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The federal budget that was released on April 17, 2024 was controversial, to say the least. For years, finance people have been hypothesizing about an increase to the capital gains “inclusion” rate. This budget finally made good on that speculation and was perhaps the most significant provision of this budget.
A capital gain occurs when you sell an asset for a higher price than what you paid for it. Of the gain that you realize i.e. the difference between the sale price and the purchase price, currently only 50% of the gain is “included” and is taxable.
It is now April and we are getting closer to the tax filing deadline. Some of us have anxiety just thinking about it and have understandably decided to procrastinate as the only reasonable response :). Of course there are those of you who have already filed their tax returns, thereby (mostly) eliminating their stress and should be commended for their judiciousness.
As I’ve been immersed in taxes (for what seems like an eternity), I have received a number of questions. I thought I would share a handful of these with you:
It is easy to get sucked into the vortex of social media. It can be a fun distraction and depending on your interests, educational and inspiring. It is also a megaphone where often the most opiniated people hold the most weight. Someone with thousands of followers who confidently asserts a fact, is taken at their word. Unfortunately, thought, some of this information is erroneous or has been manipulated to support an argument and anyone trying to correct errors or present a counter argument is shut down or simply deleted.
As we are firmly into tax season, I thought it would be useful to delve into the endlessly exciting topic of sales tax. I have several blog posts and videos about sales tax which I will link to below, including an FAQ (which I have just updated). In this article, I will provide some context that might be useful.
Sales taxes in Canada in it’s original form was introduced during the Great Depression The federal government introduced a "manufacturer's sales tax" (MST) in 1920 to bolster their revenues during a challenging time. The tax was levied on the sale of goods by manufacturers and was primarily intended to be a hidden tax, that was indirectly paid by consumers.
f you are the owner/shareholder of a small business corporation, you likely know something (and is some cases quite a lot) about dividends. As an accountant, it is one of the areas of small business tax that people ask me the most questions about. Mostly, dividends are relatively straightforward, but there are some complexities for which expert tax advice is often necessary.
A dividend is simply a reward for ownership of shares in a corporation that is represented as a payment to a shareholder, usually in cash, but sometimes in kind. Since dividends are only paid to investors, they are considered to be passive income similar to interest, rental income or gains on sale of investments. This has tax implications in the Canadian tax code in that passive income:
As we approach the deadline to contribute to RRSPs which is February 29th , I thought it would be useful to look at the potential sources that might contribute to your retirement income. For many of us, retirement seems like a long way off and consequently we perhaps don’t spend enough time thinking about it until it’s too late to make much of a meaningful change.
In my last newsletter article about RRSPs (around this time last year), I highlighted how 5,000 per year over 30 years i.e. a total investment of $150,000 invested at 5% (which is lower than the average return on the stock market) would result in $338,899.11 at the end of 30 years. This applies to all types of investments and is essentially the power of compounding which is a function of the rate of return and time i.e. the number of years the investment is earning the return. This demonstrates that contributing, even small amounts, as early as is possible, can lead to a significant nest egg.
As tax season approaches, a question that I get often is whether you should do your own taxes or outsource them to a tax preparer or accountant. My answer, perhaps unsurprisingly, is that it depends.
The first and perhaps most important factor is to determine the level of complexity you are dealing with. If your situation is simple e.g. you have a T4 slip from your employer, RRSPs and a couple of donations, it is quite easy to do it yourself especially using tax software which guides you through the process. However, if you have sold a principal residence or rental property, or have an active investment portfolio or another arcane tax event , and you are unsure of how to deal with this, it might make more sense to outsource so that you are not doubting whether you have done it correctly.
Anyone who has glanced a non fiction bestseller list over the past few years has likely noticed a book called “Atomic Habits” . The thesis of the book is that small incremental changes to our habits (i.e. atomic units) can lead to significant changes in our lives, over time. He explains the behaviour that drives habits, provides strategies for forming good habits and helps to break bad ones.
I mention this as I was thinking about my goals recently (as one does in a new year) and realized that I had some work to do on defining and refining them. My starting point was an internet search on “how to set goals” which lead me to James Clear’s (author of “Atomic Habits” ) website and this post. He provides some great insight on how to set, attain and measure goals. However, the most interesting insight to me was that the systems (i.e. habits) are more important than the goals:
As we rapidly approach the new year, with all it's possibilities and uncertainties, it can be gratifying (and revealing) to appraise the current year. We can do this through various lenses. We can examine our accomplishments and failures. We can determine how much we have changed - are we more cynical or more hopeful than we were last year? We can review our goals from the beginning of the year and assess if we were able to achieve all or at least part of them.
Most people would agree that lifelong learning is a good thing. It helps to keep you sharp, improves confidence and likely makes you more interesting at parties (assuming you don’t nerd out too much :)). It can also be quite gratifying to acquire new knowledge or a new skill, especially in an area of interest.
In Canada, there are also some tax benefits to be had from training. On an individual level, you are eligible for the tuition tax credit or the training tax credit assuming you :
File an income tax return
You were a Canadian resident for the full year
Tuition or other fees were paid to an eligible educational institution for courses that you took in the year that you are claiming the credit for or to certain bodies for an occupational, trade or professional examination
Hobbies by definition can be deeply fulfilling. When engaging, you often lose track of time and while the outcome might be important, it is the journey that provides us with most satisfaction. There is a meditative aspect to being deeply immersed in doing something that you enjoy or love and might include knitting, playing video games, or taking photographs of nature.
For some of us, hobbies can actually turn into revenue generating activities which is (quite literally) an added bonus. It seems like the dream to actually earn some money or even make a career out of doing something that you love. Sadly, Revenue Canada (CRA) or whatever revenue agency you happen to be closest to, is in the business of marring perfection and demands closer scrutiny of any activity that brings in cash.
I was talking to a young business owner in the field of digital marketing recently where we shared information about our respective businesses. As I was trying to communicate to him what I did, I could see his eyes glaze over until I said that it was crucial that every business owner, whether or not they have an accountant, to understand their numbers. Amid the the barrage of information I had given him , it was this simple statement that resonated. For me, it was a revelation as I realized that I had work to do on both understanding and communicating my own value proposition.
A value proposition (VP) is a way of communicating the benefits that your business provides or the challenges that it solves, as succinctly and clearly as possible. Ideally, it should be no more than two or three sentences.
As discussed in previous newsletters business owners have a hard time. You are required to have a working knowledge of a variety of functions to run your businesses in addition to core work of creating and refining your product and/or service. As you grow you might find that you to start to feel overwhelmed and your work life balance is non existent. It is at this point that you realize you need help.
This is easier said than done as it can be difficult to relinquish control and change the mindset that tells you that no one else can do the job as well or in the same way as you do (which I am certainly guilty of). Of course, this is not true and there is a good chance that an employee will actually do the job better as they might have more expertise and a narrower focus.
There’s a quote from Carl Jung that I really like: “Where your fear is, there is your task”.
During a recent consultation, a client mentioned that she had been wanting to start a business, but was afraid and overwhelmed by the sheer amount of (sometimes conflicting) information available. This resonated with me, as there are numerous times that I have clung to the status quo due to the fear of the unknown.
So, perhaps it won’t be surprising that I’m a bit of an excel nerd. It’s capabilities are impressive and it can used by pretty much anyone who knows how to use a computer. Understandably, many business owners that I have spoken to are intimidated by it or are unaware of its functionality. The good news is that it is fairly simple to use and there are a limitless number of resources available to become better at it.
In my view, every business owner needs to have at least a working knowledge of spreadsheets. It is essential for almost any type of financial analysis as it can provide powerful insights and save you a great deal of time. There are numerous other types of ways in which excel (or google sheets) can help. Some of the ways in which I and my clients use excel include:
I was helping someone set up their accounting on QuickBooks recently and was asked about the purpose of the profit and loss statement and how it was relevant to their business. The question was surprising to me, but I quickly realized that many business owners while understanding that accounting is important often have to figure the why by themselves.
A large number of business owners believe that the primary purpose of an accounting system is to ensure compliance with tax obligations. This is correct, however, a well set up system can be much more than that. It can give you insights into numerous aspects of your business that ultimately ensure its success. Some examples of how it can help
A few years ago I read a book called the The E-Myth Revisited: Why Most Small Businesses Don't Work and What to Do About It. (which I highly recommend). The gist of the book is that too much time spent working in the business and not enough time spent working on the business is a big reason why 50% of new ventures fail within the first 5 years. In other words, many of us (I am certainly guilty of this) spend too much of our time on the technical or management of the business rather than growing it. The book focuses on the franchise model, which allowed McDonald’s (and everyone since) to expand (and create empires) relatively seamlessly by systematizing, documenting and automating processes.
Depreciation is one of those accounting terms that sounds like technical jargon, but is actually conceptually straightforward. It simply refers to the measure by which asset will lose value over time. For example when you buy a car (which are notorious for losing a significant amount of value as soon as you drive it off the car dealership parking lot), it will be worth less each year as it starts to deteriorate. Finally, at some point in the future you will have to replace it.
In honour of Canada day, I thought it would be very exciting to discuss tax concepts that you can then share with your friends and family perhaps at a celebratory barbecue or party (this is particularly effective if you want some alone time:))
The idea of earned income is important largely as it relates to RRSP contribution room and is closely related to active income. RRSPs, as you might know, are the single most effective tax savings vehicle available to Canadians. As such, ideally, you want to maximize the amount that you can contribute each year. This is beneficial, even if you can’t contribute the full amount, as your contribution room is cumulative i.e. anything you don’t contribute gets carried forward to a future year.
As a business owner, I think a well crafted survey can provide you with a wealth of information about your customers. Creating a good survey, however ( as I have learnt), can take time and effort. It can’t be too long, shouldn’t have too many open ended questions and has to anticipate the needs of your audience. One of my goals is to get more general information on my readers and where there interest and more importantly, their challenges, lie.
The question that almost every small business owner wants to know, especially at this time of year , is what expenses can I deduct to lower how much I owe in tax. This newsletter is not going to reveal anything groundbreaking, but hopefully it is a useful reminder for expenses that you might have overlooked.
First, lets start by looking at what a business expense is. As defined by Revenue Canada it is “a cost you incur for the sole purpose of earning business income.”
As many of you know, the federal budget was released last week. They now give these budgets descriptive titles - this one is Making Life More Affordable and Supporting the Middle Class which is an interesting focus (I imagine they have a marketing department that comes up with these). Given that the biggest economic headline from the last year or so has been inflation, I suppose it is important that this budget is seen as an effort to help make life easier for Canadians. Unfortunately, the budget does not have much in the way of inflation targeting nor is there anything significant for small businesses. There are however (as always) some items of interest.
Given my immersion in tax season, and since this is at its core a financial newsletter (despite my occasional meanderings), I thought it might be useful to address some common questions and issues:
As anyone who reads the news (or this newsletter) knows, tax time is upon us. Anyone can file their taxes from now until May 1st (since April 30th is a Sunday) without penalty. If you owe tax and don’t file by May 1st, a penalty based on the amount of tax that you owe will be charged. Additionally, you will have to pay interest. If you do not owe taxes or are expecting a refund, there are no penalties or interest but benefits to which you might be entitled (child care, gst credit etc.) will be delayed.
If you search for RRSPs vs TFSAs on the internet, there are about 3.6 million results (some of which I have linked to in the past). But, since the RRSP deadline is approaching and I have spent many hours contemplating and discussing the topic, I thought it might be an opportune time to have a brief discussion. Like most money topics, it isn’t necessarily super exciting , but a good decision can literally make you richer
As we approach the tax filing deadline for T4s (and RL1s in Quebec), I thought it might be useful to (briefly) explore salaries for small business owners, and their implications.
When you’re an employee of a business to whom you are not related, your salary is a representation of the value that you bring to the job that you are doing and is often based on a market rate. If you are a small business owner, you often do not have the luxury of paying yourself a market rate (especially in the early years).
I would like to preface this by saying that as I was going down the rabbit hole of the digital economy, I realized that the term has almost become synonymous with business. The number of business that do not participate in some kind of online activity (whether it is your entire business or some part of it) is increasingly shrinking:
Hope everyone is having a lovely start to the new year! As a gift please find a mild rant below (please feel free to email me with your own opinions on this):
I’ve had various conversations with people on the subject of small business and personal finance which start with “my friend told me”. This can be compared to a game of broken telephone where the original knowledge is interpreted by the various recipients and often results in amalgam of truth and opinion, presented as fact.
As the start of the new year approaches, many of us are thinking about things we want to do differently. Of course the start of a new year is essentially a social construct. January 1st was chosen by Julius Caesar in 46 B.C. to honour the god Janus (after which January is named) and as part of his efforts to align the calendar with the seasons. The Julian calendar forms the basis for our modern Gregorian calendar (which mostly just corrects for leap year which had not been taken into account). Other cultures celebrate the New Year at various times during the year and are often not a fixed date but depend on lunar cycles and may be celebrated over a number of days.
It is hard to believe that we are approaching the end of this year(I was just getting used to writing 2022). It is the time of year (between holiday preparations, Christmas shopping and trying not to overeat) that we tend to take stock of where we are, what we have done over the past year and what we want to do in the new year.