Canuckbusiness

Start a business, Do your taxes, Save money

When do I have to register for GST/HST?

What is the GST/HST process for small businesses?

Imagine yourself as a modern Sheriff of Nottingham, without pillaging rights, and you will have a good idea of the process. First, you charge your customers GST/HST on what they buy from you (tax the serfs). Then, at the end of the period, you take the total amount of GST you collected and deduct any GST you paid when buying stuff for your business (horses and ale for your men). Then you submit the balance to Prince John, I mean the government (or get a refund if you paid out more in GST/HST than you collected).

Do I have to register for GST?

If your business meets one of these conditions you MUST register and begin collecting GST/HST for the government.

    1. If sales from your business exceed $30,000 for any single 3-month period (one quarter).
    2. If sales from your business exceed $30,000 for any consecutive 12-month period (4 quarters).
    3. If you are a taxi or limousine operator whose fares are regulated by law, no matter how much your sales are.

Voluntary registration

You can register even if you make less than $30,000 in sales. Why would you wish to do this? The only reason I can think of is your business purchased a lot of things in its start-up phase and you wish to get the HST/GST back on these things. Otherwise it is probably going to be a waste of time.

Here’s a link for more details.

 

September 22, 2011 Posted by | Random Questions, Running Your Business, Starting Your Business | Leave a comment

What is a legitimate business in CRA’s view?

“Since I’m a business owner, I can right off all kinds of stuff, like gas and groceries, right?”

I get variations of this one a lot. Businesses are allowed to write off expenses that are incurred in the operations of a business. That much is true. But first you have to convince the Canada Revenue Agency that you actually have a business. Initially, this seems easy. You tell CRA that you have a business and they say nothing, but allow you to file your tax return year after year. It may seem like they don’t care, or trust you implicitly, but the truth is, they are just ponderously slow. But make no mistake: if you have business losses for many years, the giant will awaken.

What the CRA considers a business:

A business is pretty much any undertaking you can imagine that is carried on for profit. And here is the kicker: there must be a “reasonable expectation of profit“.

In other words, if you don’t think you can make money in a business but plan to just start one solely with the intention of writing off business losses against your income from another source (like your job) then you do not have a legitimate business in the eyes of the CRA. If you start one of these “pseudo” businesses, and after several years of operating at a loss (and writing off those losses against other income), the CRA can and will reassess your tax returns and disallow all those losses you claimed in past years. They may or may not hit you with a penalty, but they will definitely charge you interest and send you a nice bill for those taxes owing from past years.

What does “reasonable expectation of profit” mean anyways?

It is CRA’s way of saying that within a reasonable amount of time your business must show a profit, otherwise it is not a business. So what is a reasonable amount of time? That depends on the industry. A restaurant business may be six months, but an oil and gas company could be ten years. The CRA will compare your business to others in the industry, and if things look dodgy you will have to prove why you are sticking with something that is obviously a failure.

No relationship joke intended.

Go here for more details.

August 20, 2011 Posted by | Random Questions, Starting Your Business | , , , | Leave a comment

What does CRA consider “acceptable” business records?

A friend of mine is just starting a small service business. He expects to have under $30,000 in sales in his first year. So he took me for lunch to pick my brain. That conjures up an image doesn’t it?

His first question was this: “Will CRA accept the Simply Accounting software for my books or do they only accept QuickBooks?”

I said both were fine in CRA’s view. Then I took out a pen and wrote on a paper napkin “Total Revenue” and “Total Expenses”, and handed it to him. “But you don’t need either. This is a perfectly legitimate set of books right here,” I said. “And if you run out of room, flip it over and write on the back.”

He thought I was joking.

But the truth is, you don’t need to have fancy software or nice ledger books with pretty columns. All you need is a way you can track what you’ve spent, what you’ve earned, and be able to back those numbers up with “source documents“. And what are “source documents”? Receipts, along with proof of payment.

In CRA’s own words:

Business records

You are required by law to keep records of all your
transactions to support your income and expense claims.
Keep a record of your daily income and expenses. We do
not issue record books or suggest any type of book or set of
books. There are many record books and bookkeeping
systems available. For example, you can use a book that has
columns and separate pages for income and expenses.
Keep your records, along with your duplicate deposit slips,
bank statements, and cancelled cheques. Keep separate
records for each business you run. If you want to keep
computerized records, make sure they are clear and easy to
read. “

I do have a “Magic Rule” though when it comes to keeping receipts or other source documents:

Magic Rule #4: Keep all receipts and other source documents in the original medium you received them.

This means if you have an electronic receipt sent to you in an email, do not simply print out the receipt and destroy that email. Feel free to print out the receipt to make adding up your expenses easier at year end, but keep that original email somewhere as well. Likewise, if you received a paper receipt from a dollar store, scan it if you like but do not destroy that original receipt.

Call me cautious, but a source document is like a Highlander immortal: “There can be only one!”

Oh, and one more thing when it comes to collecting receipts. If you go to a restaurant and pay with a credit card be sure to collect the receipt that lists what food you ate as well as the credit card receipt. One without the other is no good. An acceptable receipt is one that clearly shows when and how payment was made. So the little old-school cash register receipts that only show how much something costs, but says nothing about you actually having paid, are not acceptable in CRA’s view. Ask for a handwritten receipt. Likewise, don’t try picking up the receipt off a restaurant table when someone else put it on their card.

How long do I have to keep all these annoying bits of paper?

SEVEN YEARS. The same number of years in a bad luck sentence for breaking a mirror. The same number of years most relationships don’t get past. The same number of years that guy spent in Tibet.

Okay, I can hear the tax geeks pounding on my door (light tapping, really). CRA actually says:

“As a general rule, you must keep all of the records and supporting documents that are required to determine your tax obligations and entitlements for a period of six years from the end of the last tax year to which they relate.”

But some of us have trouble counting years, so I always tell my clients seven. Call me cautious. And it’s easy to remember.

August 12, 2011 Posted by | Magic Rules, Running Your Business, Starting Your Business, Uncategorized | , , , , , , , | 8 Comments

Expense Summary Worksheets

I was going to just put up a single expense “template” but I got carried away and thought I might as well put up separate sheets for the most common expenses that 99% of businesses use. If you need a different category, you can make a copy of one of these, change the name on the front “summary” sheet, and it will flow through to the monthly sheets.

Put these in a folder on your computer with the Revenue Summary from my previous post, all backed up with the shoebox full of receipts, and presto! You have a complete set of books that the Canada Revenue Agency (and I dare say any other country) would be very happy to see.

Please let me know if you find a mistake and I’ll fix it.

I’ll talk more about these in upcoming posts.

Advertising

Assets Costing More Than $400  (Capital assets–not true expenses but we need to keep track of them)

Business Fees & Licenses

Insurance

Interest & Bank Fees

Inventory Purchases  (For those of you who have COGS or don’t know what it is, read this post and this one too)

Legal & Accounting

Maintenance and Repairs

Meals & Entertainment

Not Sure Where it Goes  (Every business has one of these but usually uses a cooler name!)

Office Expenses

Rent

Supplies

Telephone, Internet and Utilities

Travel

July 29, 2011 Posted by | Free Downloads, Running Your Business, Starting Your Business | , , , , | Leave a comment

Revenue Summary Worksheet

Here is an Excel workbook for you to keep track of your business revenue.  Feel free to modify it to suit your business needs and share it with whomever you like. I just ask that you keep my copyright notice and links to my websites on the sheets.

If you find anything not working properly, please send me an email at quikacct@gmail.com to let me know and I’ll fix it.

I will also be putting up similar worksheets in the next week or so to help you track expenses.

For Recording Revenue:

Note: Enter your business name and year on the “Summary” tab and it will flow through to the monthly tabs automatically.

Revenue Summary Template

Example of Hank’s 2004 Revenue Summary

July 27, 2011 Posted by | Free Downloads, Running Your Business, Starting Your Business | , , , , | 5 Comments

Setting up Your Business Books: Step 2 – Revenue

Revenue = Show me the money!

It’s time to get out a fresh envelope for the shoebox and write “Revenue” on it.  Or “Sales”, or “$$$ I collected”.  Any of these will do.

The important thing is that whatever you put in this envelope gives you enough information to trace where, and in what form, the money came from.

This might be a good time to re-read the section about bank accounts in my post “What do I name my business?“.

MAGIC RULE #3: Open a dedicated bank account that you use ONLY for BUSINESS. Deposit all revenue into this account and, whenever possible, pay expenses from here as well.

Not “mostly” for business and “occasionally” for gas or pet food. Don’t go there. And whatever you do, NEVER deposit personal money into your business account unless it is well-documented. Occasionally, you may need to loan your business money so it can pay its bills, but when you do this write out a promissory note and keep it with your business papers in case you ever get audited (but don’t put it in either the Expenses or Revenue envelopes). If you do have to loan the business money, make it for an amount greater than what it needs at present. Don’t lend it $22.79 for duct tape. Lend it $200 once instead. Pay it back as soon as you can, write “paid in full” on the promissory note, but keep it with your papers for the year. You don’t have to put “loans” on the tax return at the end of the year.

Why am I being such a stickler for this you ask? Because when Revenue Canada audits small business owners, the first thing they do is look through your business’s bank statements. If things don’t look organized and reasonable, then they  go into every personal account you have ever owned. If they find deposits in any of them that you cannot prove were personal, then they attribute that as business income and you will have to pay tax on it. And maybe even a penalty if they think you were trying to pull one over on them.

Say Uncle Larry, the deadbeat, finally paid you back the $1,000 he borrowed. You tell the CRA auditor this and he says, “Yeah, right. Larry says he can’t remember paying anything.” So they slap you with tax owing, a penalty, and most of the windfall disappears.

“Thanks a lot Uncle Larry.”

I don’t ever want to hear anyone have to say that. Open a free bank account somewhere instead.

July 13, 2011 Posted by | Magic Rules, Running Your Business, Starting Your Business | | 4 Comments

I have COGS! What now?

Cheer up. It’s not all that bad and I’m sure this post will make you feel a lot better.

When you have inventory in your business, chances are pretty good that at the end of the year you will not have sold everything. The goods (or the material you use to make goods) is what we call your “Ending Inventory“. In other words, this is the amount of unsold inventory on hand at the end of the year.

Let’s look at an example.

Bob is tired of rubbing people’s backs. He gives up his massage business (a service business) and becomes a coffee roaster (an inventory business). He spends $10,000 on an old coffee roasting machine, $1,500 on 500 pounds of green coffee beans, and starts a new business.  Because he is a regular reader of the Canuckbusiness blog (I’ll put in a link to that cool blog when I have time), he puts the receipt for his coffee roaster in the envelope in his shoe box that says “Capital Assets“. And if you read my last post, you will correctly assume he will put the $1,500 receipt for the “green” into the “Purchases” envelope. Nice. Time to roast some beans.

Bob’s first year of business comes to an end. And it was slow. He weighs his green beans and sees he has 200 pounds left! And now he has to file his tax return. This is where the COGS will be calculated.

So what exactly is COGS?

Here is one definition (I made it up):  “how much you paid for all the stuff it took to make (or buy) ONLY the products that you sold in the year”.

Here is another definition (by someone smarter than me): “The cost to the business of all the goods sold during the year”.

And here is the almighty Canada Revenue Agency’s take on it:
Opening Inventory + Purchases + Direct wages + Subcontracts – Closing Inventory = Cost of Goods Sold

Since only CRA’s opinion matters when it comes to filing your taxes, we’ll forget everything the first two bozos said and focus on the above formula. There are places on the “Statement of Business (Professional) Activities” form for each one of the elements in the above formula. In TurboTax you just plug your numbers in for each of these and PRESTO! The dreaded COGS is magically calculated for you. We just need to know what these elements are.

Opening Inventory: Total cost of all inventory on hand at the beginning of the year. This is identical to the previous year’s Closing Inventory.
Purchases: Total cost of all inventory (or materials used to make inventory) bought during the year.
Direct wages: Wages paid out to workers to manufacture the inventory.
Subcontracts: Amount paid to contract workers for work directly involved with manufacturing the inventory.
Closing Inventory: Total cost of all inventory on hand at the end of the year. This will be the Opening Inventory for the next year.

Depending on your business you may need to get another envelope for “Direct Wages” or “Subcontracts”, or possibly both. Most businesses just starting out probably won’t need either of these because the owner will be doing everything.

Back to Bob:

Let’s see how our Bob made out with his coffee roasting venture. Here are the numbers he would use on his tax return:

Opening Inventory: $0 (this is his first year so he started with nothing)
Purchases: $1,500
Direct wages: $0
Subcontracts:
$0
Closing Inventory: $600 (200 pounds X $1500/500)

Bob’s COGS = $0 + $1,500 + $0 + $0 – $600 = $900
Opening Inventory + Purchases + Direct wages + Subcontracts – Closing Inventory = Cost of Goods Sold

But who cares?

Bob’s COGS for the year is $900. Whoopee–why bother? As I said before, we don’t even need to calculate COGS if we don’t feel like it because TurboTax will do it on the tax form for us. So what’s the point?

Because…

Total Revenue – COGS = Gross Profits

And Profits are sexy. So we’ll talk about them in another post.

July 4, 2011 Posted by | Running Your Business, Starting Your Business | , , , , , , | 11 Comments

You have COGS? Sorry to hear that. Magic Rule #2

We can’t truly say we’re done with our Expense envelopes until we determine what kind of business we’re going to be operating.

There are really only two types: a service business or an inventory business. Well, I suppose there are three types because you can have a combination of these as well.

Here are some examples.

Service business:

“Bob’s Massages“. Bob has clients who pay him for the service of a massage. He doesn’t sell anything else. This is strictly a service business. He has no products that he buys wholesale and sells for a higher price.

Inventory business:

“Bob’s Aromatherapy Shop”. Bob’s hands start aching from giving too many massages. His doctor tells him he has to change his profession. He decides to buy a big bottle of nice smelling oil and puts it in a bunch of cute little bottles and starts selling them at a stand in the mall. He no longer has a service business. Now he has inventory.

And where there is inventory, COGS is sure to follow.

Though COGS is not an “expense” in any accountant’s mind, it does share some similarities. COGS is an acronym for COST OF GOODS SOLD, and like expenses, it is deducted from Gross Profits to arrive at a business’s Net Income.

If you run a service business, and you will never sell inventory or buy goods at wholesale to sell at a higher (marked up) price, then you can just forget all about these ugly COGS. Stop reading now. Go do something fun.

If, however, you suspect you will try to make some cool craft items from things you buy at the dollar store, and sell them on Rodeo Drive, I’m afraid COGS will be an essential part of your business. But don’t worry. All that is required to keep the COGS monster in its place is one more envelope for your shoe box. So grab one, write “Purchases” on it, and toss it into your hi-tech Accounting System…er, I mean shoe box.

This brings us to…

MAGIC RULE #2: If you have inventory in your business (or resale items) you will need to calculate COGS at year-end, therefore, create a “PURCHASES” envelope  for your shoebox. Then read my upcoming post titled “I’ve got COGS. Now what?

If you ONLY have a service business, go watch TV.

June 28, 2011 Posted by | Running Your Business, Starting Your Business | 2 Comments

Expense or Capital Asset: Magic Rule #1

Remember that $2500 computer you bought last post? Well, I figure now is as good a time as any to talk about the difference between an expense and a capital asset.

Don’t panic. People always make this way harder than it needs to be.

A “capital” asset is just like a “capital” letter. In other words, it’s BIG.  Bigger than your average, normal, everyday asset.  And how do we define  big?  Why by $$$ value of course. This is business we’re talking about.

Let’s say I spend $50 on some ink for my printer. It may not be some big capital asset, but it is an asset nonetheless. It’s a little asset. How about a $0.50 pen? That’s a little asset as well. The Canada Revenue Agency recognizes that “little” assets like these are probably not going to last more than a year of normal use. And if they do, well CRA doesn’t care. Chances are, you’ll probably have to throw them away and buy another one before twelve months pass. Maybe several depending on what it is. And so, CRA allows us to “expense” these tiny assets completely on our tax return. This means we are allowed to decrease our income by the full amount we paid for these disposable assets in the same year we bought them.

But the CRA does care about those BIG assets (those Capital Assets). They know that if you spend a lot of money on something, you’re probably going to use it for more than one year. So they don’t allow you to deduct the full amount of the asset (“expense it”) in the year that you bought it. They will instead, only allow you to deduct a percentage of it, and this percentage varies depending on the asset.

For example, you can only deduct 30% of the value of a car, 4% of the value of a building, 20% of a fax machine, but at this point in time, 100% of a computer.

Holy cow! I thought this was going to be easy!

The truth is these percentages and categories change all the time, so let’s not waste any more time worrying about them. We’ll let our tax software at year-end tell us what we need to know. And if that doesn’t work, we might have to pay an accountant for the first year-end to figure out what category to put a certain asset in.  But once we have that sorted out, we’ll be able to let the tax software calculate the percentage for all the following years.

I’m going to give you a magic rule for determining if something is an expense (a little asset) or a capital asset.  But first, go back to your shoebox full of envelopes. Find a new envelope and write on it “Capital Assets”.

Magic Rule #1:

If it cost less than $400, call it an expense and put it in one of those envelopes you made after last post.

If it cost more than $400 put it in the “Capital Assets” envelope, if and ONLY if, you will still be able to use it next year.

In other words, if you spent $500 on pamphlets and you handed them all out, they would qualify as “Advertising Expenses” because you used them all up in the year. Even though you paid $500 for them, you would still put them in the “Advertising Expense” envelope.

So, the $2500 computer receipt would find a home in the “Capital Assets” envelope.

Stay tuned for more magic rules.

June 21, 2011 Posted by | Running Your Business, Starting Your Business | , , , | 4 Comments

Setting up Your Business Books: Step 1 – Expenses

You may be wondering why I’m going to talk about tracking expenses before tracking revenue. This is because most businesses incur expenses long before they have any sales coming in. Sometimes a business operates for months before they get any sales.  Of course, I hope that is not true in your case.

You have to fill out a “Statement of Business Activities” (T2125, used to be a T2124) as part of your tax return. On it are a list of expenses that CRA thinks are common to most businesses.  They have an “other” expense category, but unless you want a “real” person looking at your tax return, I feel it is best to leave this one blank. I find computers to be much friendlier when it comes to taxes.

Go here if you’d like detailed explanations for each of these.

  • Advertising
  • Meals and entertainment
  • Bad debts
  • Insurance
  • Interest
  • Business tax, fees, licences, dues, memberships, and subscriptions
  • Office expenses
  • Supplies
  • Legal, accounting, and other professional fees
  • Management and administration fees
  • Rent
  • Maintenance and repairs
  • Salaries, wages, and benefits
  • Property taxes
  • Travel
  • Telephone and utilities
  • Fuel costs (not related to Autos)
  • Delivery, freight, and express
  • Motor vehicle expenses (Including fuel, insurance, maintenance, etc.)

Any expense you hope to claim must be pigeon-holed into one of these categories. So, look through this list and choose the categories you think you will use (most people use less than half of these).

Set up Your Business Books: Step 1

Now here’s where I go high-tec on you: Get a shoe box. Get some envelopes (one for each expense category you will use). Write the names of the expenses on the envelopes. Now take one more envelope and write on it “What do I do with these?”. Throw all the envelopes in the shoe box and put the box in an easy to get at place. Leave the lid off! You want it to be as easy to use as possible.

When you get a receipt for those fancy new business cards you just bought, throw it in the “Advertising” envelope. You won’t need to touch that receipt again until tax time. If you buy something for your business, like for example, a $2500 computer, put it in the “What do I do with these?” envelope.

Don’t worry. If you keep reading this blog, you’ll soon be fishing those receipts out of that envelope and stuffing them where they belong!

June 17, 2011 Posted by | Running Your Business, Starting Your Business | , , , | 5 Comments