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 Welcome to our frequently asked questions. Our goal is to update this section as new questions arise. We recommend that you review the publications in our Resource Centre, since they address many common questions.
Topics Covered:
Accounting / Software [top]
| Q. | What computerized accounting system do you recommend for small to medium-size businesses? | | A. | There are many good small accounting systems on the market right now, and the one that we have found to be the best, and used by a great number of our clients, is QuickBooks®. This is, by far, the best selling small business accounting system in the United States, and also has a huge following in Canada. They have an office in Western Canada, and the product has been fully Canadianized. You usually can't go wrong choosing QuickBooks®, but please check with your accountant before making any final decision. |
| Q. | Should I upgrade my accounting system on an annual basis? | | A. | It is usually a good idea to upgrade your accounting system on an annual basis as the upgrades contain many new features and bug fixes that are essential to operating your business most effectively. Your accounting system is the backbone of your business, and it is well worth the small investment to make sure that you are using the most current product, that is supported by both the manufacturer and your accounting professional. |
| Q. | Do I really need to produce monthly financial statements? | | A. | It is extremely important that your financial records are always accurate and up to date. The best way to ensure this is to insist that you bookkeeper/accountant provides you with complete and accurate monthly financial statements, with all of the supporting schedules you need to run your business. |
| Q. | How often should I do backups of my data? | | A. | You cannot do too many backups. The minimum is daily, and, if you are doing a lot of input, backups should be done at least twice a day. Make sure that you have at least a weekly copy of your accounting data off site. Monthly copies should be kept off site and retained for all twelve months. |
| Q. | My accountant has asked me to send to him a backup of my accounting data. Why? | | A. | We have found it very useful to receive copies of our clients' data on a regular basis. This ensures that there is a backup copy off site, and that it has been tested to ensure that it is a valid backup. Your accountants can also take a look at the data to make sure that it is reasonably accurate and up to date. Your accountant can then give your bookkeeper/accountant instructions on what adjustments may be required to make the financial statements more meaningful. It also keeps your accountant up to date on how business is going, so that if you have any questions, he knows the current situation. |
| Q. | Should I enter my accounts payable bills as payables, or should I just enter items when I pay them? | | A. | If you want accurate financial statements, you must enter your bills in the month that you incur the expense or purchase the product, to ensure that the financial statements are truly accurate. This will ensure that there is a proper matching of income with expenses in the appropriate period, and that you know, at any point in time, what your outstanding debts are to your suppliers. |
| Q. | I carry a lot of inventory. Is it important to track inventory with my accounting system? | | A. | It is usually much more informative to keep track of your inventory in your accounting system. This will allow you to track the cost of each sale and determine which products are profitable, which salesman is profitable, and what your actual gross profit is each month. Otherwise, you are just guessing what your profit is until year-end when you take an actual physical stocktaking. This is way too long to wait to find out how you are doing. |
| Q. | My accountant keeps talking about accruals and prepaids. What are they? | | A. | Accruals and prepaids are items that allow you to spread out the cost or expense of an item over its useful life. This would include insurance where you pay an annual premium, but you really incur the expense over the 12-month period. Therefore, it is best to prepay the annual premium and allocate the expense out over the term of the insurance. Similarly, with amortization or depreciation of fixed assets, there is an initial cost of say $120,000; however, this is not an expense in that month, but rather a fixed asset that will be amortized or depreciated over its useful life on a monthly basis. In this manner, your monthly financial statements more properly reflect how the business is doing on a monthly basis. |
| Q. | My sales keep going up, but I seem to be making less money. What's happening? | | A. | This is usually the case of being a "sales only" focused business. It is important to realize that costs usually go up over a period of time, and many businesses do not adjust their sale prices accordingly. They tend to be too competition sensitive. It is important to mark up your products a reasonable amount to obtain a gross profit percentage that is appropriate for your business, and, therefore, give you a reasonable net income on the bottom line.
Most businesses do not devote nearly enough time to the pricing of their products, which is one of the most important functions of all business owner/managers. |
| - QuickBooks® [top]
| Q. | Which QuickBooks® product is right for my business? | | A. | QuickBooks® software comes in a number of different flavours. If you are looking for a basic accounting package to do your bookkeeping, QuickBooks® 2006 (Pro) is the version for you. With its advanced reporting capabilities, like job costing, time billing, multiple currencies, multiple users, and its tight integration with the Microsoft Office suite of products, QuickBooks® Pro will suit your needs. If you would like to add a comprehensive set of tools for financial management, like remote access that will allow you to work on your books over the Internet, QuickBooks® Premier should be your software of choice. Should you wish to discuss any of these alternatives and how you can put QuickBooks® to work in your business, give us a call today. |
| Q. | My QuickBooks® file is very slow; how can I make it run faster? | | A. | Over time, a QuickBooks® data file can become unorganized causing the file to operate more slowly. In order to improve operating efficiency, the data file should be "rebuilt." This will reorganize the database and should improve operating performance. The larger your file is, the more frequently this should be done. If you would like more information on when this procedure was last completed, type CTRL-1, while in your data file. This will open an information screen that shows your files history, version, size and other useful information. |
| Q. | Is QuickBooks® right for my industry? | | A. | Right out of the box, there are a number of data file templates that can be set up for a wide range of industries. However, if you don't find one that is well suited for your business, chances are that we can provide you with a customized QuickBooks® solution to fit your needs. As an owner of a business, we know how busy you are and that you can't afford the time to research all of the design aspects of your accounting system. Let our experience work for you. By delivering turnkey solutions, consulting and technical support, we can greatly ease your implementation anxiety and develop an efficient and effective solution for your particular industry needs. |
| Q. | How do I ensure my QuickBooks® application is up to date? | | A. | Generally, Intuit releases a new version of QuickBooks® on a yearly basis. Within a given year, they will also issue a number of Maintenance Releases to address problems and issues identified in the program. In order to make sure you have the latest patches and fixes, there are a number of alternatives available. Within QuickBooks® there is an auto update feature that will download the Maintenance Releases directly from the Internet. Alternatively, you can go directly to the Intuit web site and manually download the Maintenance Releases. To find out which version and maintenance release you are currently using, press CTRL-1, while working in your data file. |
| Q. | What is the QuickBooks® Payroll Plan? | | A. | All customers using the payroll features in QuickBooks®, need to be registered in the QuickBooks® Payroll Service Plan. For a monthly fee, which varies depending on your QuickBooks® version, you will receive the latest version of the software (and all future update versions), as well as the payroll tax tables required to issue pay cheques. This service ensures that you always have the latest fixes and features and that your payroll tax remittances are being calculated using the most up-to-date tax tables. |
| Q. | How do I do a year-end close? | | A. | In QuickBooks® there is no formal year-end procedure to close your books. QuickBooks® utilizes a "Soft Close" procedure that automatically does all of the year-end calculations without any user intervention. However, once a fiscal year has finished, it is strongly advised to set a closing date to prevent the ability to make changes to a prior year's data file. While a user can still make changes to prior years' information, it will prevent accidents by further prompting the user to verify the transaction changes.
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| Business / Corporations [top]
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| - Books and Records [top]
| Q. | How long do I have to keep my records? | | A. | It is important to keep good document records. If your records are not complete, the CRA may determine your income and expenses for you. Keep your records for at least six years from the original date your tax return is assessed. If you have filed an appeal or an objection, keep your records beyond the six-year period, until the matter is resolved. If you want to destroy your records at an earlier date, you need to get permission from the CRA. |
| - Incorporation / Corporate Tax Rates [top]
Tax Rates - Corporate [top]
| Q. | What are the Ontario Corporate tax rates? | | A. | For Ontario corporate and personal tax rates, and so much more, click here to view our "2007-2008 Tax Facts" sheet. |
Tax on Sale of Shares of Corporation / Capital Gain Exemption [top]
| Q. | How do I save tax when I sell my business? | | A. | There is a $500,000 capital gains exemption (the 2007 Federal Budget proposed an increase to $750,000) for the sale of qualified small business shares. There are several tests that must be met to qualify for the exemption. You should plan ahead, since one test reviews the asset mix of your prior 24 months. |
| Q. | Is there a way to increase the $500,000? | | A. | Yes! If you are prepared to spread the wealth amongst your family, every individual qualifies for the lifetime $500,000 exemption. You can have family members own the shares of the company directly, or indirectly through a family trust. |
Incorporation [top]
| Q. | Should I incorporate? | | A. | There are several beneficial reasons to incorporate. From a pure tax point of view, a corporation can be very beneficial, since the lowest corporate tax rate is below 20%. Keep in mind, personal tax is payable on a salary or a dividend paid from the company. For income subject to the small business corporate tax rate, the combined tax rate of the individual and corporation is approximately the same, when the owner is paid by salary or the after-tax corporate income is paid by a dividend. The tax advantage of the corporation is the deferral of the extra personal tax. |
| Q. | Which professionals can incorporate in Ontario? | | A. | As of March 2003, the following professionals can incorporate: - CA's/CGA's
- Chiropractors
- Dentists
- Lawyers
- Physicians and Surgeons
- Veterinarians
For more information, please refer to our publications "Incorporation of Professionals in Ontario" and "Incorporation of a Consulting Business."
It is best you give us a call, so we can review your facts to determine whether incorporating your business would be beneficial to you and your family.
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| Q. | What amount of income qualifies for the small corporate business tax rate? | | A. | Ontario has increased the small business income limits and reduced the small business tax rates for Canadian-controlled private corporations, as follows:
| Year | Ontario
Small Business
Income Limits | Federal
Small Business
Income Limits |
|---|
| 2007 + later years | $400,000 | $400,000 |
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| Q. | Does the small business lower tax rate change if I own several companies? | | A. | Yes! In 2007, in Ontario, the benefit of the small business deduction is eroded where the company and its associated corporations have combined taxable incomes, including investment income, in excess of $400,000, with the full clawback occurring at $1,128,520 of combined taxable income. |
Corporate Returns [top]
| Q. | When are my corporate tax returns and payment due? | | A. | Corporate tax returns are due six months after year-end.
Corporate tax payments are due two months after year-end (three months after year-end for certain CCPCs). |
| Family Trusts [top]
| Personal Matters [top]
| - Automobile - Personal [top]
| Q. | How much can I be paid tax free from my employer for the use of my car? | | A. | Your employer can pay you $0.52/km for the first 5,000 kilometres, and $0.46/km for 2008 and following years. If you receive a car allowance not based on these rates, the allowance is taxable. |
| Q. | Can I deduct the use of my car? | | A. | Yes! As an employee, you can deduct the use of your car if you get your employer to provide you a signed Form T2200 - Declaration of Conditions of Employment. You must compare the non-taxable car reimbursement to your actual cost to determine if there is a net deduction. You can claim the deduction on the Canada Revenue Agency's (CRA) Form T777 - Statement of Employee Expenses. |
| Q. | Should I lease or buy my automobile? | | A. | A general rule of thumb is, if you keep your vehicle for more than three years, leasing is less attractive. Leasing is a packaged financial deal, usually with the purchase of the vehicle at the end of the lease. You should compare the effective interest rate of the lease and a car loan.
The tax rules are different for leases versus purchasing. Generally, a lease gives a higher deduction in the first year. |
| Q. | Does the Income Tax Act restrict the cost of a car or lease? | | A. | Yes! The cost limits on vehicles in 2008 are:
- The maximum cost of a vehicle is $30,000, plus net GST and PST.
- The maximum lease payment is $800 per month, plus GST and PST. This is reduced for vehicles with retail values over $30,000.
- The maximum interest charge is $300 per month.
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| Q. | Should my company buy or lease my vehicle? | | A. | If the company owns or leases the vehicle, you will be charged a taxable benefit for the use and operation of the vehicle. We recommend reviewing the personal cash flow cost of the related taxable benefit from the company versus the tax-free allowance/personal tax deduction if you personally own or lease the car. |
| - Capital Gains / Losses [top]
| Q. | What is the tax rate on capital gains? | | A. | The effective tax rate is 50% of your regular tax rate. Therefore, if you are in the top tax bracket, the tax rate is 23.20% (50% x 46.41%). |
| Q. | How long can I use my capital losses? | | A. | You can carry back capital losses three years and then carry forward until your death.
On your death, your unused capital losses can be applied against any other income in the year of death and the preceding year. |
| - Filing Deadlines - Personal Returns [top]
| Q. | When is my personal tax return due? | | A. | Personal tax returns are due by April 30 (June 15 for self-employed). |
| Q. | When are my personal tax payments due? | | A. | Your final balance is due by April 30. |
| Q. | What about tax instalments? | | A. | Personal tax instalments are due March 15, June 15, September 15, and December 15. |
| - RESP [top]
| Q. | Would you recommend using an RESP? | | A. | Yes! As an added incentive, the Federal government introduced the Canada Education Savings Grant (CESG). Under this program, the government will pay annual grants of up to $400 per child under 18 directly to the RESP. The grants are based on 20% of the first $2,000 of annual contributions per child. |
| Q. | Are the contributions deductible? | | A. | No! Unlike an RRSP, contributions to an RESP are not tax deductible. However, investment income accumulates tax free in the plan until the earnings are paid out to the beneficiary. Tax savings are achieved because taxes are deferred until the earnings are paid out, and it will likely be taxed at a lower tax rate in the hands of the beneficiary. |
| Q. | What happens if your child does not go to college or university? | | A. | If you are a Canadian resident and have contributed to the RESP for at least 10 years, and the beneficiary does not pursue a post-secondary education by age 21, you will be entitled to the accumulated income. You will be able to transfer the income either to your, or your spouse's, RRSP, subject to your RRSP contribution limit and an overall total of $50,000. Any surplus is subject to a penalty tax of 20%, in addition to the regular tax payable. The original contributions can be withdrawn tax free, but any CESG grants must be repaid. |
| - RRSP [top]
| Q. | How much can I contribute to my RRSP? | | A. | The CRA is tracking your contribution deduction limit. It is noted on your prior year's tax assessment. You can also contact the CRA at 1-800-267-6999, and by keying in your Social Insurance Number, month and year of birth, and total income (line 150) reported on your 2006 income tax return. The CRA's automatic system will first tell you your RRSP deduction limit for 2007, and the amount of RRSP contributions that can be deducted on your income tax return. It will then follow with any unused deductions availably, not previously deducted on your income tax return. Therefore, the RRSP deduction limit, less the unused deductions, is the remaining amount that can be contributed for the 2007 income tax return.
For more helpful information on RRSPs, click on the following link to view our "Retirement Planning - January 2005" publication. |
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| - Tax Payments / Refunds [top]
| Q. | Where is my refund? | | A. | The status of your refund can be determined by either:
- Calling an automated information line at 1-800-267-6999. (At the time of your call, you should have available your social insurance number, month and year of birth, and total income reported on line 150 of your income tax return.)
- Looking on the CRA web site, http://www.cra-arc.gc.ca/esrvc-srvce/tps/menu-eng.html, and selecting telerefund.
- Calling 1-800-959-8281 and speaking with an individual at the CRA.
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| Q. | Due to my financial circumstance, I cannot pay my income tax liability. What can I do? | | A. | If your debts exceed your assets, we would recommend a free consultation with one of our trustees at Ginsberg, Gingras & Associates Inc. This is not an uncommon problem. Our trustee can help resolve your debt problem with the CRA and other creditors. We recommend giving us a quick call to discuss the situation and your options. |
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QuickBooks® is the registered trademark of Intuit Inc. We do not have the authorization of other software companies to make reference to their products.
THE INFORMATION PROVIDED IN THIS PUBLICATION IS INTENDED FOR GENERAL PURPOSES ONLY. CARE HAS BEEN TAKEN TO ENSURE THE INFORMATION HEREIN IS ACCURATE; HOWEVER, NO REPRESENTATION IS MADE AS TO THE ACCURACY THEREOF. THE INFORMATION SHOULD NOT BE RELIED UPON TO REPLACE SPECIFIC PROFESSIONAL ADVICE.
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