Compass Accounting - Financial Guidance To Achieve Business Success

Topics Of Interest To Small Business

Should I incorporate my business?
i)The main benefit of incorporation is that it offers the ability to the owner(s) of the business to limit their liability to the amount of their investment in the shares of the corporation.

ii) In addition, an unincorporated business does permit the ability to defer the payment of income taxes, in certain circumstances. In general terms, the income tax regulations assess a similar amount of income tax on the profits generated by the business whether received personally by the owner as compared to leaving the profits in the company, paying taxes at the corporation level and then distributing the remaining profits as a divdend. On receipt of the dividend, the owner will pay personal tax at a lower rate, due to the effect of the Dividend Tax Credit. The total tax payable in this latter option, i.e., the amount payable by the corporation plus the amount paid personally, will be very similar to the tax that would have been paid had the amount been received in its entirety by the owner,

iii) Should the owner, at time of planned retirement, wish to turn the business over to a family member, then a corporation offers advantages, relative to an unincorporated business.

iv) Finally, at time of retirement, where the owner wishes to sell the shares of an incorporated business there is a (lifetime) capital gains exemption of up to $750,000 (certain conditions apply).
The disadvantages of incorporation include;
1) as a corporation there are additional administrative requirements to prepare, for example, minutes of the annual meetings of shareholders and directors,
2) where there is more than one shareholder, it may be beneficial to create a Shareholders Agreement so that roles are clearly defined, and
3) since an incorporated business is viewed as a separate person, from a legal viewpoint, relations between the owner and the business have to be formalized, e.g., where the owner makes a loan to the corporation, the details of the loan such as interest rate and maturity date have to be documented.

What is the Quick method of dealing with GST?
To reduce the administrative requirements for remitting GST, the CRA has developed a streamlined method for remitting GST which is referred to as the Quick Method.
The CRA has set out various remittance rates for small businesses; the rates vary according to the type of operation, i.e., whether a service provider, a manufacturer or a reseller.
The GST remittance is calculated as the appropriate remittance rate multiplied by the taxable sales for the period (including the GST charged to customers).
The benefit of this method is remove the requirement to the business to report on the GST incurred on purchases. However, there are several types of transactions that are excluded from the calculation; I will be pleased to discuss the advantages of this method for your business.

Should I obtain a PST Exemption Certificate for items purchased for resale?
Unlike the GST, amounts paid for PST on purchases are not refundable, so it is important that this amount be paid at the appropriate place in the sales cycle.
The PST is applicable primarily to the ultimate consumer. If a business buys an item for re-sale the PST should not be applied to that purchase since the company is not the ultimate consumer.
A PST purchase exemption certificate is available for businesses that deal in the resale of goods and permits the corporation from having to pay GST on selected purchases.

What is the Income Tax rate for small businesses in Ontario?
Income taxes, both Federal and Provincial, are applicable on the earnings of a corporation. At the present time the combined Income tax rate is 18.6% on the taxable income of a Canadian Controller Private Corporation that is based in Ontario.
This combined rate is scheduled to decrease to 17% in 2008.

Do I have to remit GST on items purchased outside of Canada?
If the item in question is to be used in Canada then GST is applicable. However, if items similar to this item are normally categorized as "zero rated" for GST purposes, then the item will likely be exempt and therefore not GST taxable.

Is there still an Investment Tax Credit available for purchases of certain types of equipment?
In the past, expenditures made for manufacturing and processing equipment and for scientific research and experimental development permitted a reduction in taxes payable according to a specified rate. However, the scope of this program has since been greatly reduced.
Today, expenditures made for manufacturing equipment no longer qualifies for a tax credit, except for investments made within designated regions within Canada. Scientific research and experimental development expenditures do qualify for a tax credit.
Further, this program has been extended to include expenditures made for purposes of job creation and for the creation of Child Care spaces by an eligible businesses.

What types of assets qualify for the fast "write off" for Income Tax purposes?
Certain assets, generally those found within Class 12 of the Capital Cost Allowance regulations, are allowed a 100% write-off in the year of purchase. These types of assets include; tools under $500, dies, jigs, computer software (non-system types) and cutlery.
In addition, for your information, the most recent Federal Budget has allowed a temporary increase in the Capital Cost Allowance rate for manufacturing equipment from 30% to 50%.
It should be noted that some of the assets under discussion may be subject to further restrictions.

How will the new Dividend Tax credit rules affect me?
Commencing in 2006, both the Federal and Ontario governments have lowered the Income Tax rates applicable to dividends received from a Canadian public company.
As a result, an individual who resides in Ontario will incur a Tax rate of approximately 12.5% on the eligible dividends described earlier.
This rate compares favourably with the rates applicable to capital gains (17.7%) and on interest income (34.5%).
While tax considerations are an important criterion in any investment decision, other criteria such as personal objectives and investment risk should be included.

Is income splitting, within a family, still permitted?
Several provisions within the Income Tax Act discourage income splitting techniques that are based on transfer of assets between related parties carried out at less than fair market values.
Transfers of assets carried out at fair market values may offer greater opportunities for reducing income taxes. Other opportunities for permissible income splitting include the payment of reasonable wages and salaries to a spouse or family member and, contributions made to a spousal RRSP plan.

Is there any shelter of income taxes available on the sale of the shares of my business?
On disposal of the shares of a small business, the owner may be allowed a lifetime deduction of $750,000 of capital gains, if certain conditions are met.