses and gains in choosing a TFSA over an RRSP.

If you have something specific in mind that you are saving for, opting for a TFSA over an RRSP is a stronger choice, as you will not lose room in your accumulated pool of funds when you withdraw those monies and you also won’t be taxed on those withdrawals. There are two exceptions to this, as the Home Buyers Plan allows first-time home buyers to withdraw funds from their RRSP for a down payment on a property and the Life Long Learning Plan allows you to withdraw funds for educational opportunities.

At Kent Accounting, we have found that families who properly plan and save for retirement max out their RRSP savings year after year, as opposed to not planning and “hoping for the best.” Contact Kent Accounting for help devising a detailed and fruitful retirement savings plan.


Disclaimer: tax rules change frequently and can depend on your individual circumstances.  The above is not to be relied upon as tax advice and is meant for information purposes only.  Please consult a tax professional.

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Understanding Your Personal Earning Potential When You are Starting a Small Business

Alberta is a province that is ripe with potential for small business owners to build their companies and their future.  As a province, we have a higher than average family income than the rest of Canadians, sitting at $100,750 per household compared to $78,870 per household, the national average (source: http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/famil108a-eng.htm). This additional household income means more flexibility regarding saved capital for starting a small business but can also mean a larger discrepancy between your take-home pay as an employee and what you can expect to earn in the early years as a small business owner.

When you are trying to plan for your future, it is imperative to consider your financial well-being and earning potential, both in the short term and in the long term. How can you know how much to invest in real estate, stock portfolios or ancillary spending if you do not have any idea of how much your earning potential will be?

If you are considering starting your own small business, evaluating the realities of your earning potential is not only a smart business decision, it is an important life-planning decision. At Kent Accounting, we help prospective business owners thoroughly evaluate the potential of their business and, not only assist them in deciding if starting a business is the right decision, but help them map out a plan for financial success.


What is the earning potential of owning your own business?

It is no secret that in the early days of your small business, you might struggle with consistent client acquisition and cash flow. The average new small business takes 3 – 5 years to “get off the ground,” and often entrepreneurs work for “free” for the first 1 – 2 years, before they begin to take home a regular pay cheque. While there are certainly some startups that do well right out of the gate (such as restaurants or other franchises), your household income might fluctuate from where it was before you started your small business. As an individual, the best way to balance this out in both the short and long term is through tax deductions.

The tax benefits of being a small business owner are much greater than that of an employee. Income tax is the single largest expenditure a person will make in their life (even more than their home!). When a business earns $100 in income, it pays roughly $13 in tax and, therefore, keeps $87 dollars to either reinvest into the company or to pay out as dividends.  When an employee earns $100, they pay roughly $35 in tax and keep $65 to invest (please note, there are numerous assumptions being made here). As you can see, the after-tax profits are $22 higher for the business vs the employee in the example given.  Simply put, a business can earn more after tax than an employee.  As you build your business, bear in mind that a smart small business accountant will help you understand all the tax deductions available to you as a small business owner, as well as how to take advantage of those after-tax profits.

But we haven’t even gotten to the best part yet.  In addition to receiving better tax rates throughout your earning years, when it’s time to retire you can sell your small business.  When an employee retires, they typically get nothing extra from the company; they simply stop working.  The cash injection from a small business sale in the later years of one’s life can prove very beneficial in funding an enjoyable retirement.  Furthermore, if you are selling a Canadian small business you can receive up to $835,716 tax free (note: there are many restrictions on what qualifies; ensure you seek a qualified small business accountant).  In my opinion, this is the single best tax deduction available to Canadians; you should take advantage of it!

Keeping accurate, detailed financial records is critical for future sales potential – at Kent Accounting, we are happy to help you map out a record keeping plan that, if kept up to date, will save you hours of work and headaches if you choose to sell your business at some point in time.

So what should you do with those after-tax profits? To maximize the growth potential of your income, we recommend flipping that income to a secondary venture and allowing it to grow alongside your business, increasing your cash flow and earning potential. Feel free to connect with us at Kent Accounting to talk about what those new ventures could be and whether taking a passive or active role is best for you.


Disclaimer: tax rules change frequently and can depend on your individual circumstances.  The above is not to be relied upon as tax advice and is meant for information purposes only.  Please consult a tax professional.

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What Is the Difference Between Owning Your Company Vs Being an Employee?

When people are deciding whether they want to take the leap and become a small business owner, often they are more concerned with the personal pros and cons, and less the strategic financial and business concerns. Questions like, how will it affect my personal time? and do I have what it takes? are valid, but these questions are just a small part of the equation when it comes to making the decision about becoming a small business owner.

Before you make that decision, a consultation with a small business accountant like Kent Accounting can go a long way (and we offer these at no charge!). Consider it more of an educational session that will help you see and understand the full picture of owning your own business, both in the short-term and in the long-term. Here are some of the top benefits and challenges to consider when you are thinking about starting out on your own.


Benefits

There are plenty of enticing reasons to become a small business owner – here are just a few.

Freedom to Work from Wherever You Want

Regardless of whether you obtain space for your business or decide to start from your home, as an entrepreneur you get to work where you want to.  Coffee shops, your comfy chair – even the local pub can become your office. If you have a dedicated office space within your home, you can consider that square footage tax deductible, as well as some of your utilities and monthly bills. To best understand what qualifies as a deduction and what doesn’t, contact Kent Accounting.

Results and Gratification

The saying goes “Work Smarter, Not Harder.” Moreover, when you are a small business owner, the more you work, the higher your financial and personal return on investment will be. The success of your business is a direct result of the amount of energy and intellect you put into it. As an employee, success is more likely to be attributed to a team, and you might not directly benefit from your efforts. We have all experienced the fatigue of working in an underperforming team where we have equal share in the reward but end up completing the majority of the work ourselves.

Building A Company Is an Investment

When you build a successful small business, you also have the flexibility to sell your business after it has become profitable and well-established. The sale of your business can be a useful lump sum to help fund your retirement or a new venture you are passionate about. Building a successful small business starts from the beginning. Start with a strong financial plan developed with Kent Accounting.

Job Satisfaction

When you’re employed by a large company, sometimes you feel like just a number. You spend hours working, and yet the majority of the rewards go to executives and/or shareholders. Working for yourself is infinitely more satisfying – the hours of hard work and relationship building pay off exponentially when, as a small business owner, you secure a new client or project. With each new partnership secured, you will feel a pride of ownership and increased confidence in your abilities and your decision. Whether it is bookkeeping or long-term financial strategies, Kent Accounting can help keep your job satisfaction high with stress-free financial planning.


Challenges

While it may seem like owning your company is exciting and liberating (both financially and personally), there are some drawbacks that must be considered before taking the next step.

Upfront Costs

There are costs to starting a business that you will have to pay for before you even begin operating. Paying for the physical aspects of starting your business, like leasing space and buying inventory, supplies and computers, can be large investments. If you do not currently have enough capital saved to pay for these upfront expenses, there are avenues to borrow money to fund these startup costs. However, it is important to remember that these funds are borrowed – you do have to pay them back. Contact Kent Accounting to learn more about start-up funding opportunities and the realities of borrowing money to start your business.

Unsteady Pay Cheques

As a small business owner, you are the last person to get paid. Your suppliers, employees, and creditors all have to be paid before you are, so it is not always realistic to expect that your pay cheque will be reliable until you are well established. Even if you have a substantial project or client list, with a steady monthly net income, remember that in Alberta, your customers will often take 90 days to pay an invoice, so your cash flow can become an issue. It can take up to a year for small business owners to start seeing regular pay cheques, and sometimes longer for those pay cheques to be equal to those you might have been receiving as an employee. We recommend that you have at least 6 months living costs saved up in order to keep financial stressors manageable. Kent Accounting can help you build a monthly cash flow spreadsheet to ensure you are netting enough income to pay your bills.

Uncertainty

If uncertainty is an emotion that you are not comfortable with, then starting your company might not be the best decision for you. How would you feel if your company lost $10,000 in a single month and you had to use your savings to cover it? It is normal for a company to have a bad month and lose that much, or more, periodically throughout its operations. As a small business owner, sometimes it can be challenging to see the forest through the trees and balance new client acquisition (i.e. activities that keep new money coming in) with running your business (i.e. activities that get you paid today). You aren’t alone in growing your business – Kent Accounting can help you build a financial strategy to keep the stress of uncertainty at bay.


Disclaimer: tax rules change frequently and can depend on your individual circumstances.  The above is not to be relied upon as tax advice and is meant for information purposes only.  Please consult a tax professional.