Commentary Archives - Page 8 of 13

Five ways to prepare to sell your small business to reap the biggest reward

Even if your plans to sell you small business are several years away, you need to start planning now in order to get a great price when the time comes. Begin by documenting all business deals to show business connections. Also, ensure that any deals on paper are reviewed every year or so for accuracy. Risk in your businesses’ operations means a reduced price so it’s important to diversify and plan for long-term growth even if it means slightly reduced near term profits. Someone buying your business will perform due diligence, so make it easy for them to see the value in your business by cleaning up your accounting records and books. Family members may be great potential employees, but not hiring will make it easier to sell your business. Finally, a little goodwill at the end by offering to stay around and help during the transition will go a long way.

Key Takeaways:

Make sure to have things written out and organized, this includes current business deals and clients, and keeping your financial books in order.
Important to selling a business is minimizing the risk involved for the buyer by creating a stable, reliable business which insures that the buyer is confident of their purchase.
Family businesses are common, but having the business revolve around the family too much makes it difficult to transfer or sell the business to a new owner.

“A lower-profit, lower-risk business can be more valuable than a more profitable, all-eggs-in-one-basket shop. So, focus not just on maximizing profit, but also on managing risk.”

Snowbirds be warned: Spending too much time in the U.S. can trigger double tax

If you spend your winters in the United States, you might be subject to paying U.S. taxes to the IRS. The common belief that spending 182 days or less makes you safe is wrong. The reality is that the IRS applies the Substantial Presence Test, which looks at a three-year period. If you overstay, you can apply for an exemption provided you meet the “closer connection” to Canada criteria and file the correct forms with the IRS before the deadline. Either way, you’ll want to watch your days spent in the U.S., or you might get hit with a hefty fine.

Key Takeaways:

The Substantial Presence Test calculates the number of days over a three-year period that an individual spends in the U.S.
To claim the closer connection exemption for 2017, Canadians must file IRS Form 8840 provided no exceptions apply.
Planning to exit Canda for tax purposes should begin at least a year in advance to as it involves immigration, tax, estate, health care and other financial issues.

“It is important to understand the U.S. tax rules – and the actions snowbirds need to take to avoid being taxed south of the border.”

Personal Investor: Tax perks for home offices

You might call your home your workplace if you’re one of the nearly 3 million self-employed Canadians or those working for larger companies from home. Like any business-related expense, your home office will work in the same way on your annual tax returns with these expenses being deductible. Expenses that are exclusively used for business-purposes are fully deductible. Only a portion of shared expenses, like utilities, repairs and insurance, can be claimed.

Key Takeaways:

The portion you can claim on shared expenses is based on what portion of your home is used for your business in terms of its square feet relative to your home’s total square footage.
If self-employed, you can add mortgage interest and property taxes to your deductions, which employees cannot claim.
One note of caution: If you deduct expenses related to permanent changes, such as renovations or an addition, you could lose the principal residence status on your part of your home and lose a portion of your principal residence capital gains exemption.

“Many deductions are a portion of expenses homeowners typically incur anyway, but claiming the right portion is critical if you don’t want to run afoul of the Canada Revenue Agency.”

Nearly three million Canadians are self-employed. Others work for larger companies from home. In many cases, their homes are their workplaces.

How portfolio structure can save tax for clients with private corps

Private corps making less than $50,000 per year qualify for the small business tax break. Businesses with passive yearly income more than $50,000, cannot use the small business tax rate and all their business income is subject to the higher general income rate. Keep in mind that it is the taxable passive income that is used rather than all passive income. This distinction means that the passive income deduction can be preserved by using tax reduction portfolio strategies.

Key Takeaways:

Clients can preserve the small business deduction if taxable passive income is below $50,000/year.
Clients without the small business deduction (i.e., greater than $150,000 passive income per year or more than $15 million capital) should customize a portfolio to reduce taxable income.
Tax-efficient asset allocation through good portfolio design may reduce the passive income generated by $2-3 million of capital in order to continue to enjoy the small business tax rate.

“The new rules state that if passive income exceeds $50,000 per year, then access to the small business tax rate (10% to 18%, depending on the province) will drop by $5 for every $1 of passive income above $50,000.”

Taxation of Cryptocurrencies in Canada: What Business Leaders Need To Know

Cryptocurrencies, such as Bitcoin, are not viewed by many governments, including Canada, as actual currencies but as commodities. This means that transactions are viewed as “barter” and thus creates a taxable event. The IRS in America has won a landmark case against an agency that deals in investments of these currencies, forcing many of these investors to pay tax. In Canada, the CRA has the ability to hold any similar company or investor responsible for tax payments as well. As more of this type of investing occurs, you can be sure that the government will keep up and get it’s share of taxes.

Key Takeaways:

Cryptocurrency’s status as a currency is uncertain and the CRA says they should be viewed as a commodity instead.
Increasing investigations of it’s users has lead to removal of anonymity for regulatory and tax tracking purposes. Additionally, America is an example of what the CRA can follow in terms of regulation and taxation.
Scrutiny of cryptocurrency from all types of regulators, including tax authorities, will likely lead to structure, transparency and legitimacy, as well as tax implications.

“Accepting Bitcoin as payment does not exempt merchants from recognizing income on a sale. Similarly, those who swap crypto for merchandise would need to report income or a capital gain (or loss) on the disposition of their crypto asset.”

Why Reviewing Your Tax Strategy Makes Financial Sense

Businesses are regularly rewarded for creating a well-thought out tax plan from the beginning. Business opportunities and rules change can require different strategies in order to minimize taxes at year-end. New entrepreneurs often make the mistake of not counting taxes as an expense. Instead of paying attention to what is inevitable (which is paying taxes), they think they should wait to see if the business is a good or bad entity first. Staying informed and getting professional advice can help business owners make better decisions, which will pay off in the long run.

Key Takeaways:

Entrepreneurs tend to ignore tax planning in the initial phases of a venture, which can be costly.
What most of these entrepreneurs don’t realize is that implementing a tax plan usually requires some restructuring resulting in tax consequences that could have been avoided.
Once entrepreneurs realize that taxes are often a business’s largest expense which doesn’t provide any benefit like equipment, staff or services, then they understand how important tax savings are to the future growth of their business.

“To get the most out of a tax plan, it needs to be implemented before the business generates value and profits — value and profits need to be created within a tax-efficient structure to get the maximum benefit.”

Tips for creating a ‘smart-tax’ portfolio

When dealing with taxes, you need to make sure you are investing in the right way to avoid a heavy tax burden in the long run. In order to create a tax-smart portfolio, it’s important to know what your money manager is making you over what the market is providing (known as your alpha) so that you end up with profit after taxes. Being aware of the tax implicaitons of your investment portfolios, especially what is in it’s make-up as well as turnover, can led to a considerable difference in your returns. Investing wisely will help you keep all your returns at tax time.

Key Takeaways:

The majority of Canadians now face tax in provinces where the highest marginal tax rates are in excess of 50 percent.
A key tax factor is portfolio turnover, and ensuring the alpha added by your money manager is high enough to make up for any taxes created when securities are sold.
Consider your investment mix becaue each type of income is taxed differently and will result in very different portfolio values over time when investing outside of registered plans.

“The good news is that you can take steps to reduce your tax burden without having to cheat.”

Ottawa has turned income-splitting rules into an absolute nightmare for small businesses

When the government replaced the income splitting rules for private corporations, they could have made it simple. Instead, the new package is complex and pages are filled with the new rules, lengthy definitions and exemptions to the rules. Basically what the new rules now require is that family members prove that their contributions to the family business are meaningful enough to get the dividends they receive. If they can’t, then the dividend income will be subject to punitive tax rates. If a company earns less than 90 percent of its income from a service business, the rules will not apply to certain family members. Since most of Canadian small businesses are service providers, they do not qualify for these exemptions.

Key Takeaways:

Income splitting involves diverting dividend income (and certain other types of income) from one family member to another member in a lower tax bracket.
Under the new rules, family members over age 24, who work less than 20 hours per week may have to prove that their contributions to the business are reasonable.
Some of the factors for work to be considered reasonable are: work performed, property contributed, risks assumed and any other “relevant factors,” in addition to this being compared with contributions made by their relatives.

“In short, it means that many family members — of all ages — now have to convince the tax authorities that their contributions to the family business are meaningful enough to justify the dividends they receive. Otherwise, they risk punitive tax rates on the dividend income.”

Coming clean to the CRA

A small-business owner, who has not kept up with their taxes, is concerned that their receipts and bookkeeping haven’t been recorded properly, and they want to know if a ballpark estimate can be made and submitted to the Canada Revenue Agency (CRA). Since the burden of proof is on the company, the best advice is for them to hire a bookkeeper or accountant to go through their business records and recreate the books. In the event of a review or audit, any company estimating could be subject to paying significantly more without proof.

Key Takeaways:

After not filing taxes for a couple years, a small business wants to know if they can file late taxes through estimation.
Business owners are required to keep accurate records each year, so hiring a good accountant to get caught up is imperative.
File late taxes as soon as possible to minimize penalties and interest.

“By not keeping records, you are inviting CRA to do the estimating for you—and they will estimate high.”

GST and HST basics – how to do right by the CRA and your business

Entrepreneurs and small business eventually grow to a level where they need to start charging a Goods and Service Tax (GST) and/or a Harmonized Sales Tax (HST). Some companies put off charging these taxes until their company reaches the threshold of $30,000 sales over the last four consecutive quarters. One reason a company may not sign up immediate is because some customers cannot claim the tax back. Taxes cannot be collected at a later date, so companies making over the minimum need to register with the CRA and start applying the tax according to the CRA’s guidelines.

Key Takeaways:

Proper collection of the GST and HST depends on such factors as the customer’s location, and the business’s annual revenue.
A business has to decide not only which tax to collect, but when to start collecting and how often to file.
Business owners who aren’t sure of their GST/HST responsibilities should call their accountant or the CRA.

“The CRA will wait for your return, but they don’t want to wait for your money.”