As soon as the government started talking about tax reforms for corporations who used income sprinkling as a tax saving strategy small business owners across Canada started to worry about the implications these impending changes would have on them.
Before we dive in and give you the full ins and outs of this tax law change, who it impacts, and what it means for small business owners we want to start by saying that majority of our small business clients will not be impacted by these changes. Those impacted the most are high-income earning professionals, such as Doctors and Lawyers, who have been income splitting with a spouse who is not actively working in their business.
What is income sprinkling?
Income sprinkling aka income splitting is a tax strategy commonly used by higher-income business owners or incorporated professionals to help them personally access more funds from their corporation without the high tax bill. To implement this strategy the corporation pays out company dividends to a lower earning family member of the business owner or incorporated professional, in most cases a spouse or child. The family member receiving the funds is taxed at their tax rate, which is lower than the higher income earners tax rate.
The original law around income sprinkling/splitting was the Tax on Split Income (TOSI) rule which applied the highest marginal tax rate to income that was split with a family member under the age of 18. Commonly known as the “Kiddie Tax” this law had not been extended to family members 18 or over.
The New Law
You can probably already see the writing on the wall and if you assumed the new law extends the principles of the “Kiddie Tax” to all family members 18 and over who receive dividend payments from the corporation without actually being an active member of the business, you would be correct.
It should be noted that there are some exceptions to the rule:
It doesn’t apply to salaries paid to family members.
If you are income splitting with your spouse and you are aged 65 years and over you are exempt.
If your family member works consistently in the business 20+ hours per week during its operations within the tax year or can show that they have consistently worked within the business over the past 5 years they will be exempt.
If you are 25 or over and you hold Excluded Shares in the corporation and the corporation is not a professional corporation or a business that provides services.
What it means for you
For a majority of small business owners, these changes don’t pose a significant impact. So long as your family member is actively working within the business and can provide documentation to prove that fact the high tax bracket won’t be applied.
For a lot of incorporated professionals that have been income splitting with a spouse who does not actively work in the business these changes will have a significant impact on their tax saving strategy.
The current minimum wage in BC as of June 1st, 2018 is $12.65 and that number is expected to rise steadily in the coming years. As small business owners in one of Canada’s most expensive cities, it should be no surprise that minimum wages are increasing. Many small business owners are already paying well above minimum wage to align with the cities livable wage of $20.91/hour and retain good talent.
Minimum wage increases are often met with mixed reviews from business owners. While some feel it will fuel the economy as employees will have more money to spend and create happier workplaces, others feel it will have a crippling impact on small business owners and their bottom line.
No matter what your point of view is on minimum wage increases the fact of the matter is – they are coming whether you like them or not. Here are 3 ways that you can make sure you are prepared for the increase.
Inefficiencies, products and services with low-profit margins, and outdated systems tend to stick around longer than they should when a business is thriving. When a minimum wage increase hits and payroll taxes and accounting fees go up the reactionary approach for a lot of business owners is to start thinking about employee cuts because at face value higher wages appear to be the problem.
Rather than hastily cutting staff or treating your employees differently now that they cost more we recommend turning your focus on your business and getting real with yourself. Ask yourself when was the last time you shopped around to ensure your insurance policy, bank account fees etc. were the best price? What parts of your business could be automated with the right technology? Which product or service lines have small margins and should be cut? What systems can be upgraded?
Doing a thorough audit of your business, reviewing your profit margins and investing in better systems can save you thousands long term. Helping you stay on budget when minimum wage increases are announced.
2. Reduce Your Hours
It’s not always ideal but it is better than laying off good staff. If you have a storefront or provide services a lot of overhead can be reduced if you are smart about your operating hours and your scheduling. If your sales are low on a Tuesday and only barely cover your operating costs then maybe there is no need to be open that day. Or if you notice that most of the work is completed from 9am – 3pm and from 3pm – 5pm nothing gets done, reduce your teams daily hours to 9am – 3pm until you can ramp back up.
While reduced hours isn’t ideal for your existing staff it’s much better than no hours.
3. Increase Prices
While this isn’t always ideal it’s a very viable option to manage a minimum wage increase. With inflation prices can’t be expected to stay the same forever and when minimum wages increase it’s common for the cost of goods to increase with them. Talk to your bookkeeper to determine what the deficit is with the wage increase then look at how you can recoup that with incremental price increases across your products or services. So long as you continue to ensure your level of service remains high most customers will stay loyal.
A lot of small business owners in Vancouver are already paying above minimum wage to ensure they can retain talent so when wage increases are implemented the impact is minimal. If you happen to find yourself in a tight situation when the next increase is announced talk to your bookkeeper or accountant and look for ways to trim the fat from your business that are win/win for both you and your employees.
Unless you have been living under a rock we assume you’ve heard the speculation about Speculation Tax (see what we did there). The speculation tax is designed to help make the housing market of urban areas more affordable and available by encouraging homeowners to rent out their homes and not leave them vacant. The areas affected include Metro Vancouver, the Capital Regional District (excluding the Gulf islands and the Strait of Juan de Fuca), Kelowna, West Kelowna, Nanaimo-Lantzville, Abbotsford, Chilliwack and Mission.
Who this affects
The speculation tax while seemingly terrifying, because, you know it’s potentially going to mean you pay MORE TAX will actually only impact 1% of residents and homeowners with BC properties.
The types of homeowners that will be impacted are:
If you are a resident of BC who owns a home but you aren’t living in it you will be taxed 0.5% of the value of your home unless your home is worth less than $400,000.
Out of province homeowners who own a home in BC that they don’t live in or rent out for at least 6 months of the year will be taxed 1% of the value of the home.
Foreign owners who don’t pay taxes to BC and who don’t reside in the home or rent it out for a minimum of 6 months out of the year will be taxed at 2%.
The 3 types of people who fall into the speculation tax bracket will have to pay the tax, rent their home out, sell or simply move in full time.
Approximately 99% of people not affected by this new tax. If you own a home and live there all year, if you rent your home for at least 6 months of the year, if you don’t even own a home and are renting or if you own a home outside if the areas that were mentioned above, this new tax won’t impact you. Additionally, if the following apply to you then you are exempt – you are in the hospital or going through medical care, if you are temporarily away from home because of work, if you are in long-term care or in a supportive care facility or if the homeowner is deceased.
The Speculation Tax is aiming to improve livability in popular BC areas by encouraging homeowners to rent out their properties creating more access to housing which is a really BIG positive.
There are also a lot of measures in place to help make the tax more bearable. If you are a BC resident you will be eligible for a tax credit, the maximum amount for this is $2000, and $2000 isn’t something to scoff at. If you own 2 homes the Speculation Tax will only be applied to one of your homes, which is also a bonus. The tax itself is also so easily avoidable if you just rent out your second home or even sell (which is extreme but an option nonetheless). You can also completely avoid the tax if your home is valued at less than $400,000.
Even though there are exemptions in place to protect residents these exemptions take 3 months to be approved so this can be a real set back for some people. There is also a lot of chatter about the tax impacting the value of recreational homes in the areas where it is enforced, which could have a negative impact on tourism.
Some people have been petitioning against the Tax due to all of these cons, which is really not helping the Tax move along smoothly. It’s almost like a tightrope walk at this point, no one really knows what’s going to happen in the future as so many people are all for the tax and so many are completely against it. While the tax has been approved and implemented who knows how long it will remain in place.
As the sharing economy continues to grow an increasing number of startups are being developed that provide everyday people with the opportunity to increase their income streams. This is causing the average person’s tax return to become much more complicated than it would be with a simple T4 income.
First things first YES you need to claim your AirBNB income. It may be your “fun money” but to the government it’s income and it won’t be fun income if you don’t claim it and the government finds out.
How to Claim This Income
Airbnb income is considered rental income so long as you don’t include meals, personal laundry services, and other tourism services to your guests, in that case, it’s going to be business income.
If it’s confirmed rental income you need to complete a T776 (Statement of Real Estate Rentals) and declare the income on line 126 of their federal return.
The benefit of claiming this income is that unlike T4 income you can claim your expenses to offset the total net income.
The Full Property Is rented
When calculating your expenses you need to make sure that you calculate the correct percentage. You can only claim operating costs for the time your property was generating revenue.
For example: If you rent out your entire place for 165 days of the year (45% of the year) and make a total of $11,000 and over the course of the year the claimable expenses you incur on the property (eg. property taxes, strata fees, insurance) are $15,000, you can only claim 45% of this amount (ie: 165 days worth of expenses) so – $6781. Making your net income $4219. Expenses that relate directly to the rental such as replacing sheets and cleaning fees that you incur over those 165 days are 100% deductible.
Renting Out A Room
If you only rent out a room in your house then things become a little more complex. You need to go a few steps further and separate out the expenses that directly relate to the room you are renting (linen, decorating etc.) and divide them by the percentage of use (as demonstrated above) in addition to calculating your rental operating expenses for the house dividing them by the percentage of the year the room was rented AND then again by the percentage of the house used to generate income.
For Example: If you rent out a room in your home (¼ of your house) for 200 days of the year and make $10,000, the claimable expenses for the entire home $12,000 annually and the expenses relating directly to the room were $1500 annually.
You can only claim the following – The operating costs throughout the time you made the income (200 days of costs) will be $6575 for the entire home. This then needs to be divided by 4 as only ¼ of the home was rented out so $1644 can be claimed.
In addition, you can claim $822 worth of expenses for the $1500 of furniture you purchased that was used for rental purposes 200 days.
If you are unsure of what you should and shouldn’t claim we recommend filing your return with a tax professional. What may feel like a saving by not paying for advice now could cost you later if you are audited and forced to pay penalties and interest on overdue funds.
When measuring the success of a marketing plan a lot of business owners make the mistake of only focusing on website views, social media likes, and new leads. Don’t get us wrong, these key performance indicators (KPI’s) should be measured and reviewed regularly BUT to ensure that you are heading in a truly profitable direction you need to take your marketing and sales planning a step further. Talk to your bookkeeper or accountant to figure out how to accurately measure the following data so that you can use it to drive your marketing strategy.
1) Measure The Net Revenue Of Target Audience
Knowing the net revenue of each client will help you accurately determine who your most profitable clients are, which clients (if any) are costing your business money, and who you should be targeting with your marketing and sales efforts. It’s easy to make assumptions when it comes to client profitability and use these assumptions to drive your sales and marketing efforts.
For example: Henry owns a construction company with 3 key target audiences – New developments, luxury home renovations, luxury home builds. He made the assumption that new developments are his ideal target audience as they are long-term contracts, their invoices run into the millions and they allow him to build and maintain a large team. Reviewing his true net revenue by target audience revealed that after labour costs, overtime, materials, project management costs, accounting, office management, legal fees and delays that this target audience wasn’t as profitable as he originally thought and that his renovation clients were actually more profitable on average.
While there may be times when your assumptions are correct we always suggest trusting your numbers rather than your gut when making strategic marketing decisions.
2) Know Your Client Acquisition Costs
How do you find your clients? What is your cost of advertising to each target audience? How many hours a week do you spend on marketing and sales? How long is your sales cycle? How much time does each marketing activity take? These are all questions you need to know the answers to so you can determine which clients are worth pursuing and which marketing efforts are the best ones for obtaining them.
For example: Sally owns a yoga studio and to attract her ideal client she advertises on Instagram & Facebook, writes one blog a week and spends 2 hours a week networking. On average Sally brings in 6 new clients a week who purchase the introductory class offer which is $40 for the month. Out of the 26 new clients per month, only 5 continue on as annual members after the intro offer expires.
When Sally breaks down her time and costs and income it looks like this:
Social Media Advertising – $600 per month – Brings in 15 clients per month = $40 per lead
Writing a weekly blog – 10 hours per month x Sally’s rate of $60 per hour = $600 – Brings in 3 clients a month = $200 per lead
2 Hours of Networking – 8 hours per month x Sally’s rate of $60 per hour = $480 – brings in 8 clients a month = $80 per lead
Total marketing = $1680 per month
Total income from the months marketing efforts = $1040 for month one, $600 for month two
So for each month of marketing, it takes 2 months for the efforts to break even and the average cost per new lead acquisition is $65.
Sally dives deeper and realizes that the clients who are most likely to continue after the introductory offer are women in their 40’s who have back issues that she targets through her Facebook advertising and people she has built a personal connection with through networking.
Looking at the numbers Sally determines that writing her blog isn’t worth her time and puts that money into social media advertising. She spends more money targeting the demographic that is most likely to continue on an annual membership and as a result, triples her monthly leads. Her cost per lead is reduced significantly, her revenue has increased and she has saved herself 10 hours a month of writing tasks.
Without diving deeply into your marketing efforts and measuring the ROI of each effort you won’t be able to streamline and improve your marketing strategy and long term revenue.
It’s widely known thanks to Pareto principle that 20% of your customers generate 80% of your revenue. This is why knowing your CLV is so important. This metric is an easy calculation and essential number to know when reviewing your retention strategy and determining your future target audiences.
To calculate the lifetime value of a client simply add up the gross profit they have brought to your business over the course of their time as a client. In addition, it’s beneficial to note the length of time they have worked with/ purchased from you and if known how they found your business.
You can use this information to create target audience personas that are based on your most profitable clients for marketing purposes, to help with the creation of client appreciation campaigns, account development, and retention plans and to predict your future revenue.
Jennifer owns an e-commerce business and spends a lot of money marketing her products on social media to attract new clients. Once Jennifer started measuring her CVL as a key metric she was able to determine which campaigns were the most profitable long-term, cut the campaigns that were only bringing in one-off clients and build stronger nurturing and retention campaigns to keep customers who were loyal to her store coming back, increasing her overall revenue.
In this new era of online marketing what was once thought of as a creative, whimsical industry filled with fun swag and events has turned into a data-driven almost scientific one that relies heavily on the bookkeeping and accounting industry.
To ensure that your small business continues to grow successfully you need to make sure you talk to your bookkeeper or accountant to solidify that your growth strategy makes sense and that your marketing spend is bringing you the right ROI.
Your mother clearly dropped you on your head as a child and as a result, you decided that you wanted to be an entrepreneur when you grew up. You took the leap and low and behold the crazy idea you had actually worked out and business is going great but you are at a tipping point where you either need to expand or start turning away business. Sound familiar?
While it’s always tempting to keep welcoming growth and leap into the opportunity to expand it’s not an easy black and white decision. You need to be strategic and know your cost to benefit ratio to ensure the decision to expand will actually be good for your business and not harm your bottom line long term.
Here are 5 things you need to consider when determining if taking the leap makes sense
Can you afford it?
This may seem like an obvious question that is easy to answer but it’s not as simple as it sounds. An expansion, whether it’s of a physical space (ie: retail location) or simply bringing on new team members to manage demand is a money sucker in the beginning.
You need to make sure you can afford any closures, renovation, and new inventory costs as well as any hiring and training costs in addition to your regular operational expenses.
Ideally, you want to have this money saved and only finance the expansion after discussing your numbers in detail with your accountant to confirm the additional costs make sense.
How long will it take you to make back the money you spent on expanding? In most cases, expansions don’t happen overnight and increased profits aren’t guaranteed as soon as you open your new door. You need to know how long it will take for you to break even after an expansion so that you can ensure you have enough money saved to cover your increase in ongoing costs in advance.
Know Your Numbers
We say this in every post for a reason – because it’s essential if you want to grow a strong, profitable business and make smart, strategic decisions.
Without knowing your numbers you can’t accurately and successfully plan an expansion. You need to understand your cash flow projections so that you can create a financial plan designed to help you survive your worst case scenario and a marketing plan to achieve your best case scenario.
Understand Your Target Audience
Don’t rush into an expansion simply because you experience a burst of requests and it feels like demand is there. Research your target audience thoroughly and ensure that the demand is real and ongoing. You may discover that demand is seasonal, much smaller than you anticipated or can be addressed with some extended hours or a few special order requests.
Making the decision to expand isn’t going to be easy but completing a thorough analysis of the costs, benefits, and demand will ensure that when you make the decision it’s strategic and optimized for success.
If you need help understanding your numbers and determining if an expansion makes sense for you contact Homeroom today!
It’s safe to assume that Vancouverites LOVE their Yoga. There is no shortage of studios in this city and a most of the time they are filled to the brim with people gaining strength and learning to control their breath. Even though we have a large community of Yoga lovers in the city you can’t ignore the fact that competition is fierce and if you want to remain in the game you have to stay innovative and manage your business well.
Here are our top tips for staying zen and remaining profitable
Outsource Your Payroll
I know that it seems like we are trying to trick you because we are a bookkeeping company but we can confidently say even if we were in the jump rope industry this would be our advice.
Many studios make the mistake of getting the reception team to take care of duties such as payroll and bookkeeping. Your reception teams number one focus should be providing exceptional customer service so that your customers have a great experience.
Constant distractions and inexperience can lead to costly mistakes by creating the ideal environment for data entry errors. By outsourcing your payroll to a reputable provider you can ensure that you are deducting the correct amounts from your employees AND remitting the correct amounts to the government.
Reputable providers take responsibility for any errors and therefore are much more thorough with their entries. They also know the tax laws inside and out, protecting you from unnecessary penalties.
This may seem like an obvious simple step but you would be surprised how often businesses set up their sales software and tax amounts incorrectly. Ensure that all your sales (from all sources) are recorded in Mindbody (or whatever software you are using) correctly. Have a professional double check your set up to ensure that you are charging the correct taxes and that the money that goes into your bank is properly recorded as income.
The last thing you want to do is discover after several months of taking payments that you aren’t charging your clients correctly or recording your payments effectively. This can lead to significant losses, especially if you end up having to pay additional taxes from your own pocket.
Pay Your Taxes On Time
One of the easiest ways to avoid unnecessary expenses is to pay your bills on time, taxes included. Ensure that all your PST/GST returns and payroll taxes are filed and paid on time to avoid late filing penalties. If you find deadlines difficult to manage in-house then hire a professional bookkeeper to manage this element of your business. The CRA won’t tell you if you’re early or have overpaid but they will be quick to seriously penalize you for being late.
Save Your Pennies
Businesses tend to ebb and flow. Make sure you have a clear understanding of your fixed costs and create and maintain a monthly cash flow budget so that you can avoid stress during slower periods.
In addition to offering your services create passive income when possible, rent out your space to other professionals and community groups during your down times to maintain your income.
During our time offering bookkeeping services to Yoga studios around Vancouver, we have seen all the common mistakes that Yoga studios make and the great ideas that work. If you have a yoga business and need help with your bookkeeping don’t hesitate to contact us today.
If you are a Vancouver based business with a retail location then you are no stranger to the unpredictable and seemingly unfair taxation system that is forcing many businesses, some iconic staples in our community, to close down. With land taxes in some areas doubling annually to reflect soaring residential property valuations the mom and pop shops that are loved across the city risk being phased out and replaced by chains.
Unlike residential properties, commercial properties in Vancouver are taxed at a rate that is 5 times higher, are assessed based on the potential use of the property and not the actual use/business revenue of the property and the taxes are not paid by the property owner and instead, are passed onto the tenant. This puts a huge burden on small business owners and can limit growth opportunities and cost people jobs.
So the golden question is – what can be done?
While there isn’t a huge amount that can be done from a tax and bookkeeping perspective, here are some avenues that small business owners can take to voice their concerns about this growing issue.
Small businesses account for roughly 95 percent of Vancouver’s enterprises. With such a significant amount of revenue, jobs, and services at stake city council members are starting to take the issue of land tax seriously.
According to Chris Jobe, manager of the property tax division at the real-estate consulting firm Turner Drake & Partners Ltd. in Halifax, small business owners can appeal their tax bill if they can prove that the property has been overvalued during the assessment.
While the City of Vancouver website states that successful appeals are rare if you want to try your luck you can find more information here!
As we mentioned earlier small business owners make up roughly 95 percent of enterprises in Vancouver and there is strength in numbers. Trying to change the current situation is not going to be easy but by coming together and drawing attention to the issues small business owners are facing is one option that will give our retailers a fighting chance. Join your local business association and work to make this issue a focus. Educate your community and talk to the press.
If the city doesn’t do something about this growing crisis more and more small business are going to close, sell or move. This will dramatically impact the level of choice available to residents and the overall appeal of our city.
Let’s hope that the increased attention on this issue can help create some change.
Let’s be honest coming in under budget on a renovation or build is not as common as going over. Things happen that are often out of the control of the company that causes the client’s budget to be blown. Going over budget without properly managing your client’s expectations and understanding can leave you with disappointed clients, loss of revenue, reputation management issues, and in some cases legal issues. We see it all the time in the news where construction companies are under fire and bills are being disputed.
All of this can be mitigated and at most times avoided if you follow these three simple rules of thumb.
1) Communication Is Key
Be honest with your clients from the start. Set their expectations from day one. Let them know that you will do your best to stay within their budget but there are times when budgets are exceeded due to ABC. Give examples of past clients who have exceeded their budget and explain why so it’s really clear that this may happen to them.
Continue this open line of communication with your clients throughout the process. Let them know how things are going and prepare them for budget issues. They will be much more understanding when increases arise if you take this approach.
Whenever you make an order change make sure you do so in writing and the client signs off on the change. Articulate that you are doing this at their request to accommodate their needs and remind them that the change is likely to increase the cost of the project.
This will give you a legal advantage if the client tries to dispute the bill. It will also add to the clients understanding of the cost increase.
3) Know your numbers
At times going over budget is the fault of the construction company. If you don’t manage your numbers and keep your spending up to date you won’t know you are about to exceed the budget until it’s too late. This can lead to disputes with your client and ultimately to lost profits if they refuse to pay the excess.
Use a spreadsheet or bookkeeping software to manage your expenses. Update it regularly and ensure the client receives sufficient warning and communication if the build is costing more than expected.
If you need help managing the numbers on your next construction project contact Homeroom today.
Being a tradesperson isn’t easy. The job comes with early mornings and long days spent managing clients, contractors, companies, and suppliers. The last thing you want to do when you come home is think about managing your accounting on top of everything else.
That is why it’s very common for tradespeople to make these 5 avoidable mistakes when managing their books.
1) Fall Into A GST Trap
When registering for GST many tradespeople choose to pay their GST annually. This is a mistake and can really hurt your cash flow in the following year. Rather than wait for your bookkeeping to give you a massive bill that takes an eternity to pay off switch your payments to quarterly.
PST isn’t a ‘you’re annoying tax’ that you get to charge your clients when you feel. If you don’t have a valid PST number AND a signed contract stating your client will be paying for the PST you cannot charge PST at all to your clients.
Additionally, according to the BC Government, you can only charge PST in the following circumstances:
You sell them goods but you don’t install the goods
You sell them goods and install the goods, but the goods don’t become part of a building or land
Your customer agrees in writing that you can transfer the tax liability to them. Learn more about this special agreement in Real Property Contractors (PDF).
As a general rule, contractors and tradespeople don’t generally charge clients PST. Instead, you pay the PST when you purchase the materials and you factor that cost into the contract.
Throwing away your receipts is like throwing away money! You won’t be able to properly claim your expenses which can increase your tax bill. Additionally, if you get audited by the CRA and you don’t have your receipts you could find yourself in a lot of trouble.
Keep a file folder in your truck/van and put all of your receipts inside as soon as you get them. This will help you a) keep your bookkeeper happy b) ensure you charge your clients for all the materials your purchase c) help you come tax time.
4) Not Collecting Deposits
While it would be great to trust everyone and have them maintain that trust by paying their invoice in full and on time, this doesn’t always happen. Having a client fail to pay a large bill can destroy a small business.
That is why we always recommend that you have a proper invoicing system in place, collect a deposit upfront from their clients and invoice your clients regularly and not just at the end of the contract. You can apply incremental amounts of the deposit to each invoice up until the final bill to ensure you don’t get screwed. By invoicing each job in portions as you go you can ensure you get paid before continuing with the next phase of work.
Now I know that we are a bookkeeping company so this final note may seem a little biased, but SERIOUSLY DON”T WAIT UNTIL THE END OF THE YEAR…OR LATER! A good bookkeeper is going to be extremely busy at this time of year so there may be a wait to be onboarded or the work may cost extra due to rush fees.
We know that if you are reading this post then you are good at building houses, but not good at paperwork and keeping the CRA happy. The sooner you admit this to yourself the better. Hiring a bookkeeper is money well spent. Not only will you be able to sleep at night knowing that the backend of your business is well taken care of you can also know that when the CRA comes knocking because you are the ‘chosen one’ for a random audit you have nothing to worry about.
Contact us today for an obligation free consultation.