How Incorporating Your Business Can Affect Your Taxes

You own a small business and you’re ready to take it the next level. Incorporating your business carries many benefits including easier access to capital, enhancing your business’s credibility and creating an enduring legal business structure.

It also provides protection from personal liability, meaning that you can safely separate your personal assets from the business.

Does this mean you can protect your personal taxes as well?

Read on to learn how you can avoid having your taxes negatively affected by your business’s activities as well as tax benefits from incorporating and how to file your corporate income tax return:

What Does Incorporating a Business Mean?

When you incorporate a business, it means you are turning a sole proprietorship, or general partnership, into it’s own legal business structure. This business structure is set apart from the individuals who founded it.

Incorporation creates a separate legal entity in order to transact business.

Can Incorporating My Business Affect My Personal Taxes?

Because of the limited personal liability that incorporation offers, your personal assets are protected from tax-related issues.

There is an exception if you fail to deposit taxes withheld from wages. For those, you are held personally liable.

Also, if you treat the corporation as an extension of your personal affairs instead of as a separate legal entity, you could be held personally liable for financial issues. For example, you may be considered using your business as an extension of your personal affairs if you fail to follow routine corporate formalities.

As the owner, and as an individual, you are otherwise expected only to pay personal taxes on your income like any regular employee.

The corporation pays taxes on residual income after salaries, bonuses, overhead and other expenses are paid.

Can I Save Taxes By Incorporating?

In general, corporate tax rates are lower than personal tax rates – so there is opportunity to save taxes by incorporating.

However, in order to benefit from lower tax rates, the company would have to generate a substantial profit.

You can take advantage of lower tax rates if you earn more than you need to live on. Should your profit exceed what you require as a living wage, you can leave the difference in the corporation and pay a reduced income tax rate.

Otherwise, you can take advantage of income splitting in order to save taxes with your corporation. This involves splitting the business income with family members.

Income splitting can create tax advantages more beneficial than reduced tax rates.

Liu & Associates can prepare and file your corporate income tax return for you as well as take advantage of any and all tax benefits. Contact us to find out more information.

How Do I File Taxes for Incorporation?

Corporations are expected to file a T2 corporate tax return every year within six months of the end of its fiscal year. A fiscal year can be the same as the calendar year or it can begin in any months and end twelve months later.

You can file a corporate income tax return electronically with tax preparation software certified by the CRA.

The T2 corporate tax return is more complex than a personal income tax form. It is recommended that you have your corporate tax return prepared by a professional tax accountant.

If your corporation owes taxes after filing a return, the balance can be paid through the CRA online services, from the business’s bank account or by cheque.

Put Your Corporation In Good Hands

Navigating the world of taxes once you incorporate your business can be tricky and complicated.

Avoid making costly mistakes by contacting our expert accountants at Liu & Associates. We can help you properly prepare and file your corporate taxes so that you can experience all of the benefits of incorporating your company.

Does Declaring Corporate Bankruptcy Affect Me or My Credit?

Bankruptcy may seem like a golden ticket when you are looking at clearing debts from your creditors – but there are many things to think about before you file for bankruptcy, especially if you are doing so for your corporation.

One such concern is whether or not declaring corporate bankruptcy will affect your personal credit.

When it comes to owning a corporation, as opposed to a sole-proprietorship or partnership, you are not legally responsible for business debts.

However, there are exceptions for which you can be personally liable.

Before explaining these exceptions, it’s best to understand the difference between corporate bankruptcy and personal bankruptcy:

Corporate Bankruptcy versus Personal Bankruptcy

Because both individuals and corporations can own assets, they are both able to file for bankruptcy under the Bankruptcy and Insolvency Act.

The process is fairly similar, which a few key differences:

  • When declaring personal bankruptcy, all assets and liabilities are considered personal.

  • When declaring corporate bankruptcy, an incorporated entity is considered a legal “person” according to the Bankruptcy and Insolvency Act. This means that while some debts may be eliminated under bankruptcy, there are those exceptions that you may be held personally liable for.

The process of declaring bankruptcy is similar as well. The individual or corporate business owner must meet with a Licensed Insolvency Trustee (LIT) to file for bankruptcy. Once the bankruptcy is filed, creditors are notified and not permitted to contact you regarding the debt.

From the date of filing, you are eligible to be discharged from the bankruptcy after 9 months. However, the bankruptcy will remain on your or your business’s credit history for at least 6 years.

Before making any decisions about bankruptcy, talk to a trusted advisor at Liu & Associates to consider alternative solutions to your financial problems.

How Corporate Bankruptcy Can Affect Your Personal Credit

As mentioned above, there are special circumstances in which filing for corporate bankruptcy could affect your personal credit.

These circumstances include making personal guarantees on loans or credit and the company’s tax liabilities.

Personal Guarantees

It’s possible that when you apply for a loan or credit, the lender or creditor will require the corporate business owner to sign a personal guarantee for the credit.

This is an agreement that you, as an individual, will take full responsibility for the payments.

Should you file for corporate bankruptcy, this debt then becomes your financial responsibility. If the debt is unpaid, it affects your personal credit.

Business Taxes

Unpaid business taxes are not typically cleared through corporate bankruptcy. This includes any taxes withheld from employee salaries or sales tax (also known as trust fund taxes).

You are personally responsible if you collect these taxes but fail to forward them to the taxing authority. This unpaid debt will directly affect your personal credit.

Bankruptcy As a Last Resort

Before you file for corporate bankruptcy, it is recommended that you seek professional assistance to discuss all of your options.

Even if you have no debts that could be held against your personal credit, there are considerations that should be made before declaring corporate bankruptcy:

  • The business will be finished.

  • Your employees will lose their jobs.

If your corporation has run into financial difficulties, there may be an alternative to your situation.

Our expert accountants at Liu & Associates can review your corporate finances to determine if there is a better path for you, your business and your employees.

Contact us today to discuss your options. We are more than happy to help you save your business!

Common Tax Mistakes Small Businesses Make

business-drawings-on-a-paper

Small businesses are taking the world by storm as more and more people opt to work for themselves and create their own legacy. With growing businesses come growing pains and many small business owners are prone to making many mistakes – especially when it comes to taxes.

If you are a small business owner, or are thinking about starting your own business, avoid the hassle of tax-time headaches by avoiding these common mistakes:

1 Not Keeping Receipts

If the CRA sees any amounts on your claim that seem a bit too high or suspicious, they are entitled to perform an audit on your return. This would require that you provide receipts as proof of expenses so the CRA can compare the totals to those on your return.

Some businesses make the mistake of relying on their credit card statement as a record of expenses for their company. Unfortunately, the CRA does not accept credit card statements as evidence of expenses.

To avoid any potential issues with receipts and expenses, keep all receipts related to your business. Maintain an organized system by writing exactly what the receipt was for on the back.

2 Claiming Personal Expenses

When certain aspects of your personal life are used to run your business, it is important that you make a clear distinction of what percentage is business and what percentage is personal. When you fail to divide the usage, filing your taxes will become a confusing mess that will need to be sorted out.

For instance, you may use your personal vehicle for business purposes. By tracking the amount of time you use your vehicle for business, and comparing it the time you use it for personal reasons, you can generate a percentage that you can then apply to vehicle-related expenses.

3 Inaccurate Payroll Records

Many small business owners take it upon themselves to manage payroll to their employees. However, a disorganized payroll system not only creates a nightmare when preparing to file taxes but can also result in some hefty penalties if not done correctly.

Speak to a professional accountant about how you can best organize your payroll system and properly classify your employees to avoid tax related issues.

4 Forgetting to Charge HST

When your small business makes less than a $30 000 annual income, a registered HST number is not necessary. Some businesses, however, find themselves experiencing an increase in income and surpass the $30 000 mark before realizing they have yet to apply for an HST number.

It is recommended that all small businesses, despite their annual income, register for an HST number right away. This will ensure that you are prepared should your annual income surpass $30 000. Otherwise, you may be penalized for not charging taxes if your annual income is greater than that amount.

5 Failing to Report Cash or Trade Payments

Some small business owners believe that if a transaction is not recorded on paper then there is no need to claim the payment as income. This is very illegal and all cash and trade exchanged for product or work must be reported.

If not, the CRA may impose severe penalties that include charging interest, court fines and possibly jail time. It is best for all small business owners to report all income and keep copies of receipts made out to customers and clients.

6 Being Disorganized

Overall, the biggest mistake small business owners make is being disorganized. Tax time is the worst time to play catch up on your record keeping.

An experienced accountant can help you keep all your records organized as well as aid you in preparing your taxes.

Contact Liu and Associates today with any questions you may have about organizing your small business and preparing for your tax return.

What’s Best For Business Owners: Salary or Dividends?

bills-and-coins-in-red-envelope-sitting-on-a-tableIf you have chosen to set up your small business as a Canadian corporation, you have a couple of options when it comes time to pay yourself and any other company shareholders. You can choose to pay yourself a salary, receive dividends, or a opt for a combination of both. There’s no simple answer, so join Liu & Associates as we discuss the pros and cons of each option.

Business Salary

If you’re paying yourself a salary, the payments become an expense of the business. You’ll receive a personal income, and get a T4 at the end of the tax year.

The Pros

    • You’ll be paying into the Canada Pension Plan (CPP). The more you contribute to CPP, the more you’ll eventually receive once you hit retirement.
    • Your salary reduces the corporation’s taxable income, which reduces how much tax your business will owe each year.
    • When applying for a mortgage, banks like to see steady income. You’re likely to get a better rate if you have a salaried income vs a dividend one.
    • With your personal income, you’ll be able to take advantage of other investment opportunities such as a registered retirement savings plan (RRSP) or a tax-free savings account (TFSA).

The Cons

  • Your salary is taxable. It’s possible that giving yourself a salary could increase your personal tax burden.
  • You’ll have to do payroll. To keep things above board, you’ll need to set up a payroll account with the CRA and file all the necessary paperwork that comes along with such an account.
  • If your company’s profits vary from year to year, a salary could cause you tax problems down the road if you aren’t able to carry a business loss one year.

Dividends

Dividends are payments to shareholders of a corporation that are paid from the after-tax earnings of the company. Dividends are declared, and cash is transferred directly from the company’s account to a shareholder’s personal account. The business will need to prepare T5s for anyone who has received dividends.

The Pros

  • Dividends are taxed at a lower rate than a salary would be, which can result in paying less personal tax.
  • By not paying into CPP you’re keeping more money in your pocket today.
  • Transferring dividends is a pretty simple process! There’s no need to register for payroll – just declare a dividend and transfer the cash.
  • You can claim dividends anytime.

The Cons

  • By not contributing to CPP for as long, you will be entitled to less when you decide to retire.
  • Because you don’t have a personal income, you aren’t able to take advantage of RRSPs or TFSAs.
  • Dividends can exclude you from certain personal tax deductions.

Chat With An Expert

When it comes to deciding whether to pay yourself or other shareholders with a salary or dividends, it’s best to chat with a professional. Your choice will be impacted by a host of factors, like your current income level, your age, and the company’s projected income. An accounting professional will take all of this into consideration and help you draw up a plan for continued business growth and success.

For expert advice, call the team at Liu & Associates today.

 

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2019 Tax Changes: What To Expect

2019-in-sparkling-numbersAs 2019 comes into full swing, it’s bringing some tax changes with it that will have some big impacts on Canadians and small business owners. With income tax being the top expense for most Canadian families, it’s worth it to be aware of what’s going to change in 2019. Read on as Liu & Associates highlights a few of the major changes you’ll see in 2019 when it comes to your income taxes.

Why Do Tax Rules Change?

Taxes can change for a number of reasons. People often see changes to taxes when a new government comes into power, when a government is trying to win favour with voters, or when a loophole is identified. It’s important to keep your finger on the pulse of the tax landscape so you are aware of the changes and how they might impact you. Worst case scenario, you could face a reassessment or penalty from the CRA if you fail to take into account the new tax rules when filing your next return.

Increase In CPP Premiums

Canada Pension Plan (CPP) premiums will be on the rise for the next five years due to a program enhancement plan. What does this mean for you? You’ll notice more money off your paycheque going to CPP. The good news is that you’ll eventually get to reap the benefits of this extra money in retirement.

Decrease In Employment Insurance Premium

While CPP premiums may be increasing, employment insurance (EI) premiums will going the opposite direction. Employment insurance premiums are being decreased by four cents for every $100 of insurable earnings. This is the second year of decreases to EI premiums.

Decrease In Small Business Tax Rate

Small business owners can rejoice the fact that their tax rate is going down from 10 to nine percent. Similar to EI premiums, this is the second year we’ve seen decreases in the small business tax rate. This reduction makes the combined federal-provincial-territorial average income tax rate for small businesses 12.2 percent, which is the lowest in the G7. Tax savings means more money to reinvest in your company.

Changes To The Working Income Tax Benefit

The Working Income Tax Benefit is a refundable tax credit that helps to give tax relief to low-income individuals and families. At the start of 2019, the program was renamed the Canada Workers Benefit (CWB) and was enhanced in order to put more money in the pockets of low-income workers and encourage them to stay in the workforce. To keep things easy, the CRA will automatically determine if you’re eligible to receive the CWB and assess your tax return as if you’ve already claimed it, even if you hadn’t upon your original filing.

If you need help filing your 2019 tax return, contact the team at Liu & Associates today. Our experts are up to date on all tax system updates and will make sure you get the best return possible.

 

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Employee Gift Giving 101: What Employers Need To Know

an-employee-gift-sitting-next-to-wheatWhether it’s a staff holiday party, birthday celebration or just a year end gift, there are rules surrounding giving your employees gifts. Follow the rules, and both you and your employees will benefit on your tax return. Gifts that follow the guidelines set out by the Canada Revenue Agency (CRA) are not only tax deductible for you as the employer, but your employees won’t have to declare the cost of the gift as part of their taxable income. Don’t get dinged at tax time just because you were trying to recognize your employees. Read on to learn about the tax rules for employee gifts.

Tax Implications of Gift Giving in Canada

The CRA’s general rule is that all gifts given to employees are considered a taxable benefit. However, there are a few exceptions to this rule that will make the gift not taxable. These exemptions include:

  • Employees may receive up to $500 in non-cash gifts each year before the gift becomes taxable.
  • Employer-hosted social events where the cost is $100/per person or less.
  • Gifts in recognition of long service can be given once every five years and are not taxable so long as the value is less than $500.
  • Meals at work-related functions.
  • Small, valueless items such as coffee, snacks, mugs, etc.

The number of non-cash gifts an employee can receive is unlimited as long as the combined total value doesn’t exceed $500 annually. More so, small gifts, such as coffee, plaques, and mugs don’t count towards this limit.

When Does A Gift Become A Taxable Benefit?

There are some gifts that, regardless of the cost, are always considered a taxable benefit. These include:

  • Non-cash gifts that exceed the $500 annual limit. Ex. If you gift your employee a total of $700 in non-cash gifts, $200 of that is considered a taxable benefit.
  • Cash or near-cash gifts. This includes bonuses and gift cards.
  • Reward points that are redeemable towards travel, accommodation, or other rewards.
  • Reimbursing an employee for a gift they selected and paid for.
  • Any sort of gift from a manufacturer given to an employee of a dealer.

Chat With A Tax Professional

The business tax landscape can be extremely difficult to navigate alone. A qualified business accountant can help ensure that everyone in your company gets to experience the joy that is associated with the giving and receiving of gifts. If you have questions about employee gift giving, call the team at Liu & Associates today.

 

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6 Financial Considerations When Growing Your Business

6 financial considerations when growing your businessTaking the next step with your business can be just as vital to its success as your first day of operation. As any owner knows, finances are central to commercial viability– but there is much to consider when growing your business. Keep reading for Liu & Associates’ introduction to the complex financial needs of business growth.

#1: Does your business have the appropriate funding?

Unless you have considerable savings or borrowing power, growing your business requires a considerable influx of capital. If you are searching for investors or elsewhere for funds, make sure they honour your values and share the same vision of the future. Once acquired, every dollar should be accounted for and put to work efficiently in the most impactful areas.

#2: What is your business reputation with its clients?

If you are considering growing your business, it is important to have a strong relationship with your customers. Sales, retention, quality assurance– these are just some of the important aspects of customer service that you should prioritize before expansion. Often, good client relationships will naturally help indicate when your business may be ready for growth.

#3: Does your business have a “brand?”

You may have the funds and a solid customer base, but it is extremely difficult to attract new business without recognizable branding, attractive design and a healthy social media presence. While unique products and services are important, clients are human– they are more likely to choose options with clean and clear design. Also, modern customers favour brands with engaging, non-repetitive online content that is updated regularly.

#4: Is your business ready to evolve?

If you want your business to stick to what it does best and keep doing it well, growth may not be the most prudent option. Businesses only thrive when they are equipped for the demands of their industry– refusing to change means you are more likely to be left behind. Remember: you don’t know what you don’t know! Consider speaking with financial professionals, industry consultants and even other business owners.

#5: Do you want your business’s scope to widen, narrow or remain consistent?

Growing your business does not always mean changing what you do, but it usually changes how you do it. If you plan on taking the next step, consider whether you want to increase your business’s market share or diversify its services. Each has advantages and disadvantages, but your success relies on how ready your business is to tackle the new challenges. If you want to maintain the scope of your products or services, you may want to delay plans for expansion.

#6: What is your business’s long-term goal?

Look ahead five or ten years– where do you see your business? Is it neck-and-neck with competitors? Do you hope to acquire other businesses? Would you rather sell it off and move on to your next project? Each answer to these means a different strategy and plan for growth, but all are attainable with a well-organized, detailed business plan.

The considerations above are only a brief summary of the reality of growing your business. Each point introduces a change that comes with growth– for a comprehensive discussion of their financial consequences, contact or visit Liu & Associates today!

What’s in a Year: Fiscal vs Calendar Years

fiscal vs calendar yearWhen it comes to running a business, a new business owner may overlook the fiscal year or tax year. While many business owners may default to utilizing the calendar year as their fiscal year, there may be advantages to choosing a different time period.

What’s the difference

A calendar year is relatively self-explanatory: January 1 to December 31. A fiscal year be any chosen start and end date within the calendar year as long as it is no longer than 53 weeks or 371 days. For example, a business that incorporates on July 1, 2018 could choose a year end of any date within the following 53 weeks. Once the year end date is chosen, it will remain the same year-to-year.

Taxes for businesses using the calendar year are due on April 30. Taxes those operating on a fiscal year are due 6 months following year end.

Typically sole proprietorships or partnerships utilize a calendar year, though they can request to use a different fiscal year in some cases. Corporations are always able to select a fiscal year if they so choose.

Pros and Cons

Arguably the greatest advantage to using the calendar year as your fiscal year is simplicity. It’s fewer random dates to keep track of amid meetings and bill payments. The calendar year is simple and it’s commonly used by the majority of businesses.

However, businesses who do choose to utilize the fiscal year generally do so for a strategic reason. For example, seasonal businesses may choose to shift their year end to reflect their busiest time of year. This is common with large retailers who benefit from the Christmas season. Deferring their year end by a month or two really allows them to judge how successful the holiday season was for them.

Another possible reason to utilize a fiscal year comes down to balancing income and expenses. This is particularly beneficial for businesses who have received a capital investment or some other source of funding. Ensuring that you receive and spend these investment within the same tax year ensures that you don’t find yourself in a bind come tax season.

Whether or not a fiscal year is a good option really comes down to two different factors: the type of business you run, and your own personal preference. For expert advice and financial planning for your business, contact or visit Liu & Associates today.

Working from Home: What can you claim on your tax return?

what can you claim on your tax return when working from homeNowadays, business and their employees are connected more than ever– allowing increased flexibility when, where and how people complete their work. Also there is a rising number of people whose main income is self-employment, which has blurred the lines between are personal spaces and the workspace. Income tax law has always accounted for those that make their living from their living room… or anywhere else in the home for that matter! If you work from home or are self-employed, do not overlook the credits you can claim on your income tax return. For more information, read on for four fantastic facts from Liu & Associates!

#1: Self-employed vs. “Working from home.”

If you work for a business and they allow you to complete your work remotely– you are not self-employed and do not qualify for the same tax benefits unless your employer signs the appropriate form. Self-employed individuals are eligible for a much wider range of claims and credits, so it is important to distinguish between the two circumstances.

#2: Automobile costs.

In modern business, being mobile can be extremely important– which means you may use your personal vehicle for work purposes. When this happens, you are entitled to claim the cost you incurred for these specific uses. This means calculating how much gas you used, as well as the ratio of how much you use the vehicle for work versus how much you use it personally. Once totaled for the year, you may claim a percentage of these costs as a credit against your income tax.

#3: Pro-rated expenses.

Like we mentioned in the tip above, the ratio of personal and work use can be applied to many expenses. This process is called “pro-rating” the cost over time to fairly represent how much money is spent on each item over the tax year. Some categories of these expenses include: insurance premiums, mortgage interest payments, property tax payments, utilities, furnishings or equipment– refer to the Government of Canada’s guidelines for a more comprehensive list of options.

#4: Carryforward.

One of the best results of claiming your “business use of home” costs is even if you do not need the credits, they can be rolled over to the next tax year. This carryforward provision is especially useful for self-employed people who are only just starting out. They may not make enough income to require tax relief, so they can defer the benefits to a more profitable year.

The four tips above are only a sketch of the diverse and complex reality of income tax law. If you have questions or concerns about your situation, contact or visit Liu & Associates today!

How Your Business Can Benefit from a Bookkeeper

how your business can benefit from a bookkeeperBookkeepers and accountants are similar but they have different duties, even though the terms are often used interchangeably. Qualifications and education aside, just how much the two professions handle the scope and complexity of a business’ finances is the main division between them. If you are unsure if you require the services of an accountant or a bookkeeper, refer to Liu & Associates’ related articles to find out more. Once you have identified your business and financial needs, refer to the information below to learn how your business can benefit from a bookkeeper.

 

BOOKKEEPING COSTS

Only you can decide what your time is worth– that is why many struggle with the decision whether or not to hire a bookkeeper. Usually this indecision happens when a business reaches a level of revenue too complex for current employees to track, but also not varied enough to warrant an accountant. The following are some of the costs you can expect to incur when hiring a bookkeeper:

  • Accounting or bookkeeping software subscription;
  • Hourly or monthly fees (outsourced);
  • Benefits and annual salary (in-house);
  • Work-hours for recruitment, training and regular meetings.

BOOKKEEPING BENEFITS

No business owner succeeded by taking on unnecessary costs, but if you need bookkeeping services: it could end up saving money! Hiring a professional almost always means you believe that cash flow, investment strategy or other financial realities could be performing better. The next list outlines the most common benefits of bookkeepers:

  • Time and effort saved for other work;
  • Improved invoicing, collecting and record-keeping;
  • Lower likelihood of avoidable financial errors;
  • Choosing between outsourced or in-house adds flexibility.

Also known as doing a “benefit-cost analysis,” only someone who is very familiar with you or your business’ needs can know for sure if a bookkeeper is the right choice. If you are unsure, take time to review your finances or have it done by a reputable professional. Once you know the lay of the land, financially-speaking, you can move forward confidently when choosing whether or not to hire a bookkeeper. Questions? Concerns? Contact us here at Liu & Associates today for a wide range of financial services.