McDonald & Co. Accountants

15736 100 Ave N.W. Edmonton, Alberta Canada T5P 0L1
Fax (780)486-4393 -------- Phone (780)484-1133

Bob Mcdonald CMA,ISP 484-1133

SMALL BUSINESS STARTUP HELP :

As every Small Business is unique no general plan can be devised to fit all circumstances an individual encounters in starting his/her own business. There are, however, certain areas that every business person should look into and have an understanding of to ensure success and pay the least amount of tax. The time to get this understanding is before rather than after you commence business so that you are certain that the decisions you are making today are correct. Therefore, we are presenting some basic information needed in the development of a Small Business.

Frequently Asked Questions on Business Startup

1) Why do I need to keep books and records?

The "Income Tax Act" requires you to keep records to support your income and expense claims for six years. In addition, you may need permission from other federal, provincial or municipal authorities to destroy the records after this period. There are, however, other reasons for keeping books and records. If you earn income from many places, keeping records helps you keep track of where and who your income came from, and whether or not it is taxable. The above is also true for expenses. Records keep you informed about where your money goes, and if the money you spend is tax deductible. Good records ensure that you pay the minimum GST while following the GST tax laws. Records help you keep track of the financial position of your business and help you budget to keep your account at the bank from overdraft and therefore extra charges. Finally, keeping good records helps prevent any problems you may encounter if your business is ever audited by CRA.

2) Can I do my own books?

There are many business people who keep their own books and many of those have had little or no bookkeeping experience prior to the startup of their business. There are a wide variety of record keeping books and bookkeeping systems available and it is up to you to decide which will be most effective for your business. Just make sure that along with your records you keep your duplicate deposit slips, bank statements and cancelled cheques. You should also keep the original documents to support your income and expense items, (sales invoices, cash register tapes, receipts, fee statements, contracts, etc...), these will depend on what type of business you run.

If you are unsure what exactly is involved in bookkeeping there are may accounting firms that offer instruction on how to keep the appropriate records.

3) Do I need to open a bank account?

You should keep separate business and personal bank accounts for the simple reason that it will give you an idea of how well your business is doing at any one time. Also, there is less hassle involved when it comes time to do your business year end. You won't have to spend a lot of time trying to figure out whether the income or expenses going through your bank account are business or personal.

4) What is an expense?

A dictionary definition of expense is "paid out (money)" but when used in the business sense it generally means a cost of running a business. To be deductible for tax purposes it must be:

Some examples of items which could be deductible if they meet the above criteria are as follows.

5) What is a fiscal period?

INDIVIDUALS (Proprietors/Partners):

For Proprietors and Partners a business year starts on January 1 ( Or the first business day for a new business and goes until December 31 (unless the business is discontinued). If a split year is desired a deferral can be accomplished in some circumstances through incorporation of the Proprietorship/Partnership entity into an incorporated Company to take advantage of the different rules that apply.

CORPORATIONS:

A fiscal period is the time from which your Corporation starts to the day it ends it's business year. For an existing business this time is usually 12 months. However, if it is a new business or the end of a business this period may be less than 12 months, It cannot be longer than 12 months. In a Corporation you can choose your own year-end date. You choose this date when you first report your business income on a tax return. You cannot change this date without the permission of the Minister of National Revenue, and permission will only be granted for a valid business reason. It may be to the advantage of your Corporation to choose a year-end that falls in the following year. For example, if the start of your business is June 1, 2006 you may choose any year-end up to May 31, 2007. If you choose the year-end to be the Calender year-end, December 31, 2006, the business income would have to be reported in 2006 and the taxes would be payable by March 30,2007 (within 90 Days). If you choose May 31, 2007 any taxes payable would be due 90 days later.

If your Corporation is operating at a loss in the initial months of the your first year of business this loss is carried forward to offset future income (if the business is not new and has paid corporate taxes previously it may be able to carry the current years loss back to recover taxes paid previously.

A Corporation that has a profit and declares a bonus to its employees must pay out this bonus and the appropriate deductions to CRA within six months.Note: For year ends after July 1 this payment can be made to the employee in either the current or subsequent tax year.

PLAN CAREFULLY:

A great deal of planning should go in to your choice of your Corporate year-end date as your decision can often produce a significant tax savings/deferrals. Professional advice is recommended in this area.

6) Do I need to register for GST?

As a business operator you are responsible to ensure you are aware of the specific rules that relate to your business. The GST office supplies brochures and other information which you must keep up to date to ensure compliance. You should make certain that you are receiving and reading all the information pertinent to your business. Registration The obligation to apply to be registered extends to every "person" engaged in a commercial activity other than: a)a small supplier (Taxable sales less than $30,000) b)where the only commercial activity is making supplies of real property by way of sale otherwise than in the course of a business; and c)a nonresident person who does not carry on any business in Canada. A "person" can refer to any of the following: a)an individual, b)an unincorporated business, and c)an incorporated business.

In the case of a partnership it is not the individuals that would be registered it would be the partnership. Registration must take place before the 30th day after the day the person first reaches the $30,000 sales level. Registration is mandatory for all independent taxi and limo operators. Voluntary registration provisions allow new businesses to register and commence charging the tax on their taxable supplies and to claim input tax credits for the GST paid on business purchases and expenses. GST Annual Filing You may be able to become an "Annual Filer." This could help reduce some of the paperwork required by GST. Under the annual filing system, you pay equal instalments four times per year based on the GST paid in the previous year. Only one GST report is filed for the last quarter when a final adjustment is made for the year. In circumstances where net GST is less than $1,500 per year one GST report filed within three months of the Fiscal year-end may sufficient but before you decide on whether or not to file annually you may want to get the advice of an Accountant. The reason for this being that although annual filing may appeal to you because it seems like there is less hassle involved, regular filing may be more beneficial to your business and can be just as uncomplicated (GST Quick Method). GST Quick Method In some situations where GST included in Sales and Revenues that do not exceed $200,000 ($500,000 for grocery and convenience store), GST can be calculated by a specified percentage of GST included sales. Note: If you are already using one method of GST filing and you want to switch to another or if you meet the criteria and decide you don't want to be registered anymore there are special forms that have to filled out and approved by CA - GST before you can to do either of the above mentioned.

7) Can I pay myself wages?

Proprietors and Partners: This is an area of confusion for may people that start a small business. The first thing to know is that you cannot be both the master and the servant at one time (the employer employee relationship). As a proprietor/Partner you are the Master and therefore cannot be the Servant at the same time. Business owners pay tax on their earnings not drawings. The advances that are taken through the year by a proprietor/partner are simply advances on a profit still unknown, to be determined at year-end. After the profit for the year is calculated the proprietor or partner pays tax on the full amount (or partners' portion). Any amount left over is available for the proprietor or partner as tax will have already been paid once their tax return has been filed. The advances taken are not an expense for tax calculation purposes. However, if you hire your spouse who is not a partner in your business regular tax deduction rules apply.

Limited Companies: A Limited Company is created through a process called Incorporation.A new "person" is created in law and this "person" is a separate "person" from its Shareholders,Directors,etc.. Legal advice should be sought to ascertain the liabilities assumed by the Corporation,its Shareholders,Directors and Employees. Often in small businesses these are the same individuals so it is important that the rights and obligations under each category are very well understood in each particular circumstance.Special precautions must be taken when signing documents on behalf of the Corporation.Also some potential benefits can be lost if Personal Guarantees are signed for creditors such as suppliers or the Bank.Usually a lawyer is used to incorporate the Corporation. Pay particular attention to his/her instructions and ask lots of questions. In a Limited Company the nature of the relationship between the owners (Shareholder/Director Employee) changes. The Limited Company is the master as it is a distinct legal person. It employs people to carry out its objectives. These could be the same people that are the shareholders or directors. Regular payroll preparation rules apply with regular remittances to CRA required. Special rules apply to shareholders and even their family members that can remove their eligibility for EI or, are Directors (Alberta WCB is optional). Usually, a reasonable wage is taken through the year and a bonus paid if operations are successful. A bonus declared should be paid out to the employees, and deductions must be remitted within six months of the year end.

The preceding information is for educational purposes only.
As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this,
a further review should be done by a qualified professional.
Although every reasonable effort has been made to insure the accuracy of the information
contained in this, letter, no individual or organization involved in either the
preparation or distribution of this letter accepts any contractual, tortuous,
or any other form of liability for its contents or for any consequences arising from its use.

ABOUT: McDonald & Co. Accountants

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Page maintained by R McDonald, bob@rmcdonald.com Copyright(c) 1995.
Created: 01/07/95 at 5:57:32 AM Updated: 10/26/2006 at 10:06:09 AM