Our list of FAQs will help you ask us the right questions…

We want your accounting and tax compliance to take up as little of your time as possible so that you have more time to spend on your business and with your family and friends.

Should my corporation own the vehicle?

This is an easy question to answer when we have estimates of the volume of personal/business related driving and operating/ownership costs.

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This is an easy question to answer when we have estimates of the volume of personal/business related driving and operating/ownership costs.

Fact: CRA permits a tax-free km based reimbursement of 55 cents per km (49 cents for kms over 5,000kms) if you own the vehicle personally. This often exceeds the actual per km operating cost of vehicles (a great opportunity).

As a rule of thumb — if your vehicle has low operating cost and the number of kms driven for business is high, then it is almost assured that you’ll want to own the vehicle personally. This assumes it works with your insurance situation.

On the other end of the spectrum — if your vehicle has a combination of (1) high operating costs, (2) is driven more than 50% for business, and (3) the total kms driven is low, then it is worth looking at having your corporation purchase or lease the vehicle. You’ll incur a standby charge for your personal use of a company vehicle, but the taxes caused by this benefit can be lower than the taxes caused by having to draw dividends from the corporation in order to pay the vehicle operating costs personally.

In cases where a company vehicle is used personally or a personally owned vehicle is used for business, CRA requires a vehicle usage log to support your calculations. There are some handy phone apps that can help with this…and you can still use a trusty notebook.

I started a brand new business – am I forgetting to do something?

When I talk with a new business owner, this is the meeting agenda…

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  1. Business plan – Where are profits going to come from and when? How does the cash flow situation look?
  2. Determine structure of the business (corporation, proprietor, partnership)
  3. Do you need to register for GST?
  4. Do you need to register for PST?
  5. Do you need to register for Worksafe BC?
  6. Do you need a municipal business license?
  7. Set up record-keeping and invoicing system – in house or external bookkeeper?
  8. Are there other regulations to comply with (Island Health, professional regulatory bodies, etc)?
  9. How will your workers be treated (employee or subcontractor)?

Should I take wages or dividends from my corporation?

There are a lot of moving parts in making this decision – the answer comes after you prioritize the issues in the table below. Each issue will have a different priority for each person. A combination of the two can be used. A person can also switch back and forth depending on what makes the most sense.

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Issue Wages vs Dividends
Tax rates Slight (approx 1%) tax advantage Slight tax disadvantage
RRSP Builds RRSP contribution limit Does not build RRSP contribution limit
Ease of use Requires payroll remittances (more complex) Easier to administer
CPP Must contribute to CPP No ability to contribute to CPP
EI May have to contribute to EI No EI
Fair value? Must be fair value (exception is >40% shareholder) More exceptions from fair value requirement
WCB (neutral) Applies up to a maximum if WCB registration is required Applies up to a maximum if WCB registration is required
Who can receive? Anyone who provides a service to the company Shareholders only

What is a personal services business (PSB)?

Think “Incorporated employee.” Also think “Punitive tax rates.”

Being classified as a PSB is a nightmare scenario and is a very strong possibility for a lot of smaller companies who provide services. If your corporation is classified as a PSB on a certain contract, then its expenses for that contract are restricted to those available to an employee (very big problem). The tax rate on that new higher taxable income is then increased by 31% over the small business rate. This is a brutal situation to be avoided at all costs.

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Below are the four main questions that the Tax Court and CRA use to make the determination of whether a PSB situation exists:

  1. Who provides the tools?
  2. Who bears the risk of profit and loss?
  3. How integrated is the worker into the payer’s business?
  4. Who controls how and when the work is done?

If you are audited, you will be asked to supply a copy of your services contract and so a carefully worded contract is essential to help reduce the risk. When working on a new contract, you should try to make arrangements with the payer to supply your own equipment, attire, and to have the freedom to determine how and when the work is done. You don’t have the win all of the 4 arguments, but you need to do better than 50%.

If you have a PSB question, call us. There are other planning opportunities available.

I have extra cash building up – what investments can I buy in my corporation?

You can buy absolutely any investment in a corporation EXCEPT “registered accounts” which include TFSAs, RRSPs, and other similar accounts that can only be owned personally.

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The most common investments are:

  1. real estate rentals
  2. shares in and loans to other private companies
  3. marketable securities (which means shares, stocks, bonds, GICs, etc).

Each type of investment has its own particular tax advantages and disadvantages and you should have an understanding of this before making big investment decisions.

How likely am I to get audited?

It very much depends what you’ve been up to lately! Each year CRA chooses certain topics on which to focus their audit attention, but there are a few perennial favourites.

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  1. Spousal support deductions on your personal tax return – make sure you have a signed separation agreement or court order. Also, keep receipts and proof of payment of child support and spousal support. It seems there is a greater than 50% chance this will be audited for the first few years of support payments.
  2. Medical expenses and moving expenses – Large medical expenses and moving expense claims on your personal tax return are almost guaranteed to attract a CRA query.       The good thing is their attention is solely on those items, so the cost of supporting the claim is low as long as things were done correctly.
  3. Vehicle expenses – CRA is well aware that people are usually bad at keeping vehicle usage records. This is also an area that many people abuse and so it is no surprise that this is a fruitful area for CRA to audit.
  4. Company owned boats – It is very easy for CRA to identify when a company has purchased a boat. CRA has an automated query process for boats – and they are looking for unreported personal use of company assets. If you purchase a boat in a corporation, expect CRA to contact you within the next few years.
  5. General audits – CRA appears to have focused their energies toward targeted audits of specific items rather than full-blown audits. The odds of a general audit are very low (probably less than 1 in 500 per year in my experience). Large companies will be audited much more frequently than small companies. Certain industries (construction and fishing in my experience) tend to be audited more than others.

Do I need a bookkeeper?

If you dislike bookkeeping, have a time shortage, or are just getting too big to do it yourself, then it is probably time to get a bookkeeper. It is not always necessary to keep monthly bookkeeping files – sometimes a once annual compilation is good enough for small businesses where the owner has a very good handle on things.

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A good bookkeeper will keep you on track…the accountability of knowing there is someone expecting information from you will prevent you from falling months or even years behind. The late filing penalties avoided (especially on payroll) will often pay for the cost of the bookkeeper.

Every person functions differently, and it is the bookkeeper’s job to condense the information you’re generating into accounting language. The things to look for in a good bookkeeper:

  • Experienced in your type of business
  • Their focus is on freeing up your time and making things simpler for you
  • Reasonable fees
  • Good personality match

Our firm does bookkeeping in certain rare cases, but we generally prefer to refer to other bookkeepers. We’d be happy to find you a good bookkeeping match!

My profits aren’t great…what do I do?

Small cities can be a tough place to make a living. Great ideas that would flourish in a major centre can be downright dismal in a smaller city. If you are in that situation, then you need to look at changing your service offerings and/or marketing efforts. The same is true with certain obsolete industries. Don’t fall into the trap of trying to make an impossible situation work – if you’re getting frustrated with your business then you need to be realistic about whether you’re wasting your time with it.

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If your business is viable and you want to increase profitability, then try these very general guidelines:

If your costs are mostly fixed (this is where costs do not fluctuate much with changes in revenue), then spend a day or two eliminating wasteful spending that adds little or no value to you or your customers and then immediately focus your attention on maximizing sales through a combination of marketing and adjustments to your product and service offerings.

If your costs are mostly variable (they do fluctuate with changes in revenue), then you’ll have to maintain continual focus on cost control (negotiate better pricing with vendors, develop efficient processes) and eliminate wasteful spending on fixed costs. Next, identify and eliminate low-profit goods and services you’re selling. Then focus next on increasing revenue through new product/service offerings and marketing.