Setting SMART financial goals for your business

New Year, New Financial Goals: A Blueprint for Small Business Success in 2024

As we enter 2024, it’s an excellent time to ensure you’ve set some financial goals for your business. Effective financial planning is a good practice and the backbone of sustainable business growth. If you have yet to set some solid financial goals for your business in 2024, this guide will offer some practical, actionable advice on setting and monitoring those financial goals, ensuring your business not only survives but thrives in the year ahead.

Understanding the Financial Landscape of 2024

The Canadian economy looks to be on track to avoid a recession in 2024. Still, GDP growth is forecast to slow to 0.9% (from 1.1% in 2023). Our dollar is expected to remain in the 72-75 cent range. Most economists expect our inflation rate to get closer to the target 2% range but not achieve it until the end of 2024.

According to the BDC, three elements could worsen things and push us into a recession.

Geopolitical conflicts could affect the energy market. Persistent inflation could affect consumer spending. And even if interest rates hold, the current rates could cause consumer demand to collapse.

The BC economy is expected to experience slightly slower growth, with GDP growth of only 0.5% in 2024. British Columbia Real Estate Association is forecasting 24% growth in the real estate market in 2024, compared to an expected 7.1% drop this year, Which would be good news for businesses supporting the housing and construction industry.

For small businesses, this all means staying informed and adaptable is more crucial than ever. Adapting to these trends can affect everything from supply chain decisions to customer spending habits, making an agile approach to financial planning essential.

Setting Smart Financial Goals

Central to effective financial planning is the establishment of SMART (Specific, Measurable, Achievable, Relevant, Time-bound) goals.

For instance, setting a goal like “Increase net revenue by 12% by the end of Q3 2024” is a prime example of a SMART goal. It’s specific, quantifiable, achievable, relevant to overall business growth, and has a defined timeline.

In setting these goals, it’s also essential to consider the broader economic forecasts and how they might impact your specific industry or market—tailoring your financial goals to your business’s capabilities and the predicted market conditions can significantly enhance your chances of success.

Budgeting for Success

A robust budget is your financial compass, guiding every business decision you make. It involves deeply understanding your income versus expenses and balancing them to meet your goals. An effective budgeting strategy starts with thoroughly categorizing costs into fixed (rent, salaries) and variable (marketing, utilities) expenses. This distinction is crucial in creating a budget that guides spending and aligns with your financial targets.

In addition to basic categorization, integrating predictive budgeting can be highly beneficial. This involves using past financial data to forecast future spending and income, allowing for more informed budgeting decisions. Predictive budgeting can help anticipate and plan for market fluctuations, ensuring your business remains agile and responsive to change.

Read more about creating a better small business budget.

Managing Cash Flow

Cash flow management is the lifeblood of any business, particularly small enterprises. It’s about ensuring that your business has the necessary funds when needed. Effective strategies include prompt invoice management, maintaining a cash reserve for unexpected expenses, and managing credit efficiently. A well-managed cash flow ensures that your business can meet its financial obligations and invest in growth opportunities as they arise.

Moreover, employing tools like cash flow forecasts is highly beneficial. These tools help you anticipate periods of tight liquidity, allowing you to make proactive decisions to maintain a healthy cash flow. Regularly updating these forecasts based on real-time financial data keeps your business one step ahead.

Leveraging Technology for Financial Management

In the age of digital transformation, technology plays a pivotal role in efficient financial management. From cloud-based accounting solutions to mobile invoicing apps, these tools bring a level of automation and accuracy previously unattainable. They streamline tasks like expense tracking and financial reporting. They can even offer predictive insights into future economic trends based on your historical data.

But technology’s role extends beyond simplification and automation. It can provide critical insights into your business’s financial health, offering analytics to inform decision-making.

For example, many modern financial management tools come equipped with dashboards that provide a real-time overview of your financial status, helping you make informed decisions quickly.

Regular Review and Adjustment of Goals

Setting financial goals is not a one-time event but an ongoing process requiring regular review and adjustment. Ideally conducted quarterly, this practice allows you to measure your progress against set objectives and respond appropriately to any changes in your business environment.

Regular reviews also provide an opportunity to reassess your business strategies in light of new market information, economic trends, or changes in your business model. This flexibility is critical to maintaining relevance and competitiveness in the ever-changing business landscape.

Seeking Professional Guidance

While managing finances internally is essential, external expertise can be invaluable. At Avisar Chartered Professional Accountants, we offer tailored advice for your unique business needs, including specialized areas like tax planning, strategic financial consulting, estate planning, and more. Our team is well-versed in the nuances of the Canadian economic landscape, particularly in British Columbia, offering insights tailored to your local context.

Conclusion

Setting and monitoring financial goals is a dynamic process. The beginning of 2024 is the perfect opportunity to plan and adapt your financial strategies. Remember, the objective is not just survival but thriving success.

Avisar Chartered Professional Accountants is committed to guiding you on this journey. Our experience and personalized approach ensure that your financial planning aligns with your business goals. With a strong focus on local businesses in British Columbia, we understand the challenges and opportunities unique to our region.

Ready to set your business on the path to financial success in 2024? Contact Avisar today, and let’s turn your financial goals into achievements.

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.

Financial trends 2024 for small businesses

Big Financial Trends 2024: What Canadian Small and Medium-Size Businesses Need to Know

Supplier costs continue to rise. Inflation continues to impact buyer behaviour. Global unrest is making people uneasy. All of these financial trends are affecting small and medium-sized businesses as we head into 2024. 12% worry they will be unable to continue past 2024. Here’s the good news: 88% of Canadian SMBs surveyed say they are confident about growing their company over the next three years — an improvement from 2022’s 83%.

Regardless of what you see coming in the years ahead, understanding your financial situation is crucial to effectively building a successful and sustainable business. Cash flow will be more important in the coming year, and managing the economic, consumer, technology, and labour challenges should be top of mind.

Financial Trends and Challenges Facing Small and Medium-Sized Canadian Businesses

Here are some of the key financial trends and challenges that SMBs must confront in 2024.

Economic Concerns

Are we heading into a recession? That’s the big question that we’re all grappling with. The Conference Board of Canada now believes we’ll avoid a recession with a recovery in 2024. Others disagree. Either way, SMBs need to keep tight control over finances and prepare for whatever comes next.

The Bank of Canada is expected to hold tight on interest rates for the first half of 2024, with rate reductions not coming until mid-year. High interest rates slow down many areas of the economy, including consumer spending. SMBs seeking financing will find it more expensive, and loan grants may be more restrictive.

With labour challenges causing wages to rise and costs of goods increasing, SMBs will have to make difficult decisions about raising prices and managing cash flow.

Consumer Behaviour

A long-running financial trends that will continue in 2024 is more consumers are shopping online. With internet usage across Canada at nearly 93%, the retail eCommerce market is forecast to hit $71.7 billion in Canada in 2024. Yet, many small businesses nationwide are lagging in building out eCommerce solutions. Businesses must assess their eCommerce strategy to stay competitive, especially with younger consumers.

If there is a recession, expect consumer behaviour to shift. As businesses downsize, many Canadians will suddenly be out of work or have their work hours reduced. Demand for goods and services will decrease, especially for items that aren’t considered essential.

Consumers are also focusing on sustainability and eco-friendly practices in decision-making. More people expect transparency into how businesses operate as part of purchase decisions. Starting in 2024, banks and insurance companies face mandatory disclosures for climate-related risk and exposure. While most SMBs do not have such reporting requirements, expect more interest in how you are operating.

Technology

Technology is playing an increasingly important role in business. Artificial intelligence and automation are both disrupting entire sectors and providing significant efficiencies.

At the same time, SMBs need to worry more about cybersecurity than ever before. Cybercriminals are increasingly targeting small and medium-sized businesses. Cybercrime in Canada is up more than 600% since the start of the pandemic, and nearly half of all attacks target SMBs.

Labour Laws

new regulation goes into effect on February 1, 2024, as part of the Labour Code, increasing the obligations employers have when terminating employees in federally regulated businesses. More notice will need to be given to those with three years or more of employment. Up to eight weeks’ notice is required for employees working at a company for eight years or longer. There are also new requirements about the statement of benefits, wages, and severance pay that must be provided.

Businesses that use employment contracts will want to review them to ensure they comply with the new measures. Businesses must update employee handbooks and policy manuals to meet the new guidelines.

What SMBs Can Do to Prepare for 2024

Seek Financial Advice

Consulting with accounting and finance experts like Avisar Chartered Professional Accountants should be a priority heading into 2024 and pondering how to prepare for emerging financial trends. A CPA firm can provide expert guidance on budgeting, cash flow management, financing options, and more to help SMBs adapt to evolving economic conditions.

Adapting to Changing Consumer Preferences

SMBs need to evaluate their products and services, looking at ROI in light of evolving consumer behaviour. Enhancing eCommerce and digital offerings, managing supply chains, and tight cost control are all part of the SMB landscape moving forward.

Leverage Technology

SMBs should stay current on technology and look for ways to streamline operations. The right technology can boost competitiveness by automating functions. Seeking input from your accounting firm can help you find new ways to optimize finances and reduce your accounting workload.

SMBs also need to evaluate their current cybersecurity to lower risk.

Remain Compliant

Regulatory compliance is essential. Rules and reporting requirements are changing, and SMBs need to avoid costly problems by adhering to evolving laws. A CPA firm can help ensure businesses adhere to the latest accounting, tax, and other financial standards.

Get Professional Financial Management

With these complex challenges facing SMBs in 2024, you need a trusted advisor to help guide you, keep you compliant, and better manage your finances.

Avisar Chartered Professional Accountants is a trusted BC-based Canadian accounting firm focused on serving small businesses, entrepreneurs, and not-for-profit organizations. Our team of highly experienced accountants understands the unique needs of small and medium-sized businesses and is dedicated to helping you manage your finances and grow your business.

Contact Avisar Charted Professional Accountants today to book a consultation.

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.

Year-End Tax Planning Strategies for Small Business

Year-End Tax Planning Strategies for Small Business

As the year draws to a close, small business owners in Canada have a golden opportunity to minimize their tax liability and maximize their financial stability. By implementing smart year-end tax planning strategies for small business, you can ensure you keep more of your hard-earned money while complying with Canadian tax laws. In this article, we will explore important considerations and strategies for Canadian small businesses, highlighting some time-sensitive items and key business deductions to consider.

Review Your Business Structure

One of the first decisions small business owners should revisit at year-end is their business structure. Whether you are a sole proprietor, partnership, corporation, or another entity, your structure can significantly impact your tax liability. For instance, if you’re operating as a corporation, you may be able to take advantage of the small business deduction, which can reduce the federal corporate tax rate on active business income. Similarly, if your business has grown significantly, it might be time to consider incorporating, which can offer tax advantages and limited liability protection.

Evaluate Your Income and Expenses

It’s essential to review your business’s financial performance and make informed decisions about your income and expenses. Delaying or accelerating income or expenses can have a substantial impact on your current-year tax liability. If you expect your income to be lower next year, you may want to defer invoicing clients until the new year. Conversely, if you anticipate higher income next year, you might consider accelerating income into the current year to take advantage of lower tax rates.

There is a near-term opportunity to elect to fully deduct capital asset purchases (with some limitations) in 2023 versus the usual requirement to claim the deduction over several years. For these purchases, the asset must be in use before December 31, 2023, and an election made on filing the tax return. This deadline is extended to December 31, 2024, for sole proprietorships and partnerships of all individuals.

Maximize Small Business Deductions

Canadian small businesses are eligible for various deductions, which can significantly reduce their tax liability. Some key deductions to consider include:

  1. Small Business Deduction (SBD): This deduction allows eligible small businesses to reduce their federal corporate tax rate on active business income. It’s important to ensure that your business meets the criteria to qualify for the SBD.
  2. Home Office Expenses: Given the rise in remote work, many small business owners work from home. You can claim a portion of your home-related expenses, such as rent, utilities, and internet, as business expenses if you use your home as your principal place of business.
  3. Employee Benefits: Offering benefits to employees can be a valuable deduction. This can include health and dental plans, life insurance, and retirement savings plans.
  4. Scientific Research and Experimental Development (SR&ED) Tax Incentive: If your business is engaged in research and development activities, you may be eligible for the SR&ED program, which offers tax credits for eligible expenditures.

Take Advantage of Time-Sensitive Items

Certain tax planning strategies must be implemented before year-end, so it’s crucial to act promptly. Some time-sensitive considerations include:

  1. RRSP Contributions: Consider contributing to Registered Retirement Savings Plans (RRSPs) before the end of the year to reduce your personal taxable income.
  2. Dividend Planning: If your business is incorporated, assess the most tax-efficient way to distribute dividends to yourself and other shareholders.
  3. Debt Repayment: If your business has outstanding debts, it may be beneficial to pay them off before year-end, potentially reducing interest expenses and improving your financial position.
  4. Payroll and Bonuses: Ensure you’ve processed payroll and employee bonuses before year-end to claim them as expenses in the current tax year.

The Avisar Difference

Taxes are some of your business’s most significant expenses, which can cause a massive headache when it comes time to file. Remembering all deductions, credits, and strategies is difficult, even for the most well-organized businesses.

Due to the increasing complexity of the tax landscape, working with a professional is always recommended, especially one well-versed in local laws. It can optimize your tax payable throughout the year – freeing you up to focus on what you do best (running your business!)

Avisar CPA specializes in all manners of the tax act and how it applies specifically to BC residents and businesses. We sit down with you to learn more about your situation, business structure, and current goals and position.

After we have analyzed your unique scenario, we will devise a course of action and provide you with actionable steps on how we can improve your overall tax return, year after year. Book a free consultation today to learn more about how we’re helping BC businesses prosper.

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 employee benefits

Small Business Employee Benefits: What You Should Offer

Small business employee benefits can be a great equalizer when competing for talent against larger companies. The big guys have more resources to offer top talent, and small and medium-sized businesses can’t always compete with the salaries offered by larger firms. A more innovative way to approach hiring as a small business is with the help of employee benefits.

A great employee benefits plan helps small businesses attract more talent and reduce employee turnover. However, there are always tax implications to keep in mind. If you are thinking about offering benefits to your employees for the first time or want to change or increase your current benefits package, then this article is for you.

The Landscape of Employee Benefits in Canada

Canadian employee benefits are usually considered standard for all full-time employees. However, each province has different regulations for employee benefits and probationary periods. Some of the more common benefits offered by small businesses in Canada include:

  • Paid time off
  • Flexible working hours
  • Personal leave
  • Medical leave
  • Family violence leave
  • Critical illness and compassionate care leave
  • Extended maternity and paternity leave
  • Holiday pay
  • Health insurance
  • Healthcare spending accounts (HSAs)
  • RRSP contribution matching

Picking the right benefits to attract talent to your company depends on the demographic you want to hire. For example, younger recruits might be more attracted to flexible hours and personal leave benefits. At the same time, older applicants might be more interested in RRSP contribution matching and compassionate care leave.

Key Small Business Employee Benefits and Their Tax Implications

While you can offer your employees a wide range of potential benefits, there are a few that can make a big difference in your recruitment and retention strategy. These are some of the most common benefits, along with their tax implications for business owners.

Health and Dental Insurance

Offering health insurance plans or dental insurance coverage can benefit small businesses. It signals to prospective employees that you care about their well-being and can help keep them healthier, leading to fewer sick days.

For business owners, there are additional benefits to offering health and dental insurance. There is deductibility for the employee and non-taxable benefits for the employer. This helps employers and employees get more out of health and dental insurance coverage.

Retirement Savings Plans (Group RRSPs)

Another benefit small or medium-sized business owners can offer employees is a Registered Retirement Savings Plan, or RRSP, matching program. This type of employer-sponsored retirement plan uses matching contributions from employers and employees with the plan option.

The tax implications from retirement plans and RRSPs involve deductions and deferrals. Typically, the amount of money that the employer contributes is tax-deductible. The employees who contribute can also enjoy tax deferrals until they withdraw the money from the retirement savings account.

Stock Option Plans

Depending on your company structure, stock options are another type of employee benefit that can make you stand out among your competitors. This type of benefit allows you to offer stock options to employees as a benefit, usually after a certain number of years worked for the company. 

This kind of benefit gives employees an ownership stake in the company and a vested interest in its success.

This type of benefit also allows the employee and employer to defer tax implications until later. That can help save money in years when taxes are high. The value of shares is also included in taxes for the employees, so deferring the taxation on stock options can help add more value to the benefit.

Professional Development and Education

Another valuable benefit you can offer to employees is professional development and education courses and training. By helping employees gain more knowledge and learn valuable and applicable skills, you can make a job more appealing and more beneficial to their future careers.

Many professional development and education programs are tax-free or are tax-deductible for the business. So not only are you helping your workforce learn more and grow more robust, but you can also avoid taxes or deduct the expense from your yearly tax report.

Special Considerations for Small Businesses

Small businesses operate differently from large corporations, so there are some special considerations to consider as you work on your employee benefits plan.

Tax Credits and Incentives

There are some specific Canadian tax credits available for small businesses offering certain benefits, including:

  • Apprenticeship job creation tax credit (AJCTC)
  • Film and television tax credits in Ontario
  • R&D tax credit
  • Union dues tax credits in Québec

Navigating the Complexity

Trying to figure out the best types of benefits to offer your employees and track the tax implications of those benefits is challenging. Navigating the complexity on your own can be overwhelming, especially for new small businesses that haven’t offered benefits before. In these cases, it’s best to consult with a professional accountant or tax advisor to remain compliant and maximize your tax advantages.

The Impact on Employee Retention and Recruitment

The benefits you offer can be a game-changer for small businesses in the competitive job market. Small companies like Willful have maintained their competitive edge and thrived during the pandemic thanks to their benefits packages. With only 15 employees, Willful attracted top talent with benefits like medical and dental insurance, stock options, education budgets, summer hours, and a vacation fund. 

By offering benefits that your competition hasn’t even considered, you can attract the best potential recruits to come to your business, no matter what size company you have. Benefits can help level the field for your hiring and employee retention strategies.

Conclusion

Benefits can offer important tax implications and better recruitment practices for small businesses. The benefits you offer and the depth of your coverage can help you attract top talent, keep your current workforce happy, and give you a break during tax season. Reviewing your current benefits strategy and seeking expert advice from tax professionals can help you get the most out of your plans. If you need help with your benefits planning, book a free consultation to discuss your benefits plan with certified professionals.

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.

financial literacy

Unlocking Business Success: The Power of Financial Literacy for Entrepreneurs

As entrepreneurs and small business owners, you wear many hats, from marketing mavens to product developers. It’s impossible to be an expert in every aspect of your business. Still, there is one area that will pay huge dividends on the investment of time you make: financial literacy.

Financial literacy isn’t just about crunching numbers. It’s about understanding those numbers well enough to steer your business in the right direction. And in the unpredictable world of business, that understanding is priceless.

In this post, we’ll delve into the importance of financial literacy for small business owners, highlighting how mastering the basics can lead to smarter, more informed business decisions. So, whether you’re a seasoned business owner or just starting out, let’s embark on this financial journey together.

The Direct Impact of Financial Literacy on Business Success

Financial literacy is more than just a buzzword; it’s a foundational skill that can make or break a small business. Let’s dive into how understanding the financial ropes directly influences your business’s success.

Improved Cash Flow Management

Cash is the lifeblood of any business. A U.S. Bank study found that a whopping 82% of small businesses fail due to poor cash flow management1. By understanding the nuances of your cash inflow (sales, investments) and outflow (expenses, purchases), you can predict potential shortfalls and take proactive measures. It’s not just about making money; it’s about ensuring that money is available when you need it.

Informed Decision Making

Have you ever been of two minds about investing in new equipment or hiring more staff?

Financial literacy equips you with the tools to make these decisions confidently. By understanding your financial statements, you can gauge the health of your business, assess profitability, and determine the feasibility of big-ticket expenses. It’s like having a financial compass guiding you toward decisions that align with your business goals.

Risk Management

Every business faces financial risks like fluctuating market conditions or unexpected expenses. Being financially literate equips you to identify those risks early on.

For instance, if you’re aware of market trends, you might foresee a potential dip in sales and adjust your spending accordingly. Or, by regularly reviewing your financial statements, you might spot irregularities that could indicate fraud. Financial literacy acts as your business’s early warning system, helping you navigate potential pitfalls.

The Indirect Benefits of Financial Literacy

While the direct impacts of financial literacy, like cash flow management and risk assessment, are often in the spotlight, the indirect benefits can be just as transformative for small business owners. Let’s delve into these often-overlooked advantages.

Enhanced Confidence in Decision Making

When you understand your finances, you’re not just making decisions; you’re making informed decisions. Imagine being at a crossroads, unsure of which path to take. Financial literacy is like having a map, giving you the confidence to choose the right direction.

Better Relationships with Financial Institutions

Banks and creditors love working with informed clients. When you demonstrate a clear understanding of your financial position, it not only makes their job easier but also builds trust. This can lead to better loan terms, faster approvals, and even potential partnerships. Think of it this way: would you rather lend money to someone who knows exactly how they’ll pay you back or someone who’s just hoping for the best?

Long-term Business Sustainability

Financial literacy isn’t just about the here and now; it’s about the future. By understanding financial trends and the broader economic landscape, you can make strategic plans for growth and expansion. It’s like planting seeds today for a harvest tomorrow. Businesses prioritizing financial education tend to have a more sustainable growth trajectory, ensuring they’re not just a flash in the pan but a lasting presence in the market.

How to Improve Your Financial Literacy

Improving your financial know-how is more accessible than you might think. Here are some ways to chart your course to become more financially savvy.

Educational Resources

The digital age has blessed us with many resources at our fingertips. From online courses on platforms like Coursera and Udemy to insightful books like “Financial Intelligence for Entrepreneurs” by Karen Berman and Joe Knight, there’s no shortage of material to dive into.

Hiring a Professional

Sometimes, the best way to learn is from someone who’s been there and done that. Consider hiring an accountant or financial advisor, even just for a few consultation sessions. They can provide personalized insights, answer specific questions, and guide you through the intricacies of your business’s finances.

Plus, having an expert on speed dial can be a game-changer during those “I’m not sure what to do” moments.

Continuous Learning

The financial landscape is constantly evolving. Regulations change, new tools emerge, and market dynamics shift. Dedicate some time each month to stay updated. Subscribe to financial news outlets, join business forums, or attend workshops. By committing to continuous learning, you ensure that your financial knowledge doesn’t just grow but stays relevant.

In essence, improving financial literacy is a journey, not a destination. Whether you’re diving into online courses, seeking expert advice, or simply staying updated, every step you take strengthens your business’s foundation.

If you focus on developing and maintaining your financial literacy, the positive impact on your business will be profound.

If you’d like to have a conversation to help you get started, book a free consultation. We’d be happy to offer some advice.

small business budget

Building a Strong Financial Foundation: 9 Tips for a Better Small Business Budget

Creating an effective small business budget can make the difference between thriving and just surviving in the exciting and sometimes unpredictable world of running a small business. Despite its crucial importance, many small business owners feel daunted by creating and managing a budget, viewing it as a complex and time-consuming process.

Introduction: Tips for Small Business Budgeting

Budgeting is not just about tracking income and expenses or preventing your business from overspending. It serves as a compass that guides your business toward its goals, a yardstick that measures your business’s performance, and a contingency plan that prepares your business for uncertainties. It allows you to anticipate challenges, seize opportunities, and steer your business on the path to growth and stability.

In this blog post, we aim to demystify the budgeting process and provide practical, actionable tips that small business owners can apply to their businesses. Whether you’re a startup just about to venture into your industry or a seasoned business looking to improve your financial management, these tips can help you navigate the financial aspects of your business with greater confidence and foresight.

Stay with us as we delve into the essentials of business budgeting, explore strategies for creating a realistic and effective small business budget, discuss the importance of regular budget monitoring and adjustments, and offer advice on planning for uncertainties. Along the way, we’ll also highlight the value of budgeting in making strategic decisions. Ready to master the art of budgeting? Let’s get started!

What is a Small Business Budget, and Why is it Crucial?

Business budgeting might seem like a fancy term, but at its core, it’s about planning your finances so that your income is greater than your expenses. This allows your business not only to cover operational costs but also to invest in its growth. But let’s go a bit deeper into this concept.

A small business budget is a financial plan that estimates income and expenses over a specific period. It serves as a roadmap, outlining how resources will be allocated to achieve business objectives. Budgets can be designed for a quarter, a year, or any period that suits your business needs.

The importance of business budgeting cannot be understated. It helps you understand your business’s financial health, make informed decisions, and plan for the future. Budgeting offers visibility into your cash flow, making it easier to identify potential cash shortfalls in advance and take preventive measures. It also enables you to allocate resources wisely, assess the feasibility of your financial goals, and measure your progress against those goals.

small business profitability

Different Types of Budgets: Operational, Cash Flow, and Capital Budgets

There are different types of budgets, each serving a unique purpose.

Operational Budgets focus on the day-to-day running of the business. They include income and expenses related to operations, such as sales, cost of goods sold (COGS), salaries, rent, and utilities.

Cash Flow Budgets estimate the inflow and outflow of cash in your business. They are crucial for ensuring that your business has enough liquidity to meet its short-term obligations. They can be beneficial in companies with significant seasonal variations.

Capital Budgets are for large, long-term investments such as purchasing equipment, upgrading software, or expanding to a new location. They help businesses plan and allocate funds for significant expenditures that can drive growth.

The Role of Budgeting in Strategic Planning

A well-structured small business budget is integral to strategic planning. It helps you prioritize your business initiatives, guiding where to cut costs and where to invest more. It serves as a performance metric, enabling you to compare projected performance against actual results, informing future strategies. By aiding in the identification of financial strengths, weaknesses, opportunities, and threats, budgeting helps you chart the course of your business’s future.

Understanding business budgeting is the first step toward mastering it. As we dive deeper into the specifics in the following sections, you’ll see how these concepts are applied to create a realistic budget that can navigate your small business toward financial success.

Know Your Costs

Knowing your costs is like having a clear map for your financial journey. By understanding and categorizing your costs, you can make more informed decisions and create a budget that reflects the realities of your business operations.

Identifying and Categorizing Your Business Costs

There are three main types of costs that your small business will incur: fixed, variable, and semi-variable costs.

Fixed Costs are expenses that do not change regardless of your business activity level. They remain the same whether your business is bustling or experiencing a slower season. Examples of fixed costs include rent, salaries, insurance, and any other expenses that are consistent from month to month.

Variable Costs, on the other hand, fluctuate depending on your business operations. These costs increase as your business activity goes up and decrease when it goes down. They often include expenses like raw materials, shipping, sales commissions, and other costs associated directly with the production or delivery of your products or services.

Semi-variable Costs are a blend of fixed and variable costs. These costs remain fixed to a certain output level, after which they increase. For example, you might have a data plan for your business with a fixed cost for a specific limit. Still, any usage beyond that limit incurs additional charges.

By accurately identifying and categorizing your costs, you can create a more precise small business budget and make better decisions about pricing, cost-cutting, and growth strategies.

The Significance of Understanding Your Costs in Budgeting

Knowing your costs is more than just a pre-budgeting exercise—it’s an ongoing part of managing your business finances. When you understand your costs:

  • You can set prices that accurately reflect your cost structure, ensuring your business remains profitable.
  • You gain insights into the profitability of individual products or services, allowing you to adjust your offerings or marketing strategies as needed.
  • You can identify potential areas for cost savings and efficiency improvements, which could mean the difference between struggling and thriving in competitive markets.
  • You can better manage cash flow by anticipating changes in variable and semi-variable costs.

In the following sections, we’ll delve into revenue forecasting and creating your budget. Armed with a clear understanding of your costs, you’ll be well-prepared to tackle these steps confidently.

Revenue Forecasting

Accurate revenue forecasting is a crucial aspect of budgeting. It offers insights into your business’s potential income, allowing you to plan expenditures and evaluate the financial feasibility of your business goals. Let’s dive deeper into the what, why, and how of revenue forecasting.

Basics of Revenue Forecasting and Its Importance

Revenue forecasting involves estimating the amount of money your business will receive in a specific period. It’s not just a wild guess but a calculated prediction based on past data, market research, and industry trends.

Accurate revenue forecasting can help you make strategic decisions about your business operations. It can inform your budgeting, enabling you to plan your expenses accordingly and avoid potential cash flow problems. Additionally, it can help you identify which products or services are most profitable, assess the impact of price changes or marketing campaigns, and plan for growth.

Tools and Methods for Accurate Revenue Predictions

Here are some strategies and tools that can help you create accurate revenue forecasts:

Historical Data: Your past sales data is a gold mine of information. You can analyze this data to identify trends and patterns, which can inform your future revenue predictions. Keep in mind, however, that past performance does not guarantee future results. It’s crucial to consider other factors, such as changes in the market or your business operations.

Market Research: Understanding your industry trends, competition, and target market can significantly improve the accuracy of your revenue forecasts. You might use online research, surveys, or industry reports to gather this information.

Sales Pipeline: If you have a predictable sales process, your sales pipeline can be a valuable forecasting tool. By examining your pipeline stages and conversion rates, you can estimate the likelihood of potential sales becoming actual revenue.

Seasonal Adjustments: Consider these in your revenue forecasting if your business has seasonal fluctuations. You might have periods of the year with higher or lower sales, which should be reflected in your forecasts.

Creating accurate revenue forecasts requires time, effort, and a bit of skill, but the benefits are well worth it. In the next section, we’ll discuss how to integrate this information into creating a comprehensive and realistic budget for your small business.

Creating Your Small Business Budget

A detailed understanding of your costs and an accurate revenue forecast give you a solid foundation to build your budget. This process may initially seem overwhelming, but it can become a manageable and even empowering task with a step-by-step approach.

Step-by-Step Guide on How to Create a Comprehensive and Realistic Budget

  1. Define Your Business Goals: What do you want to achieve in the specific budgeting period? Your goals might involve expansion, increasing profitability, reducing debt, or investing in new products or services. These goals will influence your budget allocations.
  • Estimate Your Revenue: Use the revenue forecasting methods discussed in the previous section to estimate your income for the budgeting period.
  • Detail Your Expenses: Based on your understanding of your business costs, detail all your expected expenses. They should include fixed, variable, and semi-variable costs. Remember to include non-regular expenses such as annual insurance premiums or tax payments.
  • Create the Budget: Subtract your total expenses from your total revenue to determine your net income. This figure will show whether your business will likely make a profit or loss in the budgeting period.
  • Review and Adjust: If your initial budget shows a loss or less profit than desired, review your revenue and expenses. Are there ways to increase revenue or decrease costs without negatively impacting your business operations or growth? Make adjustments as necessary until your budget aligns with your business goals.

Role of Budgeting Software and Other Digital Tools

In today’s digital age, small business owners have access to a variety of budgeting software and digital tools that can simplify and streamline the budgeting process. These tools can automate data entry, provide visual representations of your budget, and even offer predictive analytics for more accurate forecasting. Some popular options include QuickBooks, Xero, and FreshBooks, but the right tool for your business will depend on your specific needs and preferences.

Allocating Resources Effectively: Balancing Between Growth and Sustainability

Creating a budget isn’t just about ensuring your business stays afloat—it’s about planning for growth while maintaining sustainability. Allocate resources to areas that contribute to your business growth, such as marketing, product development, or customer service. At the same time, ensure your essential operational costs are covered and you have a buffer for unexpected expenses.

Remember, a budget is a living document. It will need adjustments as your business circumstances change. The key is to start with a clear, realistic plan and stay flexible as you navigate your business journey. Next, we will discuss the importance of regularly monitoring and adjusting your budget.

Monitoring and Adjusting Your Budget

Creating a budget is a significant first step, but the process doesn’t end there. You should monitor your budget regularly and adjust as necessary to reflect the changing realities of your business.

Why Regular Monitoring is Essential

Business is dynamic, and the assumptions you use to create your budget may not always hold. Market conditions can change, new opportunities may arise, or unexpected challenges may crop up. Regular monitoring allows you to catch these changes early, assess their impact on your budget, and adjust your plans accordingly.

Moreover, monitoring your budget is about more than just tracking your financial performance. It’s also about understanding why your actual results differ from your budgeted figures. By doing so, you can gain insights into your business operations, the effectiveness of your strategies, and the accuracy of your assumptions.

How to Monitor Your Budget

Here are some practical steps for monitoring your budget:

  1. Regular Reviews: Set a schedule for reviewing your budget. This could be monthly, quarterly, or whatever frequency works best for your business. Consistency is key.
  • Track Actual Results: Keep track of your actual income and expenses. Compare these figures with your budgeted amounts to identify any variances.
  • Analyze Variances: If your actual results differ significantly from your budget, try to understand why. Were your assumptions inaccurate, or did something change in your business or the market?
  • Adjust Your Budget: If necessary, adjust your budget to reflect your new understanding of your business. This might involve changing your revenue forecasts, cutting or increasing expenses, or re-evaluating your business goals.

Tools for Small Business Budget Monitoring

You can simplify your budget monitoring with the help of digital tools. Many budgeting software options include features for tracking actual results, analyzing variances, and even sending alerts when your figures deviate significantly from your budget. These tools can save you time, improve accuracy, and provide valuable insights into your financial performance.

Monitoring and adjusting your budget is an ongoing process that encourages continuous learning and improvement. It keeps your budget relevant and effective, ensuring it continues to be a helpful tool for guiding your business decisions. In the next section, we’ll discuss how your budget can help you plan for uncertainties and secure the future of your business.

Planning for Uncertainties

Running a small business involves a degree of uncertainty. Changes in the market, unexpected expenses, and other unforeseen events can impact your financial position. However, you can use your small business budget to anticipate and prepare for these uncertainties, helping secure your business’s financial future.

The Role of Contingency Planning in Budgeting

Contingency planning involves preparing for unexpected events that could negatively impact your business. When creating your budget, it’s wise to set aside funds for such situations. This contingency fund serves as a financial safety net, ensuring you can meet unexpected costs without jeopardizing your business operations or dipping into your essential operational funds.

The size of your contingency fund will depend on your business’s risk level and financial position, but a common recommendation is to cover at least three to six months’ worth of operating expenses.

Scenario Planning and Sensitivity Analysis

Another method to plan for uncertainties is through scenario planning and sensitivity analysis. These involve creating different versions of your small business budget based on various scenarios, helping you understand the potential impact of changes in key variables on your business’s financial performance.

For instance, you might create:

Best-case Scenarios: What would your financial position look like if your sales were 20% higher than forecast? How could you use the extra revenue to further your business goals?

Worst-case Scenarios: What if your sales were 20% lower than forecast? How would you adjust your spending to keep your business afloat?

Most likely Scenarios: What if your sales were precisely as forecasted? Would your budget allow you to cover all your expenses and achieve your business goals?

By considering these scenarios, you can create plans to respond effectively to different situations, reducing the impact of uncertainty on your business.

Importance of Insurance

Insurance is another tool to manage financial risk and plan for uncertainties. Depending on your business operations, you might consider various types of insurance, such as property insurance, liability insurance, or business interruption insurance. While insurance involves an upfront cost, it can save your business from significant financial losses in the event of an unfortunate incident.

Planning for uncertainties might involve some guesswork, but it’s essential to managing your business’s financial risks. By integrating contingency planning, scenario planning, and insurance into your budget, you can create a financial plan that supports your current business operations and secures your business’s future.

Using a Budget to Make Strategic Decisions

Your small business budget isn’t just a financial document—it’s also a strategic tool that can guide your business decisions. By analyzing your budget, you can identify opportunities for growth, areas for cost savings, and strategies for improving your profitability and sustainability.

Driving Business Growth

Your budget can offer insights into potential areas for business growth. For example, suppose your revenue forecast shows strong sales for a particular product or service. In that case, you might decide to allocate more resources to its production, marketing, or development. Conversely, suppose a product or service isn’t performing as well as expected. In that case, your budget can help you decide whether to improve or phase it out.

Additionally, your budget can inform your decisions about business expansion. If your net income is consistently high and you have a strong cash flow, you might decide it’s time to open a new location, hire more staff, or invest in new equipment. On the other hand, if your net income is low or your cash flow is inconsistent, you might decide to focus on improving your existing operations before considering expansion.

Identifying Cost Savings

Analyzing your budget can also help you identify potential cost savings. By looking at your expenses in detail, you might find areas where you can reduce costs without impacting your product quality or customer satisfaction.

For example, suppose your rent is a significant portion of your fixed costs. In that case, you might consider relocating to a less expensive location, negotiating a better lease deal, or even transitioning to a home-based or online business model. If your variable costs are high, you might look for ways to improve your operational efficiency, negotiate better deals with suppliers, or reduce waste.

Improving Profitability and Sustainability

Ultimately, your budget can guide your decisions to improve profitability and sustainability. It can help you set accurate prices for your products or services, ensuring you cover your costs and earn a profit. It can inform your cash flow management, helping you ensure you have enough money to meet your financial obligations. And it can help you plan for uncertainties, securing your business’s financial future.

In the final analysis, your small business budget is more than just numbers on a page. It reflects your business strategy, a tool for decision-making, and a roadmap for your business’s financial success. It’s an asset that, when used effectively, can help you navigate the complexities of running a small business and achieve your business goals.

The Role of a Professional Accountant

Sometimes, you need a helping hand, and that’s where an accountant comes in. They can provide expert advice, help you develop a robust small business budget, and guide you through the complexities of financial management. Hiring a professional may be an added expense, but it can be an investment that pays off in the long run.

Avisar Chartered Professional Accountants is a leading accounting firm for small and mid-sized businesses in the Lower Mainland. Vancouver, Langley, Abbotsford, and Surrey.

Get a free review of your finances by booking a consultation.

Conclusion

Budgeting is a critical aspect of managing a small business. It provides an insightful financial roadmap that can guide your decision-making and strategic planning. By understanding the essentials of business budgeting, you can identify your costs, forecast your revenues, and create a detailed budget. This is not a static document but requires regular monitoring and adjustments to remain effective and relevant to your business’s changing needs.

Contingency planning, scenario analyses, and insurance play a vital role in preparing your business for uncertainties, enabling you to mitigate risks and maintain your business’s financial health in various situations. Your small business budget is also a powerful tool for strategic decisions, helping you identify growth opportunities, discover potential cost savings, and improve profitability and sustainability.

In essence, a well-structured budget is not merely a financial statement—it’s a strategic compass guiding your business toward its goals amidst the dynamic landscape of the market. By integrating effective budgeting practices into your business operations, you can enhance your financial management skills, drive your business growth, and secure its financial future.

Ready to take your budgeting to the next level? Book a free consultation today.

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.

mastering financial forecasting

Mastering Financial Forecasting: 3 Things You Need to Know

Financial forecasting is a vital skill that many small business owners overlook, especially when first starting a business. Impacting sales projections, planning for expenses, and cash flow, this skill makes it easier for you to see how your business will do not only today, but tomorrow, next week, and next month. Financial forecasts make it possible for you to determine whether you’ll have sufficient funding to keep your business operating in the future, or if additional funding may be needed.

Mastering Financial Forecasting: Predicting and Planning for Small Business Success

The Importance of Financial Forecasting in Strategic Planning

A financial forecast will project sales, expenses, and cash flow into the future of your business, allowing you to determine areas where financing may be required to prevent your business from shutting down or suffering other financial difficulties. But beyond seeing into the short-term future, financial forecasting also plays other roles in your business, specifically in your strategic planning process.

Having a strategic plan for your business gives your budget some place intentional to put every dollar and gives you strong direction on which way to go as you face a range of issues in your company. Though you’ll still want to have a buffer set aside for unexpected emergencies, having a strategic plan that includes expected growth, capital equipment replacement, annual expenses, and similar revenue and expenses in place makes it easier to make decisions that are in line with your overall strategic plan.

Think of it this way: if a business didn’t plan for capital equipment replacement or for a slow season, the business might be caught without enough funding to successfully complete the financial cycle. With a plan in place, the owner, management, and leadership of the business can make decisions that are in line with the plan, preventing wasted time, money, effort, and materials.

How to Create Financial Forecasting Models and Projections

Though expenses, revenue, and cash flow all look at different aspects of your business’s overall health, all three follow the same basic rules when undertaking your financial forecasting. The biggest difference is which factors you’ll be considering.

  1. Define your financial forecasting purpose. What do you want to learn? Are you estimating sales or determining if your budget will work? These purposes will help you decide which measurements to use in the process.

  2. Pull your past financial data and statements. The past got you to where you are today and will help you determine where you’ll go in the future. You’ll want to know about revenue, liabilities, equity, expenses, losses, investments, income, per-share earnings, and fixed costs.
  3. Choose a timeframe. How long do you want to go into the future? For a business that has a regular income, you can create financial forecasting based on a few weeks’ data, but for irregular or seasonal income, go for several years. Most companies use a single fiscal year. If you’re doing long-term planning, pull long-term data and trends.
  4. Decide what financial forecasting method to use. Quantitative forecasting uses existing historical data for identifying trends and patterns but may not take into account industry changes. For those changes, a qualitative forecasting method that includes expert opinions and sentiment about the business and industry is more accurate.
  5. Document the process and review calculations. Much like weather forecasts, financial forecasting isn’t 100% accurate and will change more the further you get from the point of analysis. Document your process for future use and revision and check its accuracy after strong internal or external changes. Automation can make this process easier.
  6. Analyze the data. By regularly checking the data created regularly in your business against your forecast, you can determine how accurate your financial forecasting will be. You can also determine when your goals and plans should be accordingly adjusted.

  7. Repeat. Based on your timeframe in #3, repeat your financial forecasting on a regular basis to ensure that you’re still on top of the figures and in control of your spending and income.


By understanding how these documents are created, you’ll have a much better idea of how to leverage them to your company’s advantage in the future, including when you’re preparing an annual budget, finding problem areas, setting intelligent business goals, attracting investors, and reducing your risk. You’ll also be able to undertake innovative discussions about your company’s financial health with financial institutions, creditors, and other organizations you work with.

Why You Should Regularly Review and Adjust Financial Forecasting

However, it’s not enough to simply finish these financial forecasting models. You’ll also want to take time on a regular basis to review and adjust as needed to optimize your results. As an example, if you have higher or lower sales or expenses than was forecast, you have the option of slowing down the progress of your strategic plan or speeding it up. The strategic plan will still come into play, but it will have its timeline adjusted when financial forecasting is reviewed and adjusted.

Though financial forecasting can seem like a very complex process, it’s actually fairly straightforward once you understand the basic processes that are involved. Why not take a little time when things are quiet and work one out using the steps above? Once you’ve figured out how to accomplish this task, your business will be in much better hands and will be facing a much stronger future.

Would you like a free review of your financial statements? You can book one 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.

Federal Budget 2023: Other Measures

Small Business Credit Card Fees

Budget 2023 announced that commitments had been obtained from Visa and Mastercard to lower fees for small businesses. More than 90% of credit card-accepting businesses are expected to see their fees reduced by up to 27%.

Automatic Tax Filing for Low-income Canadians

Budget 2023 announced that the number of Canadians eligible for CRA’s automatic File My Return service will be increased to 2 million by 2025, almost tripling the number of currently eligible Canadians. In 2022, 53,000 returns were filed using this service. In addition, a new pilot project will be implemented to assist vulnerable Canadians in applying for benefits even if they do not file tax returns.

Student Benefits

Budget 2023 proposes increasing Canada student grants by 40%, raising the interest-free Canada student loan limit from $210 to $300 per study week, and waiving the requirement for mature students (aged 22 or older) to undergo credit screening in order to qualify.

Dental Care for Canadians

The Canadian dental care plan would provide coverage for all uninsured Canadians with an annual family income of less than $90,000 (the Canada dental benefit only provided benefits for children under 12) by the end of 2023. The plan will be administered by Health Canada with support from a third-party benefits administrator. Benefits are reduced for families with income between $70,000 and $90,000.

Protecting Federally Regulated Gig Workers

Budget 2023 proposes to amend the Canada Labour Code to strengthen prohibitions against employee misclassification for federally regulated gig workers such that they will receive protections and benefits including EI and CPP.

Ensuring the Integrity of Emergency COVID-19 Benefits

Budget 2023 proposes to provide $53.8 million in 2022-23 to Employment and Social Development Canada to support integrity activities relating to overpayments of COVID-19 emergency income supports.

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.

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Federal Budget 2023: Business Measures

Strengthening the Intergenerational Business Transfer Framework

Historically where parents transferred shares of their corporation to a corporation owned by their children, deemed dividends rather than capital gains would arise on the disposition (due to Section 84.1 of the Income Tax Act). In 2021, legislation was passed (Bill C-208) to provide an exception from this deemed dividend treatment to facilitate the transfer of family businesses to the next generation. This exception allowed parents to utilize the lifetime capital gains exemption or simply receive capital gain treatment on the disposition, and enjoy the same tax benefits available on a sale to unrelated third parties.

However, the government was concerned that this exception contained insufficient safeguards and may have provided an inappropriate tax advantage where there was no transfer of a business to the next generation.

More specifically, this exception did not require that:

  • the parent cease to control the underlying business of the corporation whose shares are transferred,
  • the child(ren) purchasing the shares have any involvement in the business,
  • the interest in the purchaser corporation held by the child(ren) continue to have value, or
  • the child(ren) retain an interest in the business after the transfer.

Proposed Amendments

Budget 2023 proposes to amend these rules to ensure that they apply only where a genuine intergenerational business transfer (IBT) takes place.

A genuine IBT under the current law would be a transfer of shares of a corporation (the Transferred Corporation) by an individual shareholder (the Transferor) to another corporation (the Purchaser Corporation) where both of the following conditions are satisfied:

  1. each share of the Transferred Corporation must be a “qualified small business corporation share” or a “share of the capital stock of a family farm or fishing corporation” (both as defined in the Income Tax Act), at the time of the transfer (in general terms, this requires that all or substantially all of its assets be used in an active business carried on in Canada); and
  2. the Purchaser Corporation must be controlled by one or more persons each of whom is an adult child of the Transferor (the meaning of “child” for these purposes would include grandchildren, step-children, children-in-law, nieces and nephews, and grandnieces and grandnephews).

To ensure that only genuine IBTs are excluded from the deemed dividend rules, Budget 2023 proposes additional conditions be added. To provide flexibility, taxpayers who wish to undertake a genuine IBT may choose to rely on one of two transfer options:

  1. an immediate business transfer (three-year test) based on arm’s length sale terms; or
  2. a gradual business transfer (five-to-ten-year test) based on traditional estate freeze characteristics (an estate freeze typically involves a parent crystalizing the value of their economic interest in a corporation into shares that no longer share in growth in the corporate value to allow future growth to accrue to their children while the parent’s fixed economic interest is then gradually diminished by the corporation repurchasing the parent’s shares).

The immediate transfer rule would provide finality earlier in the process, though with more stringent conditions. In recognition that not all business transfers are immediate, the gradual transfer rule would provide additional flexibility for those who choose that approach.

Both the immediate and gradual business transfer options would reflect the hallmarks of a genuine IBT. The chart on the next page outlines the proposed conditions to qualify as a genuine IBT under each option.

When the current exception was introduced, it was intended that there be restrictions for transfers of large corporations. However, these restrictions were not effectively implemented. Budget 2023 indicates that there would be no limit on the value of shares transferred in reliance upon this rule.

The current exception includes restrictions on sale of the business by the purchaser corporation within five years of the share transfer. Budget 2023 proposes that these requirements would be eliminated. In addition, new relieving rules would apply to deem requirements 3, 4 and 5 in the above chart to be met in respect of a child where either of the following occurs:

  • the child dies or becomes permanently disabled; or
  • the child disposes of their entire their interest in the business in an arm’s length disposition.

In order to benefit from the exception to the deemed dividends, the Transferor and child(ren) would be required to jointly elect for the transfer to qualify as either an immediate or gradual intergenerational share transfer. The child(ren) would be jointly and severally liable for any additional taxes payable by the Transferor on deemed dividends resulting from a transfer that does not meet the above conditions. The joint election and joint and several liability recognize that the actions of the child could potentially cause the parent to fail the conditions and to be reassessed in this regard.

The limitation period for reassessing the Transferor’s liability for tax that may arise on the transfer is proposed to be extended by three years for an immediate business transfer and by ten years for a gradual business transfer, ensuring that the Transferor can be reassessed if the requirements are not met throughout the applicable period.

Budget 2023 also proposes to provide a ten-year capital gains reserve for genuine intergenerational share transfers that satisfy the above proposed conditions, which would allow capital gains to be brought into income over a period of up to ten years, in proportion to proceeds received. The normal limit for such reserves is five years.

These rules would apply to share sales occurring on or after January 1, 2024.

Employee Ownership Trusts (EOTs)

An EOT is a form of employee ownership where a trust holds shares of a corporation for the benefit of the corporation’s employees. EOTs can be used to facilitate the acquisition by employees of their employer’s business, without requiring them to pay directly to acquire shares. This will provide business owners an additional option for succession planning. Budget 2023 proposes new rules to facilitate the use of EOTs to acquire and hold shares of a business.

The following subsections describe the general rules that would apply to EOTs. Complex requirements are set out in draft legislation included in the Budget papers.

Definitions

To be an EOT, a trust would be required to be resident in Canada (excluding deemed resident trusts) and have only two purposes. First, it would hold shares of qualifying businesses for the benefit of the employee beneficiaries of the trust. Second, it would make distributions to employee beneficiaries, where reasonable, under a distribution formula that could only consider an employee’s length of service, remuneration and hours worked. Otherwise, all beneficiaries must generally be treated in a similar manner.

An EOT would be required to hold a controlling interest in the shares of the qualifying business. A qualifying business would need to meet certain conditions. It would be required to be a Canadian-controlled private corporation. All or substantially all of the fair market value of its assets must be attributable to assets used in an active business carried on in Canada. A qualifying business would not be able to carry on business as a partner in a partnership. An EOT would not be permitted to allocate shares of a qualifying business to individual beneficiaries.

Trustees of the EOT would be elected by the beneficiaries every five years. Individuals who held a significant economic interest in a business prior to its acquisition by the EOT would not be able to make up more than 40% of the trustees of the EOT, the directors of a corporation serving as a trustee of the EOT or the directors of any qualifying business owned by the EOT. This limit would also include persons related to such individuals.

Trust beneficiaries would be limited to qualifying employees. Individuals, and persons related to them, who hold, or held prior to the disposition to the EOT, a significant economic interest in the business would be excluded from being qualifying employees.

The Tax Treatment

The EOT would be a taxable trust and will be generally subject to the same rules as other personal trusts. Therefore, undistributed trust income would be taxed in the EOT at the top personal marginal tax rate. If the EOT distributes dividends received from the qualifying business, those dividends would retain their character when received by employee beneficiaries and would be eligible for the dividend tax credit.

Qualifying Business Transfer

A qualifying business transfer would occur when a taxpayer disposes of shares of a qualifying business for proceeds that do not exceed fair market value. The shares must be disposed of to either a trust that qualifies as an EOT immediately after the sale or a corporation owned 100% by the EOT. The EOT must own a controlling interest in the qualifying business immediately after the qualifying business transfer.

Benefits

  1. A 10-year capital gain reserve would be available, therefore allowing capital gains to be brought into income over a period of up to ten years, in proportion to proceeds received. The normal limit for such reserves is five years.
  2. A loan from the qualifying business to the EOT for the purchase of the shares of the qualifying business could be repaid within 15 years, an exception to the usual rule that loans to a shareholder are included in income if not repaid by the end of the following fiscal year.
  3. The EOT would be able to hold the shares indefinitely without being deemd to realize capital gains. Most trusts are deemed to realize all gains accumulated in their assets every 21 years.

These amendment would apply as of January 1, 2024.

Clean Electricity Investment Tax Credit

Budget 2023 proposes to introduce a 15% refundable tax credit for eligible investments in:

  • non-emitting electricity generation systems: wind, concentrated solar, solar photovoltaic, hydro (including large-scale), wave, tidal, nuclear (including large-scale and small modular reactors);
  • abated natural gas-fired electricity generation (which would be subject to an emissions intensity threshold compatible with a net-zero grid by 2035);
  • stationary electricity storage systems that do not use fossil fuels in operation, such as batteries, pumped hydroelectric storage, and compressed air storage; and
  • equipment for the transmission of electricity between provinces and territories.

Both new projects and the refurbishment of existing facilities will be eligible. Taxable and non-taxable entities such as Crown corporations and publicly owned utilities, corporations owned by Indigenous communities, and pension funds, would be eligible. The clean electricity investment tax credit could be claimed in addition to the Atlantic investment tax credit, but generally not with any other investment tax credit.

In order to access the tax credit in each province and territory, other requirements will include a commitment by a competent authority that the federal funding will be used to lower electricity bills, and a commitment to achieve a net-zero electricity sector by 2035.

The clean electricity investment tax credit would be available as of Budget Day 2024 for projects that did not begin construction before Budget Day 2023. The credit would not be available after 2034.

Clean Hydrogen Investment Tax Credit

Budget 2023 proposes to introduce the clean hydrogen refundable investment tax credit for investments made in clean hydrogen production based on the lifecycle carbon intensity of hydrogen (previously noted in the 2022 Fall Economic Statement). The amount of the credit, which ranges from 15% to 40%, is based on assessed carbon intensity of the hydrogen that is produced (i.e., kilogram (kg) of carbon dioxide equivalent (CO2e) per kg of hydrogen).

The credit would be available in respect of the cost of purchasing and installing eligible equipment for projects that produce hydrogen from electrolysis or natural gas (so long as emissions are abated using carbon capture, utilization, and storage).

Property that is required to convert clean hydrogen to clean ammonia would also be eligible for the credit, at the lowest credit rate of 15%.

This measure would apply to property that is acquired and that becomes available for use on or after Budget Day. The credit would be fully phased out for property that becomes available for use after 2034.

Clean Technology Investment Tax Credit

The 2022 Fall Economic Statement proposed a 30% clean technology investment tax credit for Canadian businesses adopting in clean technology and investing in eligible property that is acquired and that becomes available for use on or after Budget Day 2023. Eligible capital costs include investments in:

  • electricity generation systems, including solar photovoltaic, small modular nuclear reactors, concentrated solar, wind, and water (small hydro, run-of-river, wave, and tidal);
  • stationary electricity storage systems that do not use fossil fuels in their operation, including but not limited to: batteries, flywheels, supercapacitors, magnetic energy storage, compressed air storage, pumped hydro storage, gravity energy storage, and thermal energy storage;
  • low-carbon heat equipment, including active solar heating, air-source heat pumps, and ground-source heat pumps; and
  • industrial zero-emission vehicles and related charging or refuelling equipment, such as hydrogen or electric heavy-duty equipment used in mining or construction.

Budget 2023 proposes to expand eligibility of the tax credit to include geothermal energy systems that are eligible for Class 43.1 of Schedule II of the Income Tax Regulations. The expansion would apply in respect of property that is acquired and becomes available for use on or after Budget Day, where it has not been used for any purpose before its acquisition.

The phase-out of the credit would commence in 2034, rather than 2032 as previously announced.

Investment Tax Credit for Carbon Capture, Utilization and Storage (CCUS)

Budget 2022 proposed a refundable investment tax credit for the cost of purchasing and installing eligible equipment used in an eligible CCUS project for businesses that incur eligible expenses starting on January 1, 2022.

Budget 2023 proposes the following changes in respect of the CCUS, with details to be released in the coming months:

  • Dual use equipment that produces heat and/ or power or uses water, that is used for CCUS as well as another process, would be eligible for the CCUS tax credit on a pro-rated basis in proportion to the expected energy balance or material balance supporting the CCUS process over the first 20 years of the project.
  • British Columbia would be added to the list of eligible jurisdictions for dedicated geological storage, applicable to expenses incurred on or after January 1, 2022.
  • Credits related to eligible refurbishment costs incurred once the project is operating would be calculated based on the average of the expected eligible use ratio for the five-year period (the period) in which they are incurred, and each subsequent period (i.e., the periods over which they contribute to the useful life of the project).

These measures would apply to eligible expenses incurred after 2021 and before 2041.

Labour Requirements Related to Certain Investment Tax Credits

Budget 2023 proposes to implement the government’s intention to attach prevailing wage and apprenticeship requirements to the proposed clean electricity, clean technology and clean hydrogen investment tax credits. In general, the rates available for these credits will be reduced by 10% if the following labour two requirements are not met.

  • Wage requirement – Businesses would need to ensure that all covered workers are compensated at a level that meets or exceeds the relevant wage, plus the substantially similar monetary value of benefits and pension contributions (converted into an hourly wage format), as specified in an “eligible collective agreement.”
  • Apprenticeship requirement – Businesses would need to ensure that for a given taxation year, not less than 10% of the total labour hours performed by covered workers engaged in subsidised project elements be performed by registered apprentices. Covered workers are those whose duties correspond to those performed by a journeyperson in a Red Seal trade.

The requirements would apply to work performed on or after October 1, 2023. Budget 2023 also indicated that labour requirements are intended to apply to the investment tax credit for carbon capture, utilization, and storage, with details to be announced at a later date.

Clean Technology Manufacturing Investment Tax Credit

Budget 2023 proposes to introduce a 30% refundable investment tax credit for clean technology manufacturing and processing, and critical mineral extraction and processing, on the capital cost of eligible property associated with eligible activities, including:

  • extraction, processing, or recycling of critical minerals essential for clean technology supply chains, specifically: lithium, cobalt, nickel, graphite, copper, and rare earth elements;
  • manufacturing of renewable or nuclear energy equipment;
  • processing or recycling of nuclear fuels and heavy water;
  • manufacturing of grid-scale electrical energy storage equipment;
  • manufacturing of zero-emission vehicles; and,
  • manufacturing or processing of certain upstream components and materials for the above activities, such as cathode materials and batteries used in electric vehicles.

The credit would apply to property that is acquired and becomes available for use on or after January 1, 2024. The credit would be gradually phased out, starting with property that becomes available for use in 2032 and would no longer be in effect for property that becomes available for use after 2034.

Interaction of Clean Energy Investment Tax Credits

For a particular property, businesses would be able to claim only the investment tax credits for carbon capture, utilization and storage; clean technologies; clean electricity; or clean technology manufacturing. However, multiple tax credits could be available for the same project if the project includes different types of eligible property.

Zero-Emission Technology Manufacturers

In 2021, the corporate income tax rate for qualifying zero-emission technology manufacturers was reduced by 50%.

Budget 2023 proposes to expand eligible activities to include the following nuclear manufacturing and processing activities:

  • manufacturing of nuclear energy equipment;
  • processing or recycling of nuclear fuels and heavy water; and
  • manufacturing of nuclear fuel rods.

This expansion would apply for taxation years beginning after 2023.

Budget 2023 proposes to extend the availability of these reduced rates by three years, such that the planned phase-out would start in taxation years that begin in 2032. The measure would be fully phased out for taxation years that begin after 2034.

Tax on Repurchases of Equity

The 2022 Fall Economic Statement announced the government’s intention to introduce a 2% tax on the net value of all types of share repurchases by public corporations in Canada. Budget 2023 provides the design and implementation details of the proposed measure. The tax would apply only to public corporations (Canadian-resident corporations whose shares are listed on a designated stock exchange).

It would not apply to mutual fund corporations, but would apply to real estate investment trusts, specified investment flow-through (SIFT) trusts and SIFT partnerships if they have units listed on a designated stock exchange.

The proposed tax would apply in respect of repurchases and issuances of equity that occur on or after January 1, 2024.

General Anti-Avoidance Rule (GAAR)

The GAAR in the Income Tax Act is intended to prevent abusive tax avoidance transactions while not interfering with legitimate commercial and family transactions. If abusive tax avoidance is established, the GAAR applies to deny the tax benefit created by the abusive transaction.

A consultation on various approaches to modernizing and strengthening the GAAR has recently been conducted. A consultation paper released last August identified a number of issues with the GAAR and set out potential ways to address them. As part of the consultation, the government received a number of submissions, representing a wide variety of viewpoints.

Preamble

A preamble would be added to the GAAR, in order to help address interpretive issues and ensure that the GAAR applies as intended. While the GAAR informs the interpretation of, and applies to, every other provision of the Income Tax Act, it fundamentally denies tax benefits sought to be obtained through abusive tax avoidance transactions. It in effect draws a line: while taxpayers are free to arrange their affairs so as to obtain tax benefits intended by Parliament, they cannot misuse or abuse the tax rules to obtain unintended benefits. The preamble would also clarify that the GAAR is intended to apply regardless of whether or not the tax planning strategy used to obtain the tax benefit was foreseen.

Avoidance Transaction

The threshold for an “avoidance transaction” potentially subject to the GAAR would be reduced from a “primary purpose” test to a “one of the main purposes” test. This is consistent with the standard used in many modern anti-avoidance rules in other countries and is considered by the government to strike a reasonable balance, as it would apply to transactions with a significant tax avoidance purpose but not to transactions where tax was simply a consideration.

Economic Substance

A rule would be added to the GAAR to better meet the objective of requiring economic substance in addition to literal compliance with the words of the Income Tax Act. Currently, Supreme Court of Canada jurisprudence has established a more limited role for economic substance.

The proposed amendments would provide that economic substance is to be considered at the ‘misuse or abuse’ stage of the GAAR analysis and that a lack of economic substance tends to indicate abusive tax avoidance. A lack of economic substance will not always mean that a transaction is abusive. It would still be necessary to determine the object, spirit and purpose of the provisions or scheme relied upon, in line with existing GAAR jurisprudence. In cases where the tax results sought are consistent with the purpose of the provisions or scheme relied upon, abusive tax avoidance would not be found even in cases lacking economic substance.

The amendments would provide indicators for determining whether a transaction or series of transactions lacks economic substance. These are not an exhaustive list of factors that might be relevant and different indicators might be relevant in different cases. However, in many cases, the government believes that the existence of one or more of these indicators would strongly point to a transaction lacking economic substance. These indicators are:

  1. whether there is the potential for pre-tax profit;
  2. whether the transaction has resulted in a change of economic position; and
  3. whether the transaction is entirely (or almost entirely) tax motivated.

Budget 2023 provided the example of an individual contributing to a tax-free savings account. Such a transfer could be considered to be entirely tax motivated, with no change in economic position or potential for profit other than as a result of tax savings. Even if the transfer is considered to be lacking in economic substance, it is clearly not a misuse or abuse of the relevant provisions of the Income Tax Act. The individual is using their tax-free savings account in precisely the manner that Parliament intended. There are contribution rules that specifically contemplate such a transfer and, perhaps more fundamentally, the basic tax-free savings account rules would not work if such a transfer was considered abusive.

The proposal would not supplant the general approach under Canadian income tax law, which focuses on the legal form of an arrangement. In particular, it would not require an enquiry into what the economic substance of a transaction actually is (e.g., whether a particular financial instrument is, in substance, debt or equity). Rather, it would require consideration of a lack of economic substance in the determination of abusive tax avoidance.

Penalty

A penalty would be introduced for transactions subject to the GAAR, equal to 25% of the amount of the tax benefit. Where the tax benefit involves a tax attribute that has not yet been used to reduce tax, the amount of the tax benefit would be considered to be nil. The penalty could be avoided if the transaction is disclosed to CRA, either as part of mandatory disclosure rules which are currently proposed or voluntarily.

Reassessment Period

A three-year extension to the normal reassessment period would be provided for GAAR assessments, unless the transaction had been disclosed to CRA as discussed above.

Consultation

Budget 2023 announced a consultation on these proposals to close on May 31, 2023. Following this consultation, the government intends to publish revised legislative proposals and announce the application date of the amendments.

Dividends Received Deduction by Financial Institutions

Corporations are able to deduct dividends received on shares of other corporations resident in Canada in computing their taxable income, preventing the same earnings being subject to multiple levels of corporate taxation. The government considers this treatment inconsistent with the mark-to-market rules that essentially classify gains on portfolio shares held by banks as business income. Budget 2023 proposes to deny the dividend deduction in respect of dividends received by financial institutions on shares that are mark-to-market property, effective for dividends received after 2023.

Income Tax and GST/HST Treatment of Credit Unions

A credit union (as defined for income tax and GST purposes) benefits from a GST/HST rule allowing it to receive most taxable supplies of goods and services from credit union centrals and other credit unions on an exempt basis. The definition prevents a credit union that earns more than 10% of its revenue from sources other than certain specified sources (such as interest income from lending activities) from meeting the definition of “credit union,” and qualifying for the special income tax and GST/HST rules governing credit unions.

This could arise even though the credit union’s governing legislation permits it to earn revenue from these other sources. Most credit unions are currently full-service financial institutions that offer a comprehensive suite of financial products and services. Budget 2023 proposes to eliminate the revenue test from the definition of “credit union” and amend that definition to accommodate how credit unions currently operate, effective for taxation years ending after 2016.

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.

Federal Budget 2023: Previously Announced Measures

Budget 2023 confirms the government’s intention to proceed with the following previously announced tax and related measures, as modified to take into account consultations and deliberations since their release.

  • Legislative proposals released on November 3, 2022 with respect to Excessive Interest and Financing Expenses Limitations and Reporting Rules for Digital Platform Operators.
  • Tax measures announced in the Fall Economic Statement on November 3, 2022, for which legislative proposals have not yet been released, including: automatic advance for the Canada workers benefit; investment tax credit for clean technologies; and extension of the residential property flipping rule to assignment sales.
  • Legislative proposals released on August 9, 2022, including with respect to the following measures:
  • borrowing by defined benefit pension plans;
  • reporting requirements for Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs);
  • fixing contribution errors in defined contribution pension plans;
  • the investment tax credit for Carbon Capture, Utilization and Storage;
  • hedging and short selling by Canadian financial institutions;
  • substantive Canadian-controlled private corporations;
  • mandatory disclosure rules;
  • the electronic filing and certification of tax and information returns;
  • Canadian forces members and veterans amounts;
  • other technical amendments to the Income Tax Act and Income Tax Regulations proposed in the August 9th release; and
  • remaining legislative and regulatory proposals relating to the Goods and Services Tax/Harmonized Sales Tax, excise levies and other taxes and charges announced in the August 9th release.
  • Legislative proposals released on April 29, 2022 with respect to hybrid mismatch arrangements.
  • Legislative proposals released on February 4, 2022 with respect to the Goods and Services Tax/Harmonized Sales Tax treatment of cryptoasset mining.
  • Legislative proposals tabled in a Notice of Ways and Means Motion on December 14, 2021 to introduce the Digital Services Tax Act.
  • The transfer pricing consultation announced in Budget 2021.
  • The income tax measure announced on December 20, 2019 to extend the maturation period of amateur athletes trusts maturing in 2019 by one year, from eight years to nine years.
  • Measures confirmed in Budget 2016 relating to the Goods and Services Tax/Harmonized Sales Tax joint venture election.

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.