Accounting Articles

The Difference Between Capital Gains and Investment Income

Can Smart Capital Gains Financial Planning Save You Money?

What are capital gains? The profit people generate from selling an asset or investment is typically referred to as a “capital gain.” The term has also become synonymous with taxation, because a percentage of the profit margin may end up in the government’s coffers. But it’s important to understand that not every asset falls under the capital gain rules. Financial planners and accountants have strategies to utilize to minimize tax liability.

How Are Capital Gains Taxed in Canada?

Profits made from selling items such as stocks, bonds, mutual funds, and exchange-traded funds generally fall under capital gain rules. The same applies to tangible assets, such as rental properties, second homes, equipment, and luxury items, which also may be subject to after-sale taxation. Principle homes generally are exempt as long as they remain a primary residence.  

Although there is not necessarily a “capital gains tax” explicitly written into law, 50 percent of the profit earned from the sale of an asset becomes taxable. The rate of taxation is based on the person’s marginal tax rate. For instance, if you sold a second home for $100,000 above the purchase price, minus expenses, you’d apply $50,000 (half) to your taxable income. If you’re in the 33 percent bracket, then one-third of the $50,000 goes to taxes. The remaining two-thirds plus the untaxed $50,000 are free and clear profit.

That’s why it’s crucial to maintain diligent records regarding reasonable expenses associated with an asset. Fees, commissions, maintenance, advertising, and improvements are generally deducted from the amount of capital gain total and potential taxes.

The Difference Between Capital Gains and Investment Income

It’s not uncommon for people to find the difference between capital gains and investment income confusing. This holds particularly true when dealing with investment opportunities such as stocks.

While the two are not necessarily mutually exclusive, investment income generally refers to ongoing profits. Dividends on a lucrative stock or monthly rent payments from a real estate property are examples of investment income. They are not subject to the same tax formula as a capital gain generated from the sale of an asset.

How to Minimize Taxes on Capital Gains

The fact that someone makes a hefty profit on the sale of an asset doesn’t mean they must pay the full face value in taxes. A savvy accountant may employ the following strategies to reduce capital gains tax liability.

  • Establish Tax Shelters: These financial umbrellas shield investments and allow people to buy and sell stocks in a duty-free environment. Shelters such as a Registered Retirement Savings Plan, Registered Education Savings Plan, and Tax-Free Savings Account rank among the popular ways Canadians manage wealth without incurring taxes on annual capital gains. However, tax shelters do limit your ability to deduct capital losses.
  • Deduct Capital Losses: Sometimes, people become hyper-focused on paying taxes on profits and overlook losses. This scenario proves common with real estate investments. Property owners may lose track of the ongoing expenses, fees, taxes, interest payments, and wide-reaching other costs. Although you may have earned sound investment income over the years, the final sale could result in an overall loss. It’s critical to subtract all of your expenses before arriving at a capital gains figure.
  • Know When to Pay: One of the capital gains caveats involves deferment. If you receive a capital gain from a divorced spouse or deceased parent, the taxable amount does not necessarily come due that year. The new owner of an asset incurs the tax liability when they sell it and earn a profit. It’s important to keep in mind that the profit will be calculated based on the value when your ex-spouse or parent purchased the asset.
  • Lifetime Exemption: Certain small business owners may be eligible for the Lifetime Capital Gains Exemption when selling farms, fishery property, and qualifying private interests. Canada’s lifetime exemption proves complicated, and it’s advisable to consult with a tax professional.  

An experienced advisor can help you minimize their tax liability by spreading the profits over years. This strategy, often called a capital gain reserve, does more than simply postpone payment. A capital gain reserve can reduce the amount you pay.

What Is a Capital Gains Reserve?

A capital gains reserve effectively reduces the amount of profit you enjoyed as income in a given year. After calculating your capital gain, everyday people can lower that figure on the income by claiming a reserve amount. Taxpayers can usually spread the total revenue over five years using a specific formula.

In cases involving family farms, fishing businesses, among others, a qualifying capital gains reserve may be extended for upwards of 10 years. This type of deferment helps prevent the gain from driving you into a higher tax bracket and unnecessarily giving more of your hard-earned money to the government.  

While Canadians all need to pay their fair share of taxes, it’s equally important to ensure the best financial stability for you and your business.

Want to know more about the difference between capital gains and investment income? Contact Avisar Chartered Professional Accountants and schedule a consultation today. 

Avisar is a highly-regarded accounting firm operating in Langley, Abbotsford, Surrey, Vancouver, and the rest of the Lower Mainland.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

small business accountant

How to Choose the Best Small Business Accountant

The difficulty of finding the right small business accountant can be a challenge for both start-up entrepreneurs and the proprietors of more established enterprises.

Now, in truth, it shouldn’t be too hard to find a competent and reputable local firm or individual that can carry out all the necessary functions small businesses require.

These would include bookkeeping, the maintenance of proper tax records, cost-effective inventory and invoice management, cash flow control, payrolls, and a wide variety of other “back office” tasks.

With the help of modern software packages, it’s often possible for these functions to be discharged in-house by an individual or a small team.

Small Business Accountant or Bookkeeper — Why the Difference Matters

But while these day-to-day tasks are essential to the efficient management and even the survival of any business, they’re only a small part of the value that a good small business accountant can add. As a business grows, the pressures of daily financial management grow with it, and there’s only so much that even the best software can do to help.

Caught up in the daily whirlwind of staff and inventory management, marketing, and multiple tasks involved in running a business, it’s all too easy for owners and managers to lose sight of the big picture, and to fail to make the strategic plans that will determine the long-term success of their enterprise.

The Small Business Accountant as Strategic Partner

That’s why the right choice of small business accountant is so important.

A good firm will act not just as a provider of basic services — and, in truth, they may not be the most cost-effective option for this purpose – but as a true strategic partner in the business, helping with a wide range of crucial long-term plans and decisions.  

These may include: 

Strategic tax planning   

Far more than just the timely submission of routine returns, this involves consideration of such matters as if, when, and where to incorporate, the payment of dividends, profit-taking, and perhaps planning for the eventual sale of the business.

A good small business accountant will also be aware of the personal wealth and tax implications for the business owners in such circumstances.

Financing

Debt is a very common element in the growth of businesses, but it’s often much more involved than simply asking a local bank for a loan or overdraft facility. A good small business accountant will be able to advise on all aspects of debt, such as the right kind of debt to take on — be it loans, secured or otherwise, the issue of bonds, or other types.

They will also know the best and most effective sources of financing — including how to raise new equity capital if appropriate for an incorporated business.

And, importantly, they will know exactly how, and to whom, to pitch financing applications.  

Planning for Growth

On a related point, a good accountant can also help with the preparation of the detailed business plans that must accompany any desire to expand. This includes the investigation of possible new markets, the costing of new products, and the preparation of profit and loss projections for consideration by potential finance providers. 

Goal-Setting 

Less clearly defined but just as important is the advice that a small business accountant can give regarding the long-term goals of the business owner and the key performance indicators (KPIs) that need to be monitored in their pursuit.

It may be, for example, that the owner is primarily concerned with maximizing short-term revenues from a single operation or outlet. Or they may, on the other hand, be more interested in the reinvestment of profits for the long-term expansion of the business.

Either way, a strategically-minded small business accountant will be able to help set appropriate KPIs, monitor progress against them, and modify them as changing circumstances may demand.

Acting as a Sounding Board

The life of an entrepreneur or small business owner can be a lonely, albeit exciting, one. The advice of an impartial, trusted, and knowledgeable professional can be invaluable both in helping owners to negotiate tough times and in restraining them from over-exuberant decision-making during the good.

Finding the Right Small Business Accountant

A good small business accountant should be much more than a mere “number cruncher.” They should act as a long-term financial adviser, strategic planner, mentor, and friend.

Book a Free Consultation

The decision to hire an accountant can be daunting, but it’s worth taking some time to get it right. It’s a choice that’s enormously important to the long-term success of your business. Word-of-mouth recommendations and local small business organizations can be a good starting point.

But in the end, for business owners, there is no substitute for meeting one on one with several potential firms to discuss their unique, individual needs. So, to book a free consultation, simply visit us here or call us on (604) 513-5707.

measuring profitability

Measuring Profitability in Your Business: 7 Key Ratios

Measuring profitability in a business is essential to understanding how well it’s running. From measuring minor operational changes to exiting via sale, understanding what your business’s bottom line truly means is the only way to accurately determine its value. If you run a business, here’s an overview of how to measure profitability.

How To Measure Profitability

Knowing your business’s numbers is foundational to assessing profitability. Inaccurate figures will lead to inaccurate conclusions. Don’t go with what you think the business makes and spends, and don’t use what you expect future sales and expenses to be. Use hard data from the past months or years — yes, you need to keep accurate records — to gain a true understanding of your business.

There are multiple numbers that every business owner should know. Here are a few of the more important ones related to measuring profitability:

  • Gross Revenues
  • Net Income
  • Cost of Goods Sold (COGS)
  • Operating Expenses
  • Other Income
  • Taxes

An accountant can help you calculate these, so long as you have the necessary records. Because records are so important, it’s generally advisable to hire a bookkeeper or accountant as soon as you start a business (or now if you already have a business).

Measuring Profitability: Key Ratios

Your gross revenues show the top-line income that your business makes, and net income generally shows how much the business actually earns after expenses. These figures become even more important to measuring profitability when put in the context of profitability ratios, though.

There are multiple profitability ratios that show how much a business earns with respect to different underlying costs. Some of the most common ratios are:

  • Gross Profit: Gross profit measures how profitable your goods/services are to sell. It puts the earnings in perspective to the cost of those goods, and the best way to improve this is to either raise prices or find lower-cost suppliers. 

Formula: Gross Profit = Revenue – Cost of Goods Sold

  • Operating Profit: Operating profit provides a more complete picture, as it takes into account the cost of goods sold plus how much it costs to run your business. This can be improved by bettering the gross profit or reducing operating expenses.

    Formula: Operating Profit = Gross Profit – Operating Costs
  • Pre-tax Profit: Pre-tax profit gives a complete view of your business’s profitability before the government gets its share via taxes, taking into account any other income and any non-operational expenses. The ratio will be improved by any positive change to sales, sourcing, operations, or almost any other aspect of your business.

    Formula: Pre-tax Profit = Operating Profit – Non-Operating Expenses
  • Net Profit: Net profit shows exactly how much money your business is making after everything is taken into account. Any change in revenues or expenses will impact this.

    Formula: Net Profit = Pre-tax Profit – Taxes

These profitability ratios are even more informative when used to calculate other ratios that look at returns. Most people use net profit when showing how to calculate profitability ratios that are more advanced:

  • Return on Investment: ROI is most useful when assessing whether a major investment in a business is financially advisable. You may use this when determining whether to purchase another business or when considering expanding operations. The ratio shows what sort of return you’ll receive from the outlay.

    Formula: ROI = Net Profit / Initial Investment
  • Return on Assets: ROA looks specifically at the tangible assets a business has to determine how well they’re deployed. You can use this when evaluating a major capital outlay or assessing the use of existing infrastructure/equipment. Unlike ROI, ROA will change more over time as the value of assets fluctuates with additional purchases and depreciation.

    Formula: ROA = Net Profit / Assets’ Total Value
  • Return on Equity: ROE is most often used to evaluate business profitability from a shareholder perspective. The ratio shows how much shareholders are earning. Improving profitability, rebuying equity, and issuing new equity will all impact this.

    Formula: ROE = Net Profit / Equity Investments

Each of these three ratios can be multiplied by 100 for a percentage.

For more tips on measuring profitability check out The Ultimate Small Business Profitability Checklist. It provides five key metrics you should know and be watching to understand your profitability.

Download a free copy here and get started measuring profitability in your business.

Work With a Knowledgeable Accountant

Evaluating profitability can be challenging even when you know how to calculate it via these various ratios. Working with a knowledgeable accountant who knows how to measure profitability will give you the confidence necessary to make informed business decisions. Book a free consultation if you’d like assistance determining how profitable your business is and where profits might be improved.

Disclaimer:
Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

New-Compilation-Standards

Compilation Financial Statement Standards

As a Chartered Professional Accounting (CPA) firm, Avisar’s services are governed by standards set at a national level. Recently, the standards that apply to compilation financial statements (sometimes referred to as a Notice to Reader) have been updated. Changes in the standards are normal as the environment in which businesses operate is constantly evolving and the standards must be revised accordingly.

There are several reasons why these standards are changing now:

  • The standards had not been updated in over 30 years and were outdated;
  • The new rules promote more consistency amongst CPA firms in the amount of work done on compilation engagements, particularly in understanding their clients’ businesses;
  • The new standards will provide more useful information for the users of compiled financial statements (e.g., lenders, bonding companies); and
  • They will also help CPAs clearly outline the work they have done on the financial statements from management’s responsibility for the financial information.

What you Need To Know About The Effect of These Changes:

The changes come into effect for all fiscal years ending on or after December 14, 2021. If your company’s next fiscal year-end is November 30, 2021, or earlier, these changes will not impact you until 2022.

We do not expect that these changes in standards will lead to a significant increase in fees in most cases.

These changes are focused on the standards around compilation engagements. If we currently provide you with a financial statement that has a “Notice to Reader” attached to it, you will be impacted. If the statements are audited or reviewed or we only prepare tax returns for you then you will not be impacted.

There will be two main changes to your Compilation Statements:

  • The report at the front of the financial statements will be titled Compilation Engagement Report instead of Notice to Reader. It will also be longer and include more information about the nature of a compilation, our responsibilities and management’s responsibilities; and
  • A note will be added to the financial statements titled Basis of Accounting. This note will include brief summary of accounting policies for the significant items recorded within your company’s financial statements.

For the most part, you won’t notice any significant changes in what we are asking for at the beginning of our engagement.

Important Points to Note:

  • Prior to issuing the engagement letter, we will ask a few questions about who, other than you, receives copies of these financial statements and for what purposes they use the financial statements. A typical example would be a bank for lending purposes, a bonding agent, or a minority shareholder;
  • Our engagement letter will identify these additional users and will include acknowledgement from you that they are in a position to obtain any further information from you that they require and they have agreed to the basis of accounting used in the preparation of the financial statements;
  • We will ask some questions about your business operations and your processes for keeping financial data and bookkeeping practices. This will enable us to draft the wording for the Basis of Accounting note disclosure; and
  • The information we will require you to review and sign at the end of the engagement to approve the financial statements, will look a little different than before.

In preparation for the adoption of the new standards, as we complete this year end’s financial statements on a compilation basis, we will set up a meeting with you to review the statements, how the upcoming changes will impact your company, and to ask you some additional questions in preparation for your next year-end.  After our meeting, we will provide you with a summary of the changes as they affect you and documentation of what we discussed.

If you have any questions regarding anything discussed in this post or any other matter that you wish to discuss, please reach out to your contact at Avisar and we will be pleased to discuss further with you.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

in house financial statements

IN HOUSE FINANCIAL STATEMENTS: EVERYTHING YOU NEED TO KNOW

Consider your external Chartered Professional Accountant when preparing in house financial statements.

To run an owner-managed business successfully, it is not enough just to track the movement of funds in and out. In-house financial statements provide the type of information needed by your external accountant are also essential because the external accountant is the intermediary between your business and the Canada Revenue Agency, creditors, a potential buyer and others who need the special financial statements only your external accountant can produce.

In House Financial Statements

Internal accounting systems process daily sales, purchases, and payroll transactions; effective owner-managers review the general ledger bank balance, accounts receivable, accounts payable, and the payroll summary and analyze the basic financial statements on a regular basis. Management needs these in house financial statements to meet some if not all of the following requirements:

  • All provincial corporations’ acts require financial data to support financial statement filing requirements.
  • Shareholders have a right to yearly financial statements based on recorded transactions in your in house financial statements.
  • Creditors may require regular financial statements to evaluate the quality and sufficiency of collateral covering a loan and to ensure the loan conditions are being met.
  • Potential investors may want to review monthly financial statements to evaluate throughout-the-year performance.
  • Comparable monthly historical in house financial statements give valuable information to a potential purchaser if the owner-manager retires or sells all or part of the business.
  • Financial decisions based on monthly facts and figures provide insight for planning and budgeting.
  • Comparative financial statements can reveal whether changes in sales or expenditures are creating variations in the bottom line. Such comparisons allow management to take corrective action and ward off potential working capital problems.
  • In house financial statements establish how management is guiding the company.
  • Financial statements provide information about the availability of sufficient assets to meet liabilities.
  • Operating results provided by financial statements inform management whether action is needed to increase sales, cut production costs, or reduce wage costs.
  • Properly structured income statements provide insight into the cost of production compared to sales. As a result, management can more rapidly decide whether sales prices need to be increased or job costs better controlled.
  • Monthly in house financial statements show errors in environmental, tax, payroll, pension, workers’ compensation, GST/HST or employee health tax remittances.

The external CPA usually makes some adjustments.

External Accountant

Before company accounts are ready for a third-party user, the external accountant usually has to make some adjustments to in house financial statements to provide the information in the form needed by the third party. Consider the following:

  • Data provided by an in-house system designed to give information about the day-to-day operations must be distilled into a summary format that provides information in accordance with Canadian financial statement disclosure requirements.
  • Statements prepared by an independent accountant lend credibility to the corporate entity because the preparation is independent of internal bias.
  • Reporting requirements change regularly and must be reflected in the financial statements.
  • Independent preparation of financial statements may identify anomalies within the corporate records, which need review to ensure they are correct. For instance, capital assets purchased may have been expensed.
  • Preparation of financial statements by your external accountant usually identifies items that are income tax sensitive such as shareholder draws, penalties and interest or personal use of corporate vehicles that may have to be adjusted.
  • An external review may determine whether the valuation of assets is accurate or whether capital assets should be written down or accounts receivable amounts should be written off.
  • The external accountant ensures that comparative figures are truly comparative, not only to ensure a better analysis of progress throughout the years, but also to provide insight as to the reasons for material variations in the event lenders or regulatory authorities question the differences.

Periodic In House Financial Statements

In order to prepare year-end financial statements, your accountant needs quality information produced by your accounting system. The regular preparation of financial statements allows your CPA to fully understand the financial performance and position of your business. Because CPAs have significant experience in a multiplicity of businesses, they are able to determine the benchmarks your particular business should meet and maintain.

Your Business Is Their Business

In the final analysis, most external accountants would agree that you know your business better than they do, but they know business better than you. Working with your accountant and helping them understand your business will ensure the financial statements provided to management, third parties and regulatory and tax authorities adequately explain the corporation’s financial position and operational results for the year.

Get a free review of your financial statements here.

Disclaimer:
Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

T4-Reporting

New T4 Reporting Requirements

For the 2020 tax year, additional information will need to be reported on T4 slips, “Statement of Remuneration Paid”. Employers will be required to report an employee’s income and retroactive payments paid during specified time periods; this is in addition to reporting an employee’s income on Box 14.

The purpose of the added reporting requirement is to validate payments made to individuals who have received payments from the Canada Emergency Response Benefit (“CERB”), Canada Emergency Student Benefit (“CESB”), and the Canada Emergency Wage Subsidy (“CEWS”).

Reporting Requirements

The 2020 T4 slip will have new information codes for employers to report employment income paid during specified time periods. These codes and related time periods are as follows:  

  • Code 57: Employment income –March 15 to May 9
  • Code 58: Employment income –May 10 to July 4
  • Code 59: Employment income –July 5 to August 29
  • Code 60: Employment income –August 30 to September 26

As an example, if an employer is reporting employment income earned during the period of May 6 to May 19 and the income is paid on May 31, the employer will report the income using code 58.

Please contact us if you have any questions.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

Canada Emergency Response Benefit For Workers

On March 25, 2020, the Federal Government introduced the Canada Emergency Response Benefit (CERB) to support workers and help businesses to keep their employees.  If enacted into legislation, the CERB would apply to wage earners, as well as contract workers and self-employed individuals who would not otherwise be eligible for Employment Insurance (EI).  This taxable benefit would provide $2,000 a month for up to four months for workers (who grossed at least $5,000 in the past 12 months) who lose their income as a result of the COVID-19 pandemic.  Individuals would be able to apply for the benefit in early April and receive benefits within 10 days of application.    The entire Government announcement can be read here.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

The High Costs of Equipment And Vehicles

The high cost of equipment demands that owner-managers have an in-depth understanding of the cost of owning and maintaining specific types of equipment, to ensure that it contributes to a positive return on investment. Factoring the significant costs of equipment ownership into a pricing formula could increase your sales figures and at the same time, help you understand where you can reduce present and future costs – and improve your bottom line.

Businesses spend a great deal of time reviewing salary and wages, both to control cost and to determine billing rates when providing estimates or billing clients.

Next to wages, vehicle and equipment ownership and operations are among the higher-expense items within a profit-and-loss statement. Yet, very few businesses monitor the cost of owning and operating vehicles or equipment. Instead, they may simply fold it into the price of doing business without analyzing it further.

Whether your business needs a front-end loader costing just south of $500,000, or a working truck in the $90k to $100k range, analyzing the cost and contributions that these assets make to the business may contribute to a more satisfying bottom line.

To better understand the benefits of job costing each piece of equipment, consider this advice:

This information in turn provides a basis for quoting jobs, as well as documentation you can use if you’re considering future equipment purchases.

  • Consider recording the cost of powering the equipment. Whether the source of power is fossil fuel or electricity, knowing the operation costs is a major consideration in an energy-expensive world.
  • Downtime of all equipment should also be recorded. Knowing how many hours equipment is out-of-commission due to mechanical failure is essential to:
  • Understand the cost of repairing the equipment.
  • Determine the lost opportunity cost because equipment cannot be used.
  • Establish whether that brand of equipment meets job requirements.
  • Compare the downtime to that of similar equipment, so you can analyze based on hard numbers which is the most reliable or usable piece of equipment.
  • Purchasing equipment usually requires financing. Interest is a cost of ownership and, as such, should
  • be recorded for each specific piece of equipment. Factoring interest costs into the operational cost of the equipment forces management to consider whether charge-out rates need to increase, or whether leasing or renting is a better alternative to the cost of ownership.
  • Consider extended warranty cost as part of the cost of operating equipment. If extended warranty is included, you as an owner-manager may wish to consider extending the useful life of the equipment to align with the extended warranty period, which will help you cost jobs or hire out equipment.
  • Finally, be sure to record revenue earned using the equipment based upon the predetermined hourly charge-out rate. Knowing whether the equipment is paying for itself helps determine whether your business should purchase additional equipment, sell the existing equipment or rent similar equipment in the future.

JOB COSTING

Establishing an asset-specific costing process is not as difficult as you might think. Most quality bookkeeping systems will have a job-costing module that already allows posting of expenses and/or revenues for reference purposes. If your software does not have this kind of module, you could also build a spreadsheet to record the cost and revenue attributed to specific assets.

The hard part is to ensure that all employees are trained to record the additional required information. For instance, when an in-house mechanic repairs a specific piece of equipment, the time spent on the repair should be documented to allow posting to the job cost for that equipment.

Bookkeepers must also be able to identify the invoice associated with the cost of parts for that specific equipment repair, for their job-cost posting. Each business will need to adapt its procedures to accommodate its software.

Naturally, all the recordkeeping in the world will not benefit the bottom line if management does not review, on a regular basis, the results of their decision to rent or lease an asset.

Reviewing this data allows management to:

  • Determine whether usage of equipment dictates that the business will need a replacement earlier than suggested.
  • Consider whether the asset is bringing an advantage to the business.
  • Compare similar equipment to determine which brand is less costly to maintain in future.
  • Determine whether your employees have a possible bias towards a specific piece of equipment that may sway future purchase decisions.

Using a fact-filled approach will help you arrive at decisions about acquiring future equipment to be purchased and related cash-flow requirements. It will also help your business take action to ensure that financial data, corporate records, and lines of credit are up-to-date, so you’ll be able to secure financing for any future replacement assets.

Learn more about how to read and understand financial statements in How to Read Financial Statements: A Guide for Business Owners.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

The BC Employer Health Tax Effective Jan 2019: How Will It Affect Your Business?

In February 2018, BC’s NDP government proposed the Employer Health Tax (“EHT”) as part of their provincial budget. The introduction of the EHT will be supplemented by the elimination of the Medical Service Plan Premiums (MSPP). Medical Services Plan (MSP) premiums are levied on individuals, whereas the new B.C. Employer Health Tax (EHT) will be levied on an employer’s payroll.

The EHT is being implemented as part of the government’s plan to make life more affordable for individuals in British Columbia by providing savings of up to $1,800 per family each year. The government is introducing these savings by shifting the tax from individuals to businesses.

The B.C. Employer Health Tax is effective as of January 1, 2019.

Under the current system of MSP, employers can choose whether they want to pay their employee’s MSP premiums. In contrast, the EHT will be mandatory for businesses unless they meet the new program’s exemptions. MSP premiums (paid by individuals) will be completely phased out by January 1, 2020.

WHO WILL BE AFFECTED? OVERVIEW

The B.C. EHT will apply to the following employers with B.C. payroll:

  • Employers in B.C. with payroll greater than $500,000 in a calendar year; this includes corporations, trusts, partnerships and sole proprietorships.
  • Associated Employers with a combined payroll of $500,000.
  • Charitable and Non-Profit Employers with payroll greater than $1,500,000.
  • All total payroll amounts that fall below the EHT thresholds are exempt from filing and paying EHT.

Remember, as soon as the payroll exceeds the exemption thresholds, you are required to register for EHT. So, if you are an employer or associated employer, and your payroll reaches $500,001 or more, you will need to register. If you are a charitable or non-profit employer you will need to register as soon as your payroll reaches $1,500,001.

WHAT PAYROLL (REMUNERATION) IS SUBJECT TO THIS NEW TAX?

Examples of a few items included in payroll (remuneration) that are subject to EHT:

  • Salaries and wages
  • Bonuses/Commissions
  • Commissions
  • Vacation pay
  • Taxable allowances and benefits
  • Stock option benefits
  • Employer-paid contributions to RRSP
  • Employer-paid group life insurance premiums

There are many factors to consider when determining payroll items that count towards EHT thresholds. Please contact your accountant for a full listing of items to include or exclude from your EHT calculations.

HOW MUCH WILL YOUR BUSINESS BE REQUIRED TO PAY?

Depending on the size of their payroll, for-profit businesses will be subject to EHT rates ranging from 0.98% – 1.95%. The rate of 1.95% will apply to all payroll amounts greater than $1,500,000.

Annual B.C. PayrollCalculationAmount OwingRate
$500,000 or less$0$00%
$750,0002.925% x ($750,000 – $500,000)$7,3130.98%
$1,000,0002.925% x ($1,000,000 – $500,000)$14,6251.46%
$1,500,0002.925% x ($1,500,000 – $500,000)$29,2501.95%
$1,500,1001.95% x ($1,500,100)$29,2521.95%
$2,000,0001.95% x ($2,000,000)$39,0001.95%
FOR-PROFIT EHT RATE EXAMPLE

Charities and non-profit organizations’ EHT rates range from 0.42% – 1.95%.  These types of employers do not pay the rate of 1.95% until the payroll is greater than $4,500,000.

Annual B.C. PayroAnnual B.C. Payroll at each locationCalculation separate for each locationAmount OwingRate
$1,500,000 or less$0$00%
$1,750,0002.925% x ($1,750,000 – $1,500,000)$7,3130.42%
$2,000,0002.925% x ($2,000,000 – $1,500,000)$14,6250.73%
$2,500,0002.925% x ($2,500,000 – $1,500,000)$29,2501.17%
$4,500,1001.95% x ($4,500,100)$87,7521.95%
$5,000,0001.95% x ($5,000,000)$97,5001.95%
NON-PROFIT EHT RATE EXAMPLE

HOW TO CALCULATE EHT WITH ACCOUNTING SOFTWARE?

Many businesses assume that since this tax is payroll-related, it will be part of a payroll update in their accounting software and will be calculated for them – this assumption is incorrect!

Remember, this is an employer expense, not an employee deduction, so we suggest keeping these calculations separate from your payroll module.

At this time, we recommend monitoring your payroll accounts and calculating EHT manually or using the online EHT calculator provided on the B.C. government website. It is free and easy to use:

https://forms.gov.bc.ca/taxes/employer-health-tax-calculator/

HOW AND WHEN SHOULD BUSINESSES REGISTER AND PAY EHT?

Registration for EHT commences on January 7, 2019. If your total payroll in 2018 would have exceeded the exemption thresholds outlined above you will be required to make EHT instalment payments for the 2019 calendar year. If you are required to make instalment payments, you must register for EHT by May 15, 2019.

Your first installment payment is due on June 15, 2019. Please contact our office for assistance in calculating your required instalment payment amounts.

The registration deadline for all other taxable employers is December 31, 2019. EHT returns and full tax payments will be due annually for all employers on March 31. The first filing deadline of March 31, 2020, will pertain to the payroll for calendar 2019.

If your payroll is not subject to EHT you are not required to register or file an EHT return. As there are several factors that impact exemption status, we recommend you discuss your filing responsibilities with your accountant before making a final registration determination.

All registrations can be done at eTaxBC, the same way a business would register for PST. Payments can be made online through eTaxBC or through your bank via EFT, wire transfers, or as a bill payment.

HOW TO MITIGATE THE EHT IMPACT ON YOUR BUSINESS

Since MSP will not be eliminated until January 1, 2020, some larger corporations will be hit with a double expense of EHT and MSP while they are going through this transition period.

Planning for this change and possibly making adjustments to your business’s remuneration structure can help with navigating the effects of this transition.

Please contact a specialized advisor at Avisar Chartered Professional Accountants for more information or assistance with EHT planning, registration, calculation, and payments.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.
Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.