Books & Tax

What are Source Deductions?

There are two parts to source deductions, an employee portion and an employer portion.

Employee Portion:

An employer is required to withhold money from an employees paycheck and remit to CRA.  These monies include income tax, CPP contributions and EI premiums.

Employer Portion:

An employer is also required to remit to CRA their portion of the employees CPP contributions and EI premiums. The employer portion of EI is 1.4 times the employee deduction, and the CPP is the equal amount of the employees deduction.

Do I have to charge GST/HST?

There are reasons you may to want to choose to. Note that you don’t have to until you reach $30,000 in sales within any 12 month period. However, once you hit that mark make sure you register with CRA to avoid costly reassessments down the line.

Certain businesses can be exempt or have different rules when it comes to sales tax. These include different industries as well as e-commerce businesses selling into different provinces/countries.

Can I use my family’s medical expenses as a write-off?

The short answer is, absolutely! There is a long list of eligible expenses on CRA’s website. However, you will first need to set up a Health Care Spending Account to administer the reimbursements. The contributions are tax deductible for your business and can be used to reimburse you when you, your spouse or your dependents spend on something from CRA’s list, like dental or massage.

How much money should I set aside for taxes?

This really depends on your business model and whether you are incorporated.  Always set up a savings account for your business and transfer anywhere from 10 to 30% each time a customer pays you. You can always adjust the percentage after the first year. You will get a feel for your particular setup and cashflow the business needs to survive. This is a balancing act.

What expenses can I “write off”?

There isn’t a golden rule here other than to say, if it’s directly related to your business then it is an expense (or write -off). There are common things that almost every business needs to pay for like business cards, a website and other advertising to get sales. Also, things like bank fees, office supplies and professional fees (like legal, accounting & marketing) are very common.

For more information, check out our related blog on tax deductible expenses for small business owners.

Can I claim vehicle expenses?

Yes. If they are business related. A mileage log needs to be kept for all business related outings like to the bank, to visit customers and other meetings. To and from your “regular office” is not considered eligible mileage.

Keep track of all money spent on gas, maintenance, insurance, etc. You will also need to keep track of the total number of KMs driven in order to deduct these expenses.

How do I make payments to CRA for GST, payroll (source deductions) or corporate tax?

Payments can be made one of three ways.

At your bank. If you are paying at your bank you need to have the remittance stub from CRA.

Online banking. Tax payments can be made online through your bank, similar to paying a bill online.

CRA’s website. Payments can be made through the CRA website.

When do I expense or capitalize an asset?

To capitalize an asset is to put it on your balance sheet instead of “expensing” it. If you spend $1,000 on a piece of equipment, rather than report a $1,000 expense immediately, you list the equipment on the balance sheet as an asset worth $1,000. Then, as time goes on, you amortize (depreciate) the asset over its useful life, taking a depreciation expense each year and reducing the balance-sheet value of the asset by the amount of the expense.

The process of capitalization essentially allows your company to spread the cost of the asset over its useful life and avoid drastic impacts to the income statement in the period the asset was purchased. It is a good idea to set a minimum price threshold for asset capitalization eg; $1,000.

Advice

I’m thinking of starting a business, what questions should I be asking?

This question is the BEST question to ask. Ever heard of the saying “You don’t know what you don’t know?”. Ask this very question to different professionals, lawyers, accountants, marketers etc.

Moreover, ask it to your potential competitors or just other business owners that you know. If you don’t know any join your local Chamber of Commerce and meet some at an event. Every person you ask will give you a new valuable tidbit that you probably haven’t yet heard.

If you want to know how to become a student entrepreneur, get more information here.

Do I need a business plan to start a business?

A business plan is a very worthwhile exercise as it helps you think about how the business is going to operate and get off of the ground. The reality is, no one will ever ask you for one (unless you are asking them for money).

However, they are worth their weight in gold. Yes it’s labour intensive and things never workout the way you think they will, but you will be thankful you spent the time on it.

Which is better: A sole proprietorship or a corporation?

This solely depends on 2 things; the exposure to liability in your industry and if you make more money than you need to pay your personal bills.  

For example, in industries like construction, restaurants and retail stores, the chances of someone hurting themselves or having a claim against you is higher than say, a consultant.

Sole proprietorship’s are great low cost ways to start a business from scratch. However, when the profits start to show up in the bank account it may be time to take advantage of the tax strategies possible for corporations. So it depends on your situation and business plans.

How do I hire an employee?

First you will want to have a valid employee agreement for the province you are operating in to present to your perspective new team member. You also need them to fill out some personal tax forms (TD1 & TD1 for you province) and a pre-authorized debit form from their bank.

These will be used by your payroll provider to setup and deduct the appropriate taxes from their earnings. There are many different options for providers so pick the one that works best for your situation. Getting your employees pay cheque wrong is not something I would wish on my worst enemy!

Do I need to have WSIB?

Most businesses in Ontario must register with WSIB within 10 days of hiring their first employee. WSIB provides workplace insurance coverage for all of your workers.

Even if you are not required to register with WSIB, you can still choose to insure your workers. WSIB coverage is mandatory for independent operators, sole proprietors, partners in a partnership and executive officers in a corporation who work in or carry on a business in construction.

What should I charge?

The very quick answer is triple what your “employee” wage would be. If you would work for someone else and that job pays $20/hour start your rate at $60. When self-employed, you have to not only pay yourself but quite a few other expenses to deliver your work (like your own tax bill now).

Also, you don’t get things like paid vacations, paid public holidays or healthcare that employees do. Obviously what you charge needs to be in line with your competitors, but don’t go too cheap just to win customers. Charge for the value that you deliver.

How many sick days is an employee entitled to?

Each province/territory has their own Employment Standards Act, which outlines their minimum requirements. Please refer to your province or territory’s Employment Standard Act for further details.

In Ontario, each employee from the time they start working for their employer is entitled up to 10 days Personal Emergency Leave (Sick Days) every calendar year in which 2 are to be paid .  These consist of illness, death, certain emergency and urgent matters.  An employee must be employed for one week and longer to receive the first two days of paid leave.

How much vacation time and vacation pay is an employee entitled to?

Each province/territory has their own Employment Standards Act, which outlines their minimum requirements. Please refer to your province or territory’s Employment Standard Act for further details.

In Ontario, within a 12 month entitlement period an employee with less than five years of employment is entitled to 2 weeks of vacation at 4% of their wages.  An employee with 5 or more years of employment is entitled to 3 weeks of vacation at 6% of their wages.

Technology

What are receipt apps?

Receipts apps store your paper receipts digitally. They also categorize the receipts according to vendors making it easier to file your receipts. They then get published to your accounting software to the appropriate expense accounts by your accountant.

All you do is take a picture of your receipt and upload it to receipt app. The rest is taken care by the app and your accountant. Moreover, you can upload receipts on the go during your daily activities. This saves you the time of sorting through receipts or dropping them off at your accountant’s office. Thus, you have more time on your hands to focus on your business and growing it. Talk about stress-free!

What is QuickBooks Online (QBO)?

It is an online accounting software that imports your bank transactions to be matched to expenses pushed from your receipt app. Since QBO is a cloud software, you can access it from anywhere with an internet connection.

You can create invoices and send them to your clients directly from QBO. On top of that, it allows you to process credit and debit card payments from your clients. You can also create reports to keep track of, such as Accounts Receivable, Accounts Payable, Balance Sheet, and Profit & Loss statements.

Do I need to keep the physical receipt or secondary backup if I’m using a receipt app?

No, you don’t need to keep physical receipts or a secondary backup for your receipts if you have uploaded them to your receipt app. The CRA accepts the digital copy of receipts. If you happen to need a hard copy of one of your receipts, you can always download it from your receipt app and print it. These apps help save you a lot of time and space you used to spend on sorting and storing paper receipts!

Funding

How can I get some money if the big banks have said no?

In today’s high tech age there are still several options if the big banks said no. The easiest way is to take another look at your current customers. How long does it take for them to pay? Can you ask for a deposit or payments? You can also use some of those sales invoices and “factor” or “finance” them.

Alternatively, approach The Business Development Bank of Canada (BDC). They exist to help small businesses that don’t fit it the conservative profile of large banks. They have many different programs that could help your business.

What is “factoring”?

There are factoring companies out there that will essentially buy your receivable for a discount. Once you have delivered your end of the contract and issued the invoice to the customer, the factoring company takes over and pays you up to 90% or more of face value. They then take over collecting from the end customer and you’re on to the next project. There are certain industries that this very common in like trucking.

What is “invoice financing”?

Invoice financing is kind of like factoring without the involvement of the end customer. Once you have issued the invoice, the financing company will loan the face value of that invoice to you. You would then make small payments back to them until the customer has paid your invoice which you can then pay off your loan. The main difference is you would still “own” the receivable and be responsible for collecting on it. This is great if you prefer that the end customer doesn’t know you are financing their sale.

The faster I grow, the less cash I have. How can I fix this?

This can be a real problem if your Customers (receivables) take longer to pay you than you are required to pay your Vendors (payables). On paper it could look like you are making a profit but in reality you don’t have any cash. This is a timing difference and the more you sell, the wider this gap becomes. Best practice is to have your internal controls set and know ahead of time if you require other financing like invoice financing, factoring, a bank loan, etc.

How can I take advantage of a new machine if I don’t have the cash to buy it?

A popular way to “buy” larger assets is to lease them. This requires smaller monthly payments, usually spread out over multiple years instead of cash upfront. This way the new machine will have a chance to earn at least as much revenue as it’s payment amount, having a positive cash flow effect.  This is popular for items that don’t generally retain their value very well and a new model will likely need to replace it, like computers or passenger vehicles.

I have another service to offer but need expensive equipment to deliver it. What do I do?

A popular way to acquire larger assets is to finance them. This requires smaller monthly payments, usually spread out over many years instead of cash upfront. This way the new equipment will have a chance to earn at least as much revenue as it’s payment amount, having a positive cash flow effect.  It’s common to do this for items that do generally retain their value very well like professional cameras or other video production equipment.

How can I get the bank to say yes?

Generally speaking, if you have been in business for more than 3 years, own some assets, have a good credit score, and aren’t in a “risky” industry you have a good shot with a big bank. The process is tedious, lengthy and full of conditions but if you can jump through all of their hoops you will likely be rewarded with a lower interest rate.

I’m under 40 and want to start a business, how can I get some help?

Canada is lucky to have a great program available to “young” entrepreneurs called Futurepreneur. They assist with writing a business plan, awarding a favourable loan and pairing you up with a seasoned mentor. Little know secret, this program is responsible for assisting Mike to start UpSide Accounting, so you can say it has a special place in our heart here!

Do you have a specific question or need a frequently asked question to be explained further? If so, please contact us and we will give you our best answer.