Tips

Top 5 ways to make the most of your accountant relationship

Posted on November 6, 2020September 15, 2021 by Kaitlin Kirk

06
Nov

Many small business owners only talk to their accountant when they absolutely have to. An accountant can be a business’ best friend! Here’s five ways you can connect with your accountant to help your business grow.

1. Ask Questions

Accounting and taxes aren’t intuitive, you shouldn’t “just know”. There’s no reason to be embarrassed for not knowing something. I didn’t know much at all about accounting until I began my studies. As a CPA I spent a long time in school and learning on the job before I received my designation. I’m here to be the expert for you, so please ask all the questions!

Two great types of questions are clarifying questions and specific questions.

Ask clarifying questions

If I’ve used a term you don’t understand, or we’re taking about a concept you’re not sure about, ask! It’s so important to understand what’s going on with your number because they have a big impact on the rest of your business (we’ll talk more about this later).

Get curious and ask about the “why” and not just the “what”. If you’re learning a term or concept, ask why we do it that way. It’s in the “why” that we learn out how all the pieces fit together.

If you don’t feel safe asking questions of your accountant, they might not be a good fit for you.

Ask specific questions

I know it’s tempting to ask “is there anything you can see that I should be doing better” but that doesn’t give me much direction. I can tell you about technical things I would change, like maybe a receipt wasn’t coded properly, but from a big picture perspective, we need to have a more in-depth conversation about your goals for the company.

You’re better off asking more specific questions, like “if I want to be able to spend $10k on a car in the next three months, what’s the best way to do that based on where I’m at today?” or “If I doubled my sales next year, would it double my income?”

These questions tell me your goal, your timeline, and what it is you’re not sure about. I can provide a specific answer to fit those parameters.

2. Build Processes and Workflows Together

As an accountant who sees many small business owners per day, I have a few tricks up my sleeve around process efficiency and how to help make your bookkeeping painless. However, there’s no one-size-fits-all solution.

If you like taking pictures of your receipts as you get them, great. If you’d prefer to have a weekly email reminder to submit your receipts for the week, that’s great too. However you work, your accounting process should be made for you. If there’s a major pain point somewhere along the line, the work probably isn’t going to get done, which isn’t good for either of us. Rather than feeling like you’ve failed, let’s build a process to set you up for success.

3. Communicate Regularly

Communicating with the people who have a key role in your business is so important. I have weekly meetings with each of my team members because those people are critical to the business. If waited to check-in with them once per year, we might be WAY off track by then and it might be too late to fix it.

Book regular check-in meetings with your accountant, or at the very least send an email. I touch base with my customers at least quarterly, but in some cases I have weekly calls. Communicating regularly means we’re able to be proactive about tax planning and business decisions. I also get to know the business better so I’m able to make more informed recommendations.

When you find yourself staring at confusing reports, or pulling your hair out, that’s the time to reach out for help.

4. Include Your Accountant in Business Decisions

If you’re thinking about a big change to your company, make sure to include your accountant in the conversation. It’s never fun to find out you’ve created a bigger tax bill or more administrative work by accident.

Let me tell you a story…

Taylor (not their real name) decided to switch their business from app development to selling products. Instead of reaching out to their accountant, they decided the best thing to do would be to incorporate a new company which cost $499 (unnecessary cost).

Taylor now has two corporations. Old Corp funded the start up of New Corp (intercompany loan) with every dollar in the bank account. New Corp has been losing money in the start-up phase and can’t repay the loan. Old Corp owes the CRA ~$40k in taxes but can’t pay because it doesn’t have any revenue.

We now must administrate two corporations, instead of one, and the losses generated in New Corp can’t be used to offset the income in prior years from Old Corp which means no tax savings.

All of this could’ve been avoided with a 15-minute call with their accountant

5. You Lead The Way

Accounting and taxes are never “set it and forget it”. Yes, an accountant can support you and do the tough, technical pieces. Yes, an accountant can provide guidance and strategy to help you grow your business, but it’s you who drives the bus.

I know that’s not what you wanted to hear, and it sucks. There are pieces of business we don’t like and we wish would go away, but that’s unfortunately not how being a small business owner works. We can outsource the pieces we’re not good at or don’t have time for, but we still need to be the manager.

If it were easy, everyone would be in business for themselves!

If this article inspired you to ask more questions and have some big conversations about your business, I’m happy to chat! I’m always willing to share a few minutes with any Canadian small business owner and answer any questions. You can book time with me here: https://www.kirkcpa.ca/contact

Kaitlin

Business Structure, Taxes

How to Pay Yourself

Posted on October 22, 2020January 31, 2021 by Kaitlin Kirk

22
Oct

You run your own business and want to pay the least amount in taxes, so what’s the smart way to pay yourself?

The goal is to keep the biggest slice of pie for yourself. The best way to do that depends on your business type, whether your business is a sole proprietorship or a corporation.

Your Business Structure

Sole Proprietor

As a sole proprietor, you are your business. You can’t be an employee of the business, which means you can’t draw a wage from your business. There’s no way to defer taxes by leaving money “in the business”. The business income and expenses are recorded as an additional schedule on your personal taxes, and all your income is taxed together.

Having said that, I do recommend keeping the business money separate from your personal money. Make sure to open a business bank account to help with this separation (read this to find out why: https://www.kirkcpa.ca/do-you-need-a-business-bank-account/).

How do you pay your personal expenses? Don’t do it from the business bank account. Transfer the money from your business account to your personal account and pay your personal expenses from there.

*Pro tip, these transfers to your personal account don’t count as expenses for your business.

Corporation

Paying yourself from a corporation is little more complicated because it’s a separate legal entity. I mean, logistically it’s the same in that you can transfer money from your business to your personal account, but the corporation will have to classify that payment as either dividends or salary (for the purposes of this explanation we’ll treat salaries and bonuses as the same thing).

The biggest difference between the two methods is a salary is tax deductible for the corporation and dividends are paid out of after-tax income.

What does that mean?

A corporation is a separate legal entity from its owner(s) (known as shareholders). As a separate legal entity, the corporation is responsible for paying taxes on its income. If a salary is paid out to an employee, the corporation can deduct it from revenue before calculating taxes.

The salary is then taxable for the individual. This bit isn’t news. Most of us have worked for someone else, where we’ve been paid a wage that we needed to pay taxes on.

Paying a wage seems like the better option because you only pay tax once – on your personal taxes. Payroll has its downfalls though. It’s administratively more work because the corporation needs to deduct income taxes and CPP from the salary (just like if you worked for someone else), match the CPP contribution, and remit it to the CRA every month. It can also be more expensive because CPP isn’t paid on dividends, so if the CPP is more than the corporate tax bill it might not be worth it.

Dividends

Dividends are not tax deductible for the corporation, so the money paid out has already been taxed at the corporate level. You might be thinking “sweet, if tax has already been paid, does that mean it’s tax free for me to withdraw?” Nope, unfortunately not. You still need to pay personal tax on dividends, which means you’re effectively paying tax twice.

So why would you take dividends? For you as an individual, dividends are taxed at a lower rate than a salary. Sometimes paying tax at the corporate level (usually lower than paying at the individual level) plus paying the lower individual tax rate on dividends is actually less than the individual tax rate on a salary.

Let’s recap

Salary	Dividends
Tax deductible for the corporation	Not tax deductible – paid out of after tax income
Monthly remittances of income tax and CPP deductions	No remittances
Taxed at a higher rate for the individual	Taxed at a lower rate for the individual
Corporation has a portion of CPP to pay	No CPP payments (which means no CPP withdrawal later in life)
Increases your RRSP contribution room	No impact on RRSP contribution room
More conventional personal income so it’s easier to get personal loans	Tougher to get personal loans (like mortgages) with only dividend income
More formal process for getting money into the hands of the individual	Simple transfer between bank accounts

Which one should you choose?

As with every question asked to an accountant – it depends. Your specific situation will determine the best way to pay yourself from a corporation. If you have another source of employment income, maybe dividends are the way to go. If the corporation is your only income, maybe you pay yourself a salary of $60k and switch to dividends after maxing out your CPP contributions for the year.

To make the choice, it’s important to calculate the total tax (corporate and individual) payable for a few different scenarios to see which one is the best fit for you. If you’re doing these calculations on your own, I would revisit your strategy every year to ensure you always have the best fit for your changing situation.

If you’d like help with this calculation, let’s chat! You can get in touch with me here: Contact

Kaitlin

Business Structure

Steps After Incorporation

Posted on June 10, 2020January 31, 2021 by Kaitlin Kirk

10
Jun

I am in the process of incorporating my company. I’ve also been talking to a few other clients about how it would be tax effective for them to incorporate their companies. The lawyers have been hired, the paperwork filed, so what’s next?

What needs to happen after you incorporate, and in what order, is top of mind for me and my clients in this same stage of their business adventure.

11 steps you need to take after incorporating your business:

1. Open a business bank account

As soon as I have my Articles of Incorporation, I need to go to the bank and open up a business bank account – even if I had a business bank account previously under the sole proprietorship.

This is my first step because I need to be able to pay for operating expenses and pay for them through the corporation immediately. Hopefully, they’ll give me a credit card as well.

2. Register your new corporation with the CRA

I’m going to register my new corporation with the CRA if it hasn’t already been done (if you incorporate federally it happens as part of the process). Note: I’ve already registered as a sole proprietor, that’s not useful for the corporation. I need to close my HST account and open a new one for the corporation.

I’m also going to register for a payroll account because I can put myself on the payroll along with a bookkeeper I employ. I want to be able to start paying us immediately.

3. Register with your applicable governing body

I need to register an accounting firm. This is a specific step for me as an accountant, but maybe you have to go and acquire a business license. Or perhaps you need to register with your own applicable governing body. This step to me comes after the CRA registration and the business bank account because I have to pay for this registration.

4. Buy insurance or switch insurance from Sole Proprietor to Corporation

Before I start operating this company, I need insurance. I have insurance currently for myself as a sole proprietor, but I need insurance specifically for the Corporation for liability. Because I’m an accountant, I have errors and omissions insurance; however, general business liability insurance is what I recommend immediately before you start operating your company.

5. Update your payment provider

I run all of my payments through Stripe because I have a monthly recurring business model. I charge clients’ credit cards every month. This eliminates having to send them an invoice and having them input their information every time. It just automatically charges through Stripe.

The contract that I signed with Stripe is with me as an individual and I need to make sure that I change the contract to be with the corporation. This is important because if later on I sell the company, the Stripe contract is with the company and not with me personally.

6. Update your supplier contracts with Corporation name

Along the same lines of changing contracts, I’m going to go through all of my current suppliers and make sure that I sign new contracts with them. This could be Microsoft because I have a subscription to Office 365 or Receipt Bank which allows me to upload and track all my expenses. I have a few others, but you get the idea.

7. Update your client contracts with Corporation name and have your clients sign

I have engagement letters that I send to new clients so that we understand the scope of work that’s going to happen. I have one for personal tax clients, one for corporate tax returns and one for a monthly relationship with a client like a retainer agreement. I need to rewrite these agreements and ensure they now state the Corporation’s name. I will also have a lawyer look over them just make sure they’re compliant, to protect both myself and my clients.

Then I will have to send a new agreement to each client and have them sign again. It will probably be the exact same agreement they signed before, but I need them to sign up with the Corporation because contracts need to be party to the entities that are actually in the contract.

8. Update your employee and subcontractor contract with the Corporation and have your employees / subcontractors sign

I need to redesign all of my contracts with my current employees and subcontractors. See my point above about contracts needing to be party to the most current people and entities.

9. Update your bookkeeping software with the new Corporation name and start a new file

I currently have a QuickBooks file for my sole proprietorship, but the corporation will be a completely separate entity. This means I need a new set of “books” for it.

This is the same whether you use QuickBooks, Wave, or another bookkeeping software.

10. Move your assets from Sole Proprietorship to the Corporation

I will need to move my assets into my Corporation. In my case, I only have a computer, so my assets aren’t significant. I’m going to have the Corporation buy it from me at the value it’s currently sitting on my books for.

If I had a large asset that I needed to roll into the Corporation, I would do what’s called a section 85 rollover. I’m not going to address it here in this blog as it’s dull for those that don’t study this kind of thing! However, if you need to do this, have your lawyer help you. It’s tricky.

11. New email address and website address if your company name has changed

Did you know, because I’m an accountant, I have to incorporate the URL of my business? This means I’ve incorporated Kirk CPA Professional Corporation even if I’m not thrilled about it. I had another name picked out I was really excited for, but sometimes you just do what you have to do. I’d much rather keep the URL I have then go with the name I chose.

For your business, if you are changing the name, don’t forget this might mean a new web address, a new email address, and changes to directories and/or social media profiles.

This is my current list of steps to take after incorporation, but it certainly isn’t exhaustive. It sounds like a lot of paperwork (it is, I won’t sugar coat it), but it will be worth it in the long run as my business grows.

Have you recently incorporated your business? What steps did you take after you received your Articles of Incorporation? What challenges did you have? Let’s share our experience to make it easier for entrepreneurs walking the same path. Feel free to share and join me online at www.facebook.com/kaitlinkirkcpa