Small Business, Personal Finance, Business Tax Ronika Khanna Small Business, Personal Finance, Business Tax Ronika Khanna

5 Income Tax Tips from the Trenches

It is the time of year when many accountants and tax preparers live, breathe, eat and sleep taxes (leaving very little time to write about them!).  And while much of it is routine, there are numerous issues that arise, the treatment for which is not immediately apparent and can actually be quite interesting (perhaps more so to a tax nerd), some of which are compiled below:

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Personal Finance, Business Tax Ronika Khanna Personal Finance, Business Tax Ronika Khanna

Invest in RRSPs or Repay your Mortgage?

One of the most common questions asked by Canadian taxpayers is whether they should use their excess disposable income to invest in RRSPs or pay down their mortgage.  Since contributions to an RRSP are made on a tax free basis,  reduction in taxes payable can be substantial.  Conversely,  higher mortgage payments can result in significantly lower interest expense.  As such, there several factors to consider when deciding which option is better:
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Self Employed, Small Business Ronika Khanna Self Employed, Small Business Ronika Khanna

Breaking Up with a (Likeable) Client

Many of us have clients who are annoying, cheap, stupid , high maintenance or some combination thereof.  As a new business owner, we are often stuck with these clients because we need them.  However, we look forward to the day when we will have the thriving business that we so deserve, and fantasize about the spectacular way in which are going to fire them (you can shove your business into your rear orifice etc.)  This is actually a productive fantasy as can help to channel and concentrate anger.  Of course, in the majority of cases, a firing should be conducted with slightly less vigour.

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Last Minute Guidance and Information for Tax Filers
Business Tax Ronika Khanna Business Tax Ronika Khanna

Last Minute Guidance and Information for Tax Filers

Accountants and tax preparers all over Canada are waiting with bated breath for the end of April and dreaded busy season, when sleep will no longer be a luxury and dreams cease to be tax reconciliation exercises.  At this point in the month, most tax filers have submitted their info and efiled (or mailed in) their tax returns.  Of course, there are always a few stragglers (accountants among them) who have either have not had the time to prepare their tax files or simply tend towards the easy yet stressful path of procrastination. For those that are in the straggler category, below is some guidance to help facilitate the process:
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Self Employed, Small Business Ronika Khanna Self Employed, Small Business Ronika Khanna

Small Business Survival Statistics and 9 Steps to Improve Your Chances of Sticking Around

The temptation to start a small business or venture into self employment can be strong particularly for those who are unhappy with their existing employment situation.    The freedom and flexibility that being your own boss seems to offer can be seductive, as is the potential for growth which you, as the business owner, can have full control over.  You may have an idea or a particular skill that you believe is desirable to a specific target market and you are confident that once this target market is aware of your existence they will all be banging down your door.  Consequently, you start your business by offering an amazing product or services, only to realize that building up a customer base is more challenging than you thought.  Additionally, there are a number of other obstacles for which you do not have the expertise (done by another department when you were an employee) whether it is marketing, website development, legal research and accounting.   Finally, you realize that you actually need a fairly sizable source of cash to maintain the business, deal with growth opportunities, whilst ensuring that you are able to support yourself.

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Self Employed, Small Business Ronika Khanna Self Employed, Small Business Ronika Khanna

CJAD Finance Segment with Tommy Schnurmacher – Everything You Want to Know about Small Business

Last Tuesday (August 7th) I was invited to be on Tommy Schnurmacher ‘s weekly finance segment on CJAD. The topic of discussion was “Everything you wanted to know about small business but were afraid to ask”.  It was a lot of fun and although I did not get to cover everything that you would want to know about small business in the 17 minutes that we were on the air, we were able to present some useful information to potential small business owners and fielded a few interesting questions.   Below is a recording of the interview followed by a brief discussion of the points covered and relevant links:
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3 Invoicing Options for Small Businesses and Freelancers
Accounting, Self Employed, Small Business Ronika Khanna Accounting, Self Employed, Small Business Ronika Khanna

3 Invoicing Options for Small Businesses and Freelancers

If you are running a business of any size, it is essential that you have a system in place that allows you to get paid.   A system can range in sophistication from a handwritten receipt to a software generated invoice which is part of an entity wide CRM system.  To meet this need there are countless invoicing solutions available and many billions of dollars are spent annually on setting up systems to meet each business’ unique needs. 

Almost all accounting software geared to small business owners and freelancers have built-in invoicing modules that integrate with your accounting.  This is very useful when doing your books as you don’t have to worry about entering your invoicing manually and it allows you to track your accounts receivable and deposits into your bank account.  There are also invoicing solutions that are not full-fledged accounting systems; however they usually integrate with the more popular software.

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Personal Finance, Business Tax Ronika Khanna Personal Finance, Business Tax Ronika Khanna

What Happens When You Contribute Excess Amounts to your RRSP

Being able to contribute to an RRSP is one of the great tax saving strategies available to all Individual Canadian Taxpayers who generate “earned income” which is essentially income earned from employment (salaries) or self employment,  (Passive income like dividends and interest is ineligible for consideration when calculating how much you can contribute to an RRSP).  There are .unfortunately limits to how much you can contribute and Revenue Canada (CRA) actually imposes penalties on overcontributions to your RRSP.
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Small Business, Business Tax Ronika Khanna Small Business, Business Tax Ronika Khanna

What is the Hiring Credit for Small Business?

Recently, a client received a notice from the CRA indicating that he had received a credit of $265.  The explanation was simply that it was a hiring credit.  Upon further research, we determined that the credit was a result of the provision in the 2011 budget that gave a credit to small business for hiring additional employees.

To be eligible for the credit, small businesses are not required to prepare any additional reporting.  The small business hiring credit is simply calculated based on the increase in employment insurance (EI) premiums paid in 2011 over 2010.  The maximum amount that any business is eligible to receive is $1,000.

Since the calculation is based on amounts reported on your T4 slips for 2010 and 2011, you are only eligible if the slips have been filed for these calendar years.

It appears that the amount of the credit is 100% of the excess of 2011 EI premiums over the 2010 EI premiums, up to aforementioned limit of $1,000.

The credit will not actually be paid out immediately, but applied to your payroll account.

New businesses (like my client) will receive the credit.  Their 2010 EI premiums will be calculated at $0.

Note that since the EI credit should reduce your payroll expense, it will reduce your business expense and by extension, increase profits.  The journal entry is as follows:

Dr. Payroll (EI) Liability

Cr. Payroll Expense

Once you receive your payroll statement from Revenue Canada indicating the amount of the credit, you may reduce the payroll liability owing to them by the same amount.  You cannot, however, estimate the amount of the credit before you have received notification from Revenue Canada.

 

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Self Employed, Small Business, Business Tax Ronika Khanna Self Employed, Small Business, Business Tax Ronika Khanna

10 Corporate Income Tax Facts for Small Businesses

There are essentially two types of tax returns for small businesses and the self employed.  If you are an unincorporated sole proprietor or a partnership, you are required to fill out the statement of business activities (T2125) on your personal tax return also referred to as the T1.  If you are incorporated, then you are required to complete a corporate income tax return referred to as a T2.  (The corporate tax return is in addition to the personal tax return).  Although the accounting for unincorporated and incorporated entities is almost the same, except with respect to the equity sections, preparing the T2 is more complex and is generally best outsourced to a qualified accountant.  Regardless, it is good to have an understanding of some of the important considerations when preparing a corporate income tax return.
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Accounting, Business Tax Ronika Khanna Accounting, Business Tax Ronika Khanna

Is Facebook’s Valuation Justified? A Comparison of Key Financial Metrics to Apple and Google

The recent release of Facebook's S-1, the financial filings that are required to be publicly available prior to filing an IPO, has created a media frenzy. The report has been dissected and analyzed extensively, financial news networks can’t seem to stop talking about it and it seems that people who have never heard of an IPO are discussing it, fittingly, on their Facebook pages.   The most controversial issue, of course, is whether Facebook is actually worth $100 Billion. 

Although Facebook is unique in its global reach and ubiquity, the starting point for any valuation is to compare it with similar businesses.  I have chosen Apple and Google, given the similarity of their business models and their respective global dominance, to compare certain key metrics:

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Self Employed, Small Business, Business Tax Ronika Khanna Self Employed, Small Business, Business Tax Ronika Khanna

Preparing your Small Business and Self Employed Tax Return with UFile Tax Software

Unincorporated Small Business and Self Employed owners are fortunate to be in an age where preparing tax returns have been significantly simplified.  Not only are calculations automated, but contemporary tax software provide interfaces which make input of data fairly straightforward.  Tax software also help taxpayers to optimize their deductions, so preparing your own taxes has never been easier.  Of course tax software is still only a tool and is not a replacement for tax expertise.  Business owners should be cautioned that, when in doubt, it is always best to consult with an an accountant. 
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How to Update Wave Accounting for the 2012 QST Rate Increase

As of January 1st, 2012 the Quebec Sales Tax (QST Rate) which had gone up from 7.5% to 8.5% on January 1, 2011 will now increase to 9.5%.  The effective sales tax in Quebec will go up from 13.925% to 14.975%.  Since QST is calculated on the net amount + GST, the rate is not 14.5% but 14.975% .  In other words the effective QST rate is 9.75%.  Business owners will need to update their invoicing and accounting systems accordingly to ensure that the rate is properly reflected.

If you are using Wave Accounting, the update to the rates is fairly straightforward, with one little quirk.  Since Wave, unlike Quickbooks, does not allow for the QST to be calculated on the GST, the effective rate has to entered manually.  This is done as follows:

To update Quickbooks for the tax rate increase, please see “Updating Quickbooks for the 2011 QST Increase”.  The procedure is essentially identical except for rates.

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Accounting, Regulatory/Legal Ronika Khanna Accounting, Regulatory/Legal Ronika Khanna

Deferred Revenue and its Impact on your Small Business

Most small business owners are familiar with the concept of revenues, which is essentially the total sales of their product or service, to customers and clients, prior to deducting any costs.  Revenues are a crucial component of business’ profit and loss statement and it is essential that they are accurate so that the business owners may effectively analyze the profitability of their businesses.  Additionally there are third parties for which the accuracy of the revenues, and corresponding financial statements, is essential for effective decision making.  Third parties include tax authorities, banks, partners and key employees (on which remuneration/bonuses might be based). 

At first glance the calculation of total sales/revenues seems fairly straightforward.  Add up your total sales (or ideally have your accounting software do it for you) and voila – you have your gross sales. There are, however, several types of adjustments that need to be made depending on the nature of the sale, including any amounts that might be construed as deferred revenues.  Essentially (and quite simply) deferred revenues represent sales that are invoiced their customers now for goods or services to be provided at a later date.   Revenue recognition principles dictate that, unless the sale has actually occurred, the revenue cannot be recognized.  In other words these amounts must be reflected as deferred revenues.  Once the product or service has been delivered or performed, the deferred revenue is then considered to be an actual sale/revenue.  To a non-accountant, this can sound like a lot of mumbo jumbo.  The examples of deferred revenue below should help illustrate the concept more clearly:

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