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:

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.
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.
Employee Benefits: Offering benefits to employees can be a valuable deduction. This can include health and dental plans, life insurance, and retirement savings plans.
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:

RRSP Contributions: Consider contributing to Registered Retirement Savings Plans (RRSPs) before the end of the year to reduce your personal taxable income.
Dividend Planning: If your business is incorporated, assess the most tax-efficient way to distribute dividends to yourself and other shareholders.
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.
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.

Setting up a My Business Account with the CRA

A My Business Account gives directors, officers, and partners access to their corporate taxes, GST, and payroll accounts online. Follow these steps to set up a My Business Account with CRA.

Having a My Business Account with the CRA will make your tax life much easier. Whether you’re looking to review outstanding balances or expected refund amounts, check your past returns or add information to your account, My Business Account is the one place where you can do it all.

Once you have set up your My Business Account, you will be able to:

Update any information related to your business (name, address, banking information, etc.)
View and file GST returns, payment transactions and GST instalment schedules
View T slips that were filed and transactions made
View notices of assessment for corporate tax returns filed and any account transactions and balances

What You Need For Setting Up A My Business Account

Setting up a My Business Account with the CRA is a straightforward process, but you will need your CRA business number and your program account identifiers (GST/HST, payroll, corporation income tax, exercise tax and others) to complete the registration process.

In addition, you will have to provide some personal information, including your social insurance number (SIN), postal code, date of birth and information from a previously filed personal income tax return.

Follow these simple steps to register for your CRA My Business Account.

Navigate to the CRA’s sign in services webpage and select “My Business Account” from the list of services.
Scroll down the page to “Option 2 – Using a CRA user ID and password” and select “CRA register.”
Enter your SIN and click next to continue.
Enter your postal code, date of birth, and the requested tax information from a previously filed tax return. Click next to continue.
Confirm that the mailing address CRA has on file for you is correct before selecting next to continue.
Create a CRA user ID consisting of 8 to 16 characters, no more than 7 digits, no spaces, and no special characters except: dot (.), dash (-), underscore (_), and apostrophe (‘).
Create a password consisting of 8 to 64 characters with at least 1 upper-case letter, 1 lower-case letter, and 1 digit. No spaces, accented character or special characters except: dot (.), dash (-), underscore (_), and apostrophe (‘) will be accepted.
Select and provide the answers to five security questions.
Enroll in mandatory multi-factor authentication by selecting your preferred method (telephone or passcode grid).
Enter your business number.
Review and agree to the terms and conditions of use by entering your password and selecting “I agree.”
Registration is now complete until you receive your security code in the mail. Once you do, log in to My Business Account using the CRA user ID and password created in steps 6 & 7 and enter the code when prompted.
Review and agree to the My Business Account terms and conditions of use.
You will now have full access to My Business Account.

Note: Internal accountants and employees (that are not officers) should not use the My Business Account system but are welcome to create a CRA RepID and access the company’s information using the Represent a Client system.

When you work with Avisar CPA, you can authorize us as your representative with the CRA through your My Business Account.

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.

What is SR&ED

SR&ED stands for Scientific Research and Experimental Development. And if you want to get tax benefits for doing R&D in Canada, you should know about the SR&ED tax credit program.

Our guest expert, Jude Brown, CEO & Co-Founder of Bloom Technical, explains what the program is, how to qualify, and what you need to do to apply.

The SR&ED tax credit program rewards Canadian businesses for doing innovative and risky work in their fields. The CRA runs the SR&ED tax credit program, and it gives you tax credits, refunds, and deductions for your R&D expenses. But only some businesses can qualify for the program.

How Do I Apply for the SR&ED tax credit program?

You need to meet some criteria to be eligible. Here are the main ones:

You must be a CCPC, a Canadian partnership, a sole proprietorship, or a trust. CCPCs get the most benefits from the program.
You must do scientific research or experimental development to create new or improved products, processes, materials, or knowledge.
You must face technical risk, meaning you don’t know if your work will succeed or fail. You must demonstrate your project iterations.
You must keep proper records of your R&D activities, including what you did, how you did it, and what you learned.

To apply, you need to fill out Form T661 and submit it with your tax return. This form asks you to describe your R&D activities in detail and report your expenses and outcomes.

This can be tricky and time-consuming, so getting help from a professional SR&ED consultant is best. They can help you prepare your application and maximize your benefits.

How Big Could My SR&ED Claim Be?

The size of your tax benefits depends on your business type, income, and tax rate. The CRA has different formulas for each factor. The more you spend on eligible R&D expenses, the more you can claim. But there are limits and rules to follow.

Eligible R&D expenses include:

Salaries or wages of the employees who worked on the R&D project
Contractor fees for the arm’s length parties who performed R&D on your behalf
Materials that were consumed or transformed during the R&D project

Some expenses are not eligible for SR&ED, such as capital, overhead, and marketing costs. You also need to prove that your R&D expenses are reasonable and related to your industry. In BC, businesses can expect to get about 64% back from eligible SR&ED expenses.

To get an accurate estimate of how much you can get from SR&ED, contact us today, and we can put you in touch with a SR&ED professional. You can also find extensive information on the program through the CRA.

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.

Federal Budget 2023: Sales and Excise Tax Measures

Alcohol Excise

Alcohol excise duties are automatically indexed to total Consumer Price Index (CPI) inflation at the beginning of each fiscal year (i.e., on April 1st). Budget 2023 proposes to temporarily cap the inflation adjustment for excise duties on beer, spirits and wine at 2%, for one year only, as of April 1, 2023.

Cannabis Taxation – Quarterly Duty Remittances

Excise duties are imposed on cannabis products, and are generally remittable on a monthly basis. Budget 2022 brought forward a measure that allowed certain smaller licensed cannabis producers to remit excise duties on a quarterly basis. Budget 2023 proposes to allow all licensed cannabis producers to remit excise duties on a quarterly rather than monthly basis, starting from the quarter beginning on April 1, 2023.

Air Travellers Security Charge

The Air Travellers Security charge (ATSC) is generally paid by passengers when they purchase airline tickets. Budget 2023 proposes to increase ATSC rates by 32.85%, noting that these rates were last increased in 2010, at which time they were raised by 52.4%. The proposed new ATSC rates will apply to air transportation services that include a chargeable emplanement on or after May 1, 2024, for which any payment is made on or after that date. The charge for a domestic one-way flight will rise from $7.48 to $9.94. The transborder charge will increase from $12.71 to $16.89, and the charge for other international travel will increase from $25.91 to $34.42. These rates include the GST or federal portion of HST

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.

Surviving a CRA Audit: What You Should Know

It’s the letter you never want to receive from the Canadian Revenue Agency (CRA). You are subject to a CRA Audit.

The CRA sends thousands of letters every year to notify people that they’re being subjected to an audit. Of all the returns they receive, it’s usually business taxes that they take a fine-tooth comb to. This is unfortunate because business owners and entrepreneurs are often swamped with numbers, and the last thing they have time for is to parse through each one.

If you want the best chance of successfully getting through a CRA audit, we’ll look at how they decide who to investigate, what you can do to prepare, what’s going to happen, and what your accountant should be doing in the meantime.

Risks for a CRA Audit

The biggest risk for being selected for a CRA audit is the size of your business. The majority of the CRA audit program spending is devoted to small and medium-sized businesses. When they run through all of the numbers, here’s what they’re looking for:

Discrepancies: Officials are looking for gaps and glaring margins between the reports. For instance, if your reported income is different than the average reported income in prior years, this could be a red flag for the CRA. Or if your income is far higher than the norm in your industry, this may trigger the next step.
Deductions: Sometimes just claiming home office deductions, which can include utilities, insurance, and property taxes, can be enough to have the CRA send you a letter. Because many people will claim these expenses when they aren’t explicitly used for the business, many of the write-offs don’t qualify. You may also face an audit if you’re making a lot of charitable donations or medical expenses.
Cash: Dealing with a lot of cash in a business opens the path to fraud because it’s notoriously difficult to track. This is doubly true if you’re reporting loss after loss in a cash-heavy business.
Family: There are plenty of business owners out there who will take advantage of their familial connections to make it easier to pay their taxes. So while plenty of people will employ family members without breaking the rules, you may be flagged simply for having a child or spouse on the books.

How the CRA Audit Process Works

The first step is a CRA auditor contacting you (usually by mail or by phone). They’ll give you specifics of the auditing process and then conduct an on-site audit at the place of business. The auditor is generally looking at the following paperwork:

Tax returns, perhaps and organizational chart or property details, depending on the nature of the audit.
Ledgers, invoices, receipts, contracts, bank statements.
Records of other individuals or entities not being audited (e.g., partnerships, corporations, spouses, common-law partners, etc.)

The records looked at will include those for your place of business but also your personal records as well. They’ll also look at any adjustments made by your bookkeeper or accountant to ensure that they were all completed according to tax law.

By the end of a CRA audit, the auditor will either declare your filing to be a correct assessment, which means that your case is complete and your audit will be closed. Or they may conclude that you either owe additional taxes or that you’re entitled to a refund.

What You Can Do to Prepare For A CRA Audit

The best way to prepare is by organizing all your records and ensuring that there’s concrete evidence to justify your numbers and answer any questions. This can include anything from invoicing history to physical receipts. The CRA requirement is to keep your records for at least seven years before shredding them, though CRA will generally audit within three years of your return being filed.

You can also consider gathering proof for regional shifts in supply and demand for your industry. For instance, if you’ve taken several losses over the course of your business, you may be able to point to general trends that have pushed down revenue among all of your competitors. However, these records are not to be shown to the auditor unless specifically asked for. Simply having them at the ready can help give you a sense of confidence as you move into the proceedings.

In addition, when you’re getting ready to speak to the auditor, make sure that you’ve given some thought about what you want to address with them. Generally, less is more and answer what is asked of you. You should be friendly but also thorough when asking about anything from due dates to expectations. It’s common for people to get flustered when they’re talking to an official from the CRA — even when they haven’t done anything to be nervous about. When the auditor is working with you, they should get the sense that you have nothing to hide.

The Role of Your Accountant During A CRA Audit

A CRA audit can be difficult for many reasons, particularly if you’re a busy business owner who doesn’t have a lot of bandwidth to organize, catalog, and verify every last record. When you have a good accountant on your side, they can help you manage the process from beginning to end. Accountants stand between you and the auditor, making it easier to handle the questions and produce the paperwork they need to close the case.

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.

Tax Changes for Filing Your 2022 Tax Return

Like many years, Tax Year 2022 comes with several changes you need to know about when filing your personal and business taxes. Understanding the tax changes for 2023 filing is critical to reducing the risk of overpaying your taxes. The following are some of the most important changes Canadians must know about heading into tax filing season.

Repayment of COVID-19 Benefits

Those who received COVID-19 benefits in 2022 from CRA, such as any of the following, are likely to receive a T4A slip to report these benefits on tax returns:

Canada Recovery Benefit (CRB)
Canada Recovery Caregiving Benefit (CRCB)
Canada Sickness Recovery Benefit (CSRB

Those with a net income after adjustments higher than $38,000 from the CRB will need to repay some or all of the benefits they received. For those who repaid all or some of those benefits in 2022, it is possible to claim the tax deduction in the year you desire (when received or when repaid).

Updated Basic Personal Amount

The Basic Personal Amount (BPA) was adjusted to $14,398 for 2022. As a result, you may see a slight boost in your tax return for the year. In 2023, the BPA will increase to $15,000.

Shifts in Federal Tax Brackets

For the tax year 2022, the federal tax brackets are as follows:

Up to $50,197 income: 15%
From $50,197 to $100,392: 20.5%
From $100,392 to $155,625: 26%
From 155,625 to $221,708: 29%
Above $221,708.01: 33%

Be sure to adjust and plan for any tax changes this year based on your income. The upward adjustment of these tax brackets means that some people may see a shift from a lower tax bracket to a higher one compared to last year’s filing.

Work-From-Home Expenses

As so many people have transitioned to working from home, the government has worked to carry over the work-from-home tax credit first put in place in the previous year. That means Canadians who have expenses from working from home and keep documentation of those costs can now claim up to $500 in those expenses on their income taxes. If you did not calculate this, you can use a $2 per day flat rate for each day you worked at home.

First-Time Home Buyers’ Tax Credit

The First-Time Home Buyers’ Tax Credit is on its way up. The HBTC aims to make it more affordable for Canadians to purchase a home. For the tax year 2022, if you purchased a home, you can now claim $10,000 as a non-refundable income tax credit on your taxes. That is twice as much as it was in the year prior. That could provide up to a $1,500 tax savings for some people.

Change in Old Age Security Income Limits

Another update for the tax season this year is a change in Old Age Security income limits. Seniors who make more than what is allowable may have to pay some of their OAS back to the government. For the 2022 tax year, the new limits are:

$80,761, the minimum income recovery threshold
$134,626, the maximum recovery threshold for those between the ages of 65 and 74
$137,331, the maximum recovery threshold for those over the age of 75

If you made more than the minimum amount, you might need to repay some of your OAS. However, your OAS might be cancelled if you made more than the maximum amount listed here.

TFSA Limited Increases

Tax-free savings account limits have also increased for the tax year 2022 to $6,500.

Air Quality Improvement Tax Credit

Another federal change to note is the Air Quality Improvement Tax credit. Businesses that made suitable ventilation upgrades under this credit can claim 25% up to $10,000 can be made in 2022. That provides up to a $2,500 tax credit.

Labour Mobility Deduction

For those who work as apprentices, tradespeople, or employees in the construction industry, the Labour Mobility Deduction (LMD) will allow for claims for meals and lodging expenses. This applies when those in this field must move to a temporary location to work in the industry.

RRSP Dollar Limit Increase

The Registered Retirement Savings Plan (RRSP) dollar limit for 2022 is $29,210. You cannot, however, go beyond 18% of your earned income from the previous year.

For more tips on retirement planning, we recommend checking out this post.

Consult an Accountant to Ensure You’re Filing Properly

With the changes occurring in income tax returns for 2023, be sure to set up a consultation with your accountant to discuss any that may affect you. That helps ensure you are compliant and take full advantage of all potential deductions. If you’d like to discuss these changes with us, just book a free 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.

How do financial statements help in decision-making?

Most small business owners get started to serve customers and to do something they find fulfilling. Not many find that fulfillment in reading financial statements. Yet these statements not only tell them how they’re doing but also suggest actions to promote future success. They are a critical leadership tool to aide in decision making.

When trying to answer the question, how do financial statements help in decision-making, there are three financial statements that every small business owner should understand. They’re the income statement, the cash flow statement and the balance sheet. Here are some keys to using each for business decision-making.

Income Statement

It’s also known as the profit and loss statement, or simply the P&L. It shows all the revenue and expense for a specific time period, be it a month, a quarter or a year.

It reads from top to bottom. Revenue is the top line, net profit is the bottom line, and different types of expenses and intermediate totals are in between, as follows:

Revenue – Cost of Goods Sold (COGS) = Gross Profit.
Gross Profit – Selling, General and Administrative Expenses (SG&A) = Operating Income.
Operating Income – Interest = Pre-Tax Income.
Pre-Tax Income – Taxes = After-Tax Income or Net Profit, aka the bottom line.

While everyone talks about the bottom line, the most fruitful places to make changes are near the top of the sheet.

Increasing revenue improves numbers all down the line.
Decreasing COGS means finding lower prices for inventory and reducing manufacturing costs.
SG&A can be minimized by actions such as reducing utility and building expenses and targeting marketing campaigns effectively.

The last two expenses, interest and taxes, are areas where a business owner should consider consulting an expert for financial advice.

There are ratios that help a business owner gauge financial health.

Gross Profit Margin = Gross Profit / Total Revenue
Operating Profit Margin = Operating Income / Total Revenue
Net Profit Margin = Net Income / Total Revenue

Ratios vary by industry, so it’s hard to make broad statements about desirable numbers. A professional accountant can help benchmark these against industry norms.

Cash Flow Statement

In accrual accounting, income and expenses on the income statement don’t correspond to cash flowing in and out. For example, when a sale is made, the customer owes money and the income statement recognizes revenue. However, a business can’t spend that money until the customer actually pays.

The Cash Flow Statement shows how much money was generated from (or used in) operations and how that cash was used for investments and where it came from in the form of financing. Even with a healthy income statement, a lack of cash means trouble in the future.

There are two ways to calculate cash flow: direct and indirect.

A direct Cash Flow Statement shows changes in cash from three categories:

Operations: cash received for sales minus cash paid out for inventory, wages and other current expenses.
Investing Activities: cash spent for major capital expenditures minus cash received for retiring them.
Financing Activities: loaned money received minus interest on loans.

The direct method is straightforward but requires keeping track of every dollar received or spent.

The indirect method starts with net income from the income statement. It then subtracts any factor that added to net income but didn’t produce cash (e.g., an increase in accounts receivable). It adds anything that’s subtracted from net income but didn’t reduce cash (e.g. a decrease in accounts receivables).

If cash flow is low or varies greatly from period to period, the business should take action to improve it.

Balance Sheet

A balance sheet lists the company’s assets and liabilities.

Assets and liabilities are classified as current and non-current. Current includes cash, receivables, inventory, and debts due within a year. Non-current includes building, major equipment, and long-term loans.

A healthy company has more assets than liabilities.

Assets minus liabilities equals the third category on the balance sheet, retained earnings. This is the amount of money that has been earned and reinvested. Net profits for the income statement are added to retained earnings.

The current ratio is current assets divided by current liabilities. There’s also a quick ratio, which is like the current ratio but excludes inventory from the assets. If this is greater than one, the company can meet its short-term obligations.

The balance sheet also shows whether a company has enough overall assets to cover long-term debt.

Interpreting Financial Statements

A savvy business owner can learn much from the 3 financial statements, and a knowledgeable partner such as Avisar Chartered Professional Accountants can really unlock the statements and show a business how to improve its financial position. Avisar specializes in taxes, statements, and consulting for small businesses, entrepreneurs and non-profits.

Read our Guide to Understanding Financial Statements for Business Owners for more on how to make the most of your financial statements.

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 2022: Charities Measures

Annual Disbursement Quota for Registered Charities

Registered charities are generally required to expend a minimum amount each year for charitable purposes, referred to as the disbursement quota (DQ). Presently, the DQ is set at 3.5% of property not used directly in charitable activities or administration.

Budget 2022 proposes to increase the DQ rate from 3.5% to 5% for the portion of property not used in charitable activities or administration that exceeds $1 million. Budget 2022 also proposes to clarify that expenditures for administration and management are not considered qualifying expenditures to satisfy a charity’s DQ.

Where a charity cannot meet its DQ, it may apply to CRA and request relief. Budget 2022 proposes to amend the existing rule such that CRA will have the discretion to reduce a charity’s DQ obligation for any particular tax year. It also proposes to allow CRA to publicly disclose information relating to such a decision to provide relief.

These measures would apply to charities in respect of their fiscal periods beginning on or after January 1, 2023.

Charitable Partnerships

Budget 2022 proposes to allow a charity to provide its resources to organizations that are not qualified donees, provided that these disbursements further the charity’s charitable purposes and the charity ensures that the funds are applied to charitable activities by the grantee.

To be considered a qualifying disbursement, the charity will need to meet mandatory accountability requirements, including, for example:

conducting a pre-grant inquiry sufficient to provide reasonable assurances that the charity’s resources will be used for the purposes set out in the written agreement, including a review of the identity, past history, practices, activities and areas of expertise of the grantee;
monitoring the grantee, which would include receiving periodic reports on the use of the charity’s resources, at least annually and taking remedial action as required; and
publicly disclosing on its annual information return information relating to grants above $5,000.

In addition, Budget 2022 proposes to require charities to, upon request by CRA, take all reasonable steps to obtain receipts, invoices, or other documentary evidence from grantees to demonstrate amounts were spent appropriately.

Finally, Budget 2022 proposes to prohibit registered charities from accepting gifts, the granting of which was expressly or implicitly conditional on making a gift to a person other than a qualified donee.

These changes would apply as of Royal Assent.

Federal Budget 2022: Sales and Excise Tax Measures

GST/HST on Assignment Sales by Individuals

An assignment sale in respect of residential housing is a transaction in which a purchaser (an “assignor”) under an agreement of purchase and sale with a builder of a new home sells their rights and obligations under the agreement to another person (an “assignee”). An assignment sale of newly constructed (or substantially renovated) residential real estate made by an individual would generally be taxable if the individual had originally entered into the agreement of purchase and sale with the builder for the primary purpose of selling their interest in the agreement. Where there was another primary purpose, such as residing in the property, the assignment sale would generally be exempt.

To provide greater certainty on the status of assignment sales, Budget 2022 proposes to make all assignment sales in respect of newly constructed or substantially renovated residential housing taxable for GST/HST purposes. As a result, the GST/HST would apply to the total amount paid for a new home by its first occupant. Typically, the consideration for an assignment sale includes an amount attributable to a deposit that had previously been paid to the builder by the assignor. That deposit would already be subject to GST/HST when applied by the builder to the purchase price on closing. Budget 2022 proposes that the amount attributable to the deposit be excluded from the consideration for a taxable assignment sale.

The assignor in respect of a taxable assignment sale would generally be responsible for collecting the GST/HST and remitting the tax to CRA. Where an assignor is non-resident, the assignee would be required to self-assess and pay the GST/HST directly to CRA.

The amount of a new housing rebate is determined based on the total consideration payable for a newly-constructed home, which would include the consideration for a taxable assignment sale. Accordingly, these changes may affect the amount of a New Housing Rebate that may be available in respect of a new home.

This measure would apply in respect of any assignment agreement entered into on or after May 7, 2022 (one month after Budget Day).

GST/HST Health Care Rebate

Hospitals can claim an 83% rebate and charities and non-profit organizations can claim a 50% rebate of the GST (or federal component of the HST) that they pay on inputs used in their exempt supplies. The 83% hospital rebate also applies to eligible charities and non-profit organizations that provide health care services similar to those traditionally performed in hospitals.

One of the conditions to be eligible for the expanded hospital rebate is that a charity or non-profit organization must deliver the health care service with the active involvement of, or on the recommendation of, a physician, or in a geographically remote community, with the active involvement of a nurse practitioner.

Budget 2022 proposes to allow the 83% hospital rebate to a charity or non-profit organization that delivers health care service with the active involvement of, or on the recommendation of, either a physician or a nurse practitioner, irrespective of their geographical location.

This measure would generally apply to rebate claim periods ending after April 7, 2022 in respect of GST/HST paid or payable after that date.

Excise Tax on Vaping Products

Budget 2021 announced a consultation on a new excise duty on vaping products. Budget 2022 sets out a taxation framework on vaping products that include either liquid or solid vaping substances (whether or not they contain nicotine), with an equivalency of 1 ml of liquid = 1 gram of solids (excluding those already subject to the cannabis excise duty framework).

A federal excise duty rate of $1 per 2 ml, or fraction thereof, is proposed for the first 10 ml of vaping substance, and $1 per 10 ml, or fraction thereof, for volumes beyond that. If a province or territory were to choose to participate in a coordinated vaping taxation regime administered by the federal government as set out in the budget documents, an additional duty rate would be imposed in respect of dutiable vaping products intended for sale in that participating jurisdiction.

Other Excise Tax Measures

Excise Duty Framework

Budget 2022 proposes several amendments to streamline, strengthen, and adapt the cannabis excise duty framework specifically, as well as other excise regimes, including the following:

allow licensed cannabis producers to remit excise duties on a quarterly rather than monthly basis, starting from the quarter that began on April 1, 2022 where the licensee’s required excise duty remittances for the four immediately preceding fiscal quarters were less than $1M in excise duties during the four fiscal quarters;
allow CRA to approve certain contract-for-service arrangements between two licensed cannabis producers to permit the producers to:
transfer stamps, and packaged but unstamped products, between them;
stamp and enter cannabis products into the retail market that have been packaged by the other producer; and
pay the excise duty on cannabis products that were stamped by the other producer.
amend the penalty provision for lost cannabis excise stamps so that the higher penalty for losing stamps for a province or territory would only apply where the adjustment rate for that jurisdiction is greater than 0%;
apply the existing cannabis penalty provisions to situations where unlicensed parties illegally possess or purchase cannabis products, and where licensed parties illegally distribute cannabis products;
exempt holders of a Health Canada-issue Research Licence or Cannabis Drug Licence from the requirement to be licensed under the excise duty regime;
in respect of spirits, wine, tobacco and cannabis products:
add all cancellation criteria for an excise licence, other than a proactive request by a licensee to cancel its licence, to the criteria that CRA may use to suspend an excise licence;
remove cash and transferable bonds issued by the Government of Canada, and add bank drafts and Canada Post money orders, to the types of financial security that could be accepted by CRA; and
confirm the ability of CRA to carry out virtual audits and reviews of all licensees.

Except where indicated otherwise, the above proposals would be effective only on Royal Assent.

100% Canadian Wine Exemption

Wine that is produced in Canada and composed wholly of agricultural or plant product grown in Canada (i.e. 100% Canadian wine) is presently exempt from excise duties. However, this exemption was challenged at the World Trade Organization (WTO). In accordance with a settlement reached in July 2020, Budget 2022 proposes to repeal the 100% Canadian wine excise duty exemption effective on June 30, 2022.

Low-alcohol Beer

At present, wine and spirits containing no more than 0.5% alcohol by volume (ABV) are exempt from federal excise duty, however beer containing no more than 0.5% ABV is subject to duty. Budget 2022 proposes to eliminate excise duty for beer containing no more than 0.5% ABV, bringing the tax treatment of such beer into line with the treatment of wine and spirits with the same alcohol content. This measure would come into force on July 1, 2022.