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 to choose an accountant for your small business

how to choose an accountant for your small businessSmall businesses face unique challenges– not only in their own markets, but internally and structurally as well. Budgets must be met and bills must be paid at any company, though for a small business it might mean the difference of being around next year. If you own or operate a small business, it is wise to protect your finances with sound investment and prudent choices. Out of all of these, employing or contracting an accounting professional is one of the most efficient ways to stretch your dollar. Keep reading for Liu & Associates’ guide to choosing an accountant for your small business.

IN-HOUSE vs CONTRACT

All businesses need at least a bookkeeper to be financially viable, but often in small business that role may be filled by an owner, a partner or even a family member. As businesses grow, so do their needs– owners and operators will eventually have to decide on one of two options: hiring an in-house financial professional or contracting the services of an individual or firm. There are advantages to both… A salaried accountant or bookkeeper is always on the job; although third-parties can be hired on a case-by-case or renewal basis.

AN IDEAL CANDIDATE IS…

…Whatever fits your needs best! It may be frustrating to read, but only the owner or operator of a small business can decide. Employees need to fit into your culture, but they can also grow with your business. Firms and contractors are flexible, but you may outgrow them (or they may outgrow you). These are just some of the many facets that differ from in each choice and neither are mutually exclusive.

QUICK TIPS

The following are some helpful ideas when choosing an accountant for your small business:
Seek referrals from similar-sized businesses;
Interview multiple candidates;
Be prepared to answer questions about your business;
Prepare questions unique to each candidate;
Negotiate fees or wages before work begins;
And much more…

…Questions? …Concerns?

Contact or visit us today: the small business accounting experts at Liu & Associates!

How Do I Change Accountants?

how do i change accountants?

 

Whether for your personal finances or a business, employing an accountant is first and foremost a relationship. Just like in our private lives, professional relationships have their ups and downs– they also evolve over time. You may find that you employ several accountants over time, which is normal for both you and the financial professionals. Keep reading for Liu & Associates’ guide to when, why and how to handle this kind of change.

When or why would I change accountants?

People change accountants for many reasons. You may be simply dissatisfied with the level of service you received– but more likely, your needs have evolved beyond your accountant’s specialization. Just so, your accountant’s scope may have changed to a point that your needs are difficult to prioritize. Either way, this decision is usually not personal! If you are dissatisfied, it can be valuable to discuss this with your current accountant before severing the relationship.

How do I cut ties with my current accountant?

So the time has come: your first step is to inform your current accountant that their services are no longer needed. If at all possible you should stay on good terms, but your new accountant can communicate on your behalf if necessary. Your current accountant should then forward a disengagement letter— the professional document that outlines important information and dates related to your finances.

How do I transfer to a new accountant?

Firstly, your new accountant should provide you with a letter of engagement– the outline that establishes the parameters of the professional relationship. Once they acquire professional clearance, your new accountant can proceed with registering your info, assessing your file and setting out their financial plans moving forward. Always negotiate fees and finalize other major decisions before you authorize any financial professional.

The above three entries only summarize the process of transitioning your accountancy services. Be sure to use due diligence any time you make a choice about your finances, it can have serious consequences. Questions? Concerns? Contact or visit the pros at Liu & Associates today!

3 Misconceptions About Accounting & Accountants

3 misconceptions-about-accounting-and-accountants

 

We see it all the time from corny comic strips, bad movies, and hacky stand-up comedians– if you need a boring job to make fun of, go after the accountants! Most people perceive accounting as a dull ocean of cubicles, filled with bespectacled pencil pushers that love nothing more than using an abacus. In truth, accountants are as diverse and multifaceted as professionals across all industries. Keep reading for three of the most common stereotypes about accounting and accountants, then educate yourself with the truth from the pros here at Liu & Associates.

“I know math– I can do it all myself!”

First of all, accounting is more than just math! While arithmetic skills are essential to a good accountant, the real strength of financial professionals is organizational skills, analysis, and logic. In fact, complicated maths like calculus are rarely, if ever, used in the industry. Additionally, beware the promises of do-it-yourself accounting services and software– they can give you a false sense of security that might lead to costly errors or omissions.

“Accounting is expensive, only big businesses can afford it.”

The fact that big businesses all have accountants means one thing: they understand the importance and value of proper finances. Anyone can benefit from accounting– no matter the size, scope or scale of your needs. While it is true that not every accountant is right for you, that is why there is such a wide range of services available. From affordably basic to fully custom-tailored, there is a financial professional that suits you!

“Accountants only fill-in spreadsheets and file taxes.”

As with most of these misconceptions, there is a grain of truth to the myth. Yes, spreadsheets are critical to accounting and any good accountant knows their way around a tax return. Ultimately though, spreadsheets are just a tool– only the talent and skill of a financial professional makes them sing. Likewise, filing taxes is merely a cherry on the top of the long list of intricate finance and business decisions influenced by accountants’ advice.

You may have believed some of the misconceptions and myths above, but hopefully, this article has helped clear the air. Questions? Concerns? Contact us at Liu & Associates today!

How to Choose an Accountant for Taxes

how to choose an accountant for taxes

 

While many people may choose to do their own taxes, there are a number of reasons why someone would opt to hire an accountant. Whether your taxes are particularly complicated, or you feel overwhelmed or uncomfortable by the very thought of taxes, an accountant can help everyone. There are a number of different factors to consider when search for a tax professional. Here are a few things to consider in your search for a tax accountant.

 

What type of tax professional is best for you?

During tax season, you will probably notice a number of pop-up tax preparation chains in everywhere from the mall to a university campus. While convenient, these chains don’t always offered the most seasoned professionals. Here are the different types of tax professionals you should be aware of:

  • Certified public accountants have passed rigorous testing and certification requirements in order to obtain their title. They are also able to represent you in the event of an audit or collections. CPAs have a tonne of other financial experience as well, so they can help with other financial situations as well. Not every CPA is an income tax expert, so be sure to ask about their experience.
  • Enrolled agents also much pass testing and background checks in order to gain their title. Unlike CPAs, they are specialized specifically in taxes, including complex tax situations. They even need to take a test every three years to ensure they are up-to-date in all of the latest tax regulations. Like CPAs, they can represent you in the event of an audit or collections.
  • Tax attorneys are lawyers specialized in tax law. They are most often used for highly complex tax matters such as estate tax returns of if you need representation in Tax Court.

Experience

Not all accountants are tax experts. If you’re shopping around, it’s important to ask accountants about their previous tax experience and areas of expertise. This is crucial if you need an accountant with experience in certain areas such as home businesses or other circumstances that could complicate taxes. Any licenses or accreditation that help to support their skills and knowledge are also beneficial.

Fees

Cost is top of mind for most people, so be sure to ask about fees! Find out the hourly rate and get an estimate for how long the return will take. Not every firm will charge the same rate, so be sure to ask. Talk to potential accountants to learn if there are things you can do in order to keep the fees down (i.e. organizing documents). Finally, be sure to ask what is and isn’t included in their fees. Find out the costs for “extra” or additional services so that there are no surprises when you get the bill.

Don’t be afraid to ask questions, take notes, and compare your options. Above all else, be sure that you are comfortable with the accountant you choose. Whether you need help with a simple return or you have a complicated tax issue, contact Liu & Associates today!