What Is a Capital Dividend and How Does It Benefit Your Corporation

When an individual sells some property, investments or other assets (perhaps you have a Picasso lying around that's appreciated in value), only 50% of the gain is subject to tax. For example if you sell a rental property and realize a gain, after brokerage and expenses, of $100,000, only $50,000 will be taxable. (The actual tax that you pay will depend on your marginal tax rate at the time). The other 50% of the capital gain is a non taxable gain. For a corporation, however, this distinction is a little more complex. In order to allow corporations the same benefit as individuals with respect to capital gains and losses, the 50% non taxable portion of the gain on a corporate capital transaction is allocated to what is referred to as a Capital Dividend Account or CDA. The balance in the CDA, which is a cumulative balance over the lifetime of a corporation, is then available to the shareholders on a tax free basis.

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How to Pay Dividends: Completing the T5 Slip and Summary

This post has been updated to reflect changes in 2019

If you are the owner of a corporation, you can choose to pay yourself (and other shareholders) dividends instead of a salary, or they can be paid in addition to a salary.  If you do decide to pay yourself dividends, it is important to ensure that you prepare the proper documentation for Revenue Canada (CRA) and if you live in Quebec, Revenue Quebec.  The documents are due by February 28th of the calendar year following the year in which the dividend was paid.  And although no taxes are due at the time of filing with the government, interest and penalties apply for late payment.  The documents that need to be filled out and returned to the CRA and MRQ are discussed below:

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Investment Strategies for Your Incorporated Small Business

One of the benefits of having an incorporated small business is that after paying yourself a salary or dividend any excess funds can be invested directly through the corporation. Since small businesses often cannot predict how their business will perform from year to year, the ability to retain funds in the corporation allows for a cushion to smooth out fluctuations in earnings which can then be paid out in lower performing years. By keeping the funds in the corporation, the business is able to defer tax since usually the small business tax rate is lower than the personal tax rate. Some points to consider:

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4 Alternatives for Preparing Your Small Business Payroll

Paying salaries to employees (or yourself) requires more than just determining the gross amount to be paid.  The Canada Revenue Agency and Revenue Quebec require that employers calculate a variety of taxes on the salaries paid, remit them to the federal and provincial governments and prepare annual reports demonstrating that the calculations are correct and all salary deductions have been paid.  This can be a lot of work for business owners whose time is better spent generating sales and building their businesses.  Luckily there are many options for small business owners to calculate their payroll and salary remittances, many of which simplify the process:

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Why you should register your business online with Revenue Canada and Revenue Quebec (and how to do it)

With all data moving to the cloud these days and ubiquitous online access to banking, customer and supplier portals, it makes sense that Revenue Canada (CRA) and Revenue Quebec (RQ) have followed suit. Considerable resources have been spent by the revenue agencies on developing their online portals and encouraging both individual taxpayers and businesses to move the majority of their tax related interactions online (almost every accountant conference has an appearance by a CRA representative talking about the improvements to their online portal and imploring accountants to convince their clients to make the switch). The upfront investment has resulted in significant cost savings for CRA/RQ (postage costs alone have dropped dramatically) while improving accuracy and perhaps most importantly increasing the effectiveness of tax collection efforts. CRA personnel have been able to move away from verifying calculations and manually reviewing tax returns to more value added analysis which has allowed them to identify tax miscreants with higher accuracy.

For both the individual taxpayer and small business owner there are numerous benefits to registering online:

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Guidance on Deducting Home Office Expenses

One of the benefits of having a home based business (for freelancers, self employed contractors and small business owners) is that you can deduct the expenses relating to the space that you use to work.  This can result in a reduction in your tax bill for costs that you would incur regardless, which is certainly an incentive to being your own boss.  

Criteria for Deductibility:

For home office expenses to be deductible, they have to meet the following criteria: 

  • It has to be your principal place of business i.e. you cannot deduct home office expenses if you have another office that relates to your business, elsewhere, even if you work 22 hours a day or you check your blackberry in bed.

  • The space designated as your home office is used to earn business income and/or you meet clients or customers on a regular basis. You can deduct expenses relating to the workspace in your garage which is used for home improvement projects.

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10 Payment Alternatives to Help Small Businesses Get Paid Faster

One of the numerous ways in which technology has benefitted small businesses has been to increase the number of payment options available.  While  conventional methods of payment like cash and cheque still exist, there are also a variety of other options like debit cards, internet transfers and mobile payments that have greatly facilitated payment infrastructure and made financial management significantly more flexible.  Every business owner must wade through the alternatives and decide what type of payment options are right for their customers.  This is based on several factors including their industry, common practices, location and of course business specific considerations.  For example, a retailer will usually allow for payment by credit and debit cards, cash and possibly some form of mobile payment.  Conversely, a law office may not offer a credit card option, but request payments via cheque or bank transfer.

Some payment alternatives for small businesses to consider are discussed below:

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Prevent Cash Flow Crises with these Ten Tips:

Prevent Cash Flow Crises with these Ten Tips:

One of the most pervasive problems that face small business owners, particularly in the initial and growth stage of their enterprise, is maintaining sufficient cash flow.  Many businesses with great potential have suffered an untimely demise due to their inability to pay their suppliers, employees and revenue agencies (always pay your government obligations otherwise Revenue Canada and Quebec will take matters into their own hands and potentially freeze your bank accounts).   Often these issues can be prevented through a greater awareness of your small business’ cash flow requirements along with a proactive mindset.  This list focuses on ten different ways you can manage this process to reduce the number of potential crises that arise:

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Should you Register or Incorporate Your Small Business?

When embarking on a new business venture one of the first decisions that has to be made is the type of legal structure best suits the needs of the new business. In Canada there are essentially two choices - business registration (sole proprietorship or partnership/unincorporated entity) or incorporation.  Like many small business decisions, the answer in not necessarily straightforward and depends on the business owner’s specific set of circumstances:

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Excel for Small Business Owners

As a confirmed excel nerd, there is something about large amounts of data that I am inextricably drawn towards . I suppose it has something to do with an affinity for organization combined with a love of numbers and the innate desire to solve problems. As an accountant and financial consultant , I am often presented with the task of organizing and analysing data into a format that allows for greater insight into my clients businesses . And although good accounting software is absolutely necessary for any small business owner, a significant amount of analysis and reporting is done most effectively in excel.

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How Being Prepared for Bad Debts can Improve Cash Flow Decisions

One of the more unpleasant aspects of being a business owner is having to chase clients that do not pay.    It is simeltaneously frustrating, stressful and disheartening, while attempts to collect are an utterly unproductive use of time and can have a significant impact on cash flow, particularly if you are unprepared.

There are ways to mitigate the possibility and impact of bad debts.  Some of these include: 

  • Performing a credit check on potential customers
  • Charging a retainer, which is paid up front
  • Offering discounts for early payments
  • Allowing several payment options including credit cards which allows for immediate payments
  • Following up on delinquent receivables dilligently.

Regardless of your efforts to prevent them, incurring bad debts is often inevitable and ultimately, a cost of doing business.  Consequently, it is important to ensure that you are prepared.

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How to Register a Small Business in Quebec

Many budding business owners are interested in setting up a small business or becoming self employed, either on a full time or part time basis, but are not really sure where to start.  The process of registering a business in Quebec, depending on your circumstances,  can actually be quite simple or it can be a little more involved.  Below we look at the questions that you need answer to determine your business registration obligations:
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Are Clothing and Other Personal Attire Costs Tax Deductible?

The fundamental rule for deducting any type of expense from your business income is to determine whether it was incurred for the purpose of earning income:
No deduction shall be made in respect of an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property
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GST and QST Considerations For New Business Owners

The Goods and Services Tax or GST is a consumption tax that is charged on most goods and services sold within Canada, regardless of where your business is located.  Subject to certain exceptions, all businesses are required to charge GST , currently at 5%, plus applicable provincial sales taxes.  A business effectively acts as an agent for Revenue Canada by collecting the taxes and remitting them on a periodic basis.  Businesses are also permitted to claim the taxes paid on expenses incurred that relate to their business activities.  These are referred to as Input Tax Credits.

Does Your Business Need to Register?

Prior to engaging in any kind of commercial activity in Canada, all business owners need to determine how the GST and relevant provincial taxes apply to them. Essentially, all businesses that sell goods and services in Canada, for profit, are required to charge GST, except in the following circumstances:

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Should you register for GST/HST and QST and What it Means to Be Zero Rated

One of the first tax questions you will be faced with as a small business owner or self employed worker is whether you need to register for GST/HST & QST.  The answer in most cases is that if you anticipate that your annual gross revenues (total sales) are going to exceed $30,000, then you should register for GST/HST and QST UNLESS you are considered to be providing a zero rated or tax exempt product or service, in which case you are not required to register.

A more detailed analysis of whether you are required to register for GST-QST

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Guidelines For Deducting Conference and Training Expenses

Attending conferences and investing in ongoing training can be a great way for small business owners to keep current on industry developments and improve their skills.  It also allows for networking opportunities and occasionally includes trips to exotic locations (and Las Vegas), which can be a nice break.  The best part is that the cost of both the events and travel are deductible against your business income, subject to specific guidelines discussed below.

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The Many Hats of Self Employment

Being self employed comes with many benefits.  You can sleep in, work in your pyjamas and go shopping in the middle of the day.  You no longer have to report to a boss who doesn't really understand what you do or deal with mindless workplace politics.  It all sounds wonderful, but unfortunately there are also many challenges.  Small business owners have to deal with uncertainty and risk.  They need to be disciplined and deal with the many demands that being self employed can impose upon us.  In the early stages of self employment, most of us have to take on the responsiblity of fulfilling the administrative functions that you find in a more established business. Some of the skills that you need to develop are:

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One Simple Step to Help Streamline your Self Employed Finances

If you are self employed or a small business owner,  you have probably discovered that keeping track of your accounting and finances can be time consuming and occasionally frustrating.  Unless you are an accountant, you’re never really sure if you are doing things correctly.  Consequently, you procrastinate, which really just makes things worse at year end or tax time.  To combat the problem it is important to have tools in place to facilitate the process and make it less painful, which could include  accounting software and/or a bookkeeper as well as a good organization system for your documents, whether it is electronic or paper format.  Another very simple measure that you can take is to have a separate bank account for your business.
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Should You Pay Yourself a Salary or Dividend? 7 Considerations For Small Business Owners

While incorporation has many benefits for small business owners, it does introduce additional complexities that are not faced by registered  businesses.  Unincorporated business owners are essentially taxed on their net business income, which allows for more time to devote to tax planning and how to spend all of your richly deserved profits.   Incorporated business owners, on the other hand,  cannot just withdraw cash from their businesses as the need or whim arises.  There needs to be a formalized structure in place which usually takes the form of either salary or dividends.  Either type of remuneration has tax and other implications that need to be considered before making a decision. 

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Tax Tips: Car Expenses and Benefits

Access to a car can be crucial to running a small business effectively.  Costs of ownership, however, can be onerous, especially in the early stages when your business is not hugely profitable.  Luckily, Revenue Canada allows individuals and corporations who use their cars to generate income to deduct the expenses and actually provides fairly comprehensive (i.e. complex) guidance to this end.  Below are some of the main provisions that impact small business owners:
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