All the leaves are brown. (Thinking of a Salary or a Dividend?)

The leaves are brown but the sky is definitely not gray.  What a gorgeous September.  The month of July, August and September have been eventful for the firm.  Both partners enjoyed some relaxing vacation  time in Calgary and abroad.

With the last three months of the year upon us the office is busy.  We have all hands on deck and look forward to tackling another busy season. Of course, we’ll also be taking some time to enjoy Calgary’s beautiful fall weather.  

This week, we would like to discuss a significant accounting and tax issue we often encounter with both start up and established businesses: how to compensate the business owner.

Once a business is incorporated, it is established as a legal entity know as a corporation.  The corporation is now a separate entity from the business owner.  As a result, business owners cannot simply withdraw cash from the company without tax consequences.  Corporations will need a formalized structures in place to pay the business owner. This structure is important because it will have cash management and tax implications. The two most common methods of remuneration are salary or dividend.

The following considerations should be examined when putting formalized payment structures into place.  We strongly advise discussing  the following with a qualified accountant to determine what option best suits your business model.

v  Salaries are considered to be active income.  Dividends are investment income.  RRSP contribution room is calculated on active income.  With active income (salary) the taxpayer’s RRSP room increases.  If your only source of income is dividends, the taxpayer cannot build RRSP room nor benefit from certain tax deductions, such as child care expenses.

v  Salaries are considered operating expenses for the corporation.  They are fully deductible in the corporation.  The salaries are then taxed normally through the personal tax payer.  Dividends are not an expense for the corporation.  The dividends are taxed as investment income through the personal tax payer.   There is a tax credit available on the dividends.

v   Salaries require additional administration.  Each month deductions have to be calculated and remitted to the CRA.

v  With a salary, taxes are deducted from each pay cheque. As dividends are usually lump sum withdraws, the taxpayer must pay the applicable taxes when they file their personal tax return.

v  CPP is not payable on dividends.

v  Depending on the corporate structure, dividends can be strategically claimed to defer personal taxes and declare income to different shareholders.

v  Salaries must be paid to employees of the company and dividends paid to shareholders.  If you are not an employee or not a shareholder, the choice has already been made.

As you can see, there are tax consequences and other factors to consider when determining remuneration from your company.  The decision all depends on specific circumstances for each business and owner.

Summer Summer time

Hope everyone is having a fabulous summer.

We enjoyed a busy Stampede, Will did some vacationing in BC and Paul got married in Bermuda. We have been having fun in Calgary as well. 

Below is a link to an article about small business in Canada and the entrepreneurial spirit. 
Small business owners feeling very happy

Have a great week and weekend

Yeehaw! Enjoy the Stampede Everyone

Canada Day, and incorporating your business

Beautiful Elbow Falls, I spent an afternoon out there a couple of weekends ago, some great Canadian landscape.

So it's Canada Day, very exciting.  The summer warmth is finally here. It is a great weekend to celebrate this great country of ours.

I spent a few years living in the Netherlands; their Canada Day equivalent is called Queen's Day.  They celebrate by wearing bright orange from head to toe, taking to the streets in a country wide free market, and of course cruising up and down the canals, singing laughing and celebrating everything Dutch. It is an amazing display of patriotism and joie de vivre.  My point here is that, on this holiday Friday, go out and celebrates everything Canadian; be proud about it.  Whatever it is that you love about this country go out and enjoy it; and maybe wear some bright red.  O'Canada.

Onto some accounting matters.  Since the end of the personal tax deadline we have spoke with many clients contemplating the decision to incorporate their business or not.

The decision to incorporate is a difficult one. Every business is in a different situation and has different goals.  Therefore whether to incorporate or not all depends on your situation. 

I highly recommend sitting down with your accountant before making the decision and gathering all the information you need before proceeding. 

Generally speaking, below are disadvantages and advantages of incorporating your small business. 

Disadvantages 

- The costs and administrative obligations.  Once you form a corporation, you now have a separate legal entity.  This company is now completely separate from the individual. Legal and accounting fees are required to get the incorporation process completed.  (I highly recommend paying to get the company set up properly).

The newly formed corporation must file corporate tax returns, produce financial statements, track balances through bookkeeping, have separate bank accounts and register each year, to mention a few requirements.

-There are many myths out there.  One such myth is that a corporation has many more tax credits and deductions available.  This is false.  A proprietorship (non incorporated business) actually has more tax credits available, as it is included on a personal tax return.  Personal tax credits can be used to reduce taxes. Business losses can be applied against other sources of income. The same business expenses/deductions against business income apply to a business, incorporated or not.

Advantages 

-Limited Liability. Since a corporation is an entirely separate legal entity.  A shareholder’s personal liability is limited to what is invested in the company.

-Flexibility on timing of taxes, and distribution of income.  If a corporation does not distribute all of the profits to shareholders, there is a potential to defer personal taxes until the individual receives income from the corporation.  Deferring shareholder distributions for a subsequent year (through payroll or dividends) results in the company paying corporate taxes (at a low rate) on the profits, and the personal taxes are deferred. I’d like to emphasize that if the shareholders take all the profits from the company each year; there is no advantage to incorporating.

-Planning.  If planned appropriately the corporation can have several shareholders.  How these shareholder's are paid, when and who is paid, offers tax planning options to the corporation and shareholder.

These are just a couple of factors to consider when operating a small business.  Before making the decision, sit down with your accountant and determine what suits you the best.

Now go out and enjoy Canada.

Time to budget

So it's June.  What a spring.  Let's hope the April and May showers have passed and the summer sun is on the way. At the office, we are excited for the summer months, as I'm sure you are too.

We have been busy in May and into June.  The idea that everything slows down after April 30th is not so accurate.  It's exciting here at Henderson Campeau, we continue to grow and develop new and existing relationships.

We are trying to get some golf in as the weather improves. We are also looking forward to all the summer events and fun to be had here in Calgary

So this week the government re-introduced the 2011 budget with very little surprises.  In regards to how it may affect you click on the following link and explore the highlights.

2011 budget highlights

A few that stick out are:

• Children's arts credit.  A $500 tax credit for children enrolled in artistic activities.  Similar to the existing fitness credit but for the arts
• Family caregiver credit. An additional tax credit of $2000 for caregivers of mentally or physically infirm dependents.
• For small businesses.  A onetime $1000 EI premium credit on the company's increase in premiums if they hire new employees in the year.  (the total EI premiums for the business must be under $10,000)

Just a few highlights. Keep yourself informed and aware of how tax changes (or even current rules) affect you, your family and your business.

Have a great weekend.

Keeping it local

Let it rain, let it rain.

Instead of going on about accounting and taxes, I'm going to switch it up a bit.  This post is a link to an interesting article in the ffwd paper. It is a good article to stir up debate on an issue Calgary is currently facing.

Check it out
http://www.ffwdweekly.com/article/life-style/urban-living/density-what-good-is-it-7471/

Here at Henderson Campeau we love the idea of living, working and shopping all within a small radius.  Both partners of the firm live within a few of blocks from the office.  We also engage suppliers in the neighborhood and dislike driving in traffic.

Have a great week.

May Day

So the tax season is officially over.  Yahooooooo.  Bring on the summer.

We enjoyed the busy time of year and are very pleased with the last several months.  It is a great time of year to see and get to know our clients a little better.  Thanks to every one of our clients for stopping by and meeting with us.  A big thank-you to all those who stuck with us from previous years and to all those new clients who came and met with us this year.  It is a pleasure to get to know all of you, it is fun to be involved in the community and interesting to keep a pulse on the Calgary economy.

We look forward to meeting more people as the our firm grows and helping you out in any way both personally and corporate.

We finished up the season with a gathering at the Kensington Pub with family and friends to celebrate the end of the tax season.  It was a good time had by all.  As you can see a cake was in order.

So thanks for being a part of Henderson Campeau we were glad to help out with your financial matters and look forward to seeing all our personal clients again next year. As well as meeting more people in this great city as time goes on.