Accurate bookkeepers understand the bookkeeping cycle and how bookkeeping works. They know how taxes and deadlines can make or break a business and the impact of paying extra tax on it. Real bookkeepers are not data-entry clerks.
In part one of our satirical look at how to pay more for bookkeeping services, we looked at the danger of not giving your bookkeeper adequate and complete information. You can read this blog post by clicking this link.
In part two, our blog post looked at #2 on our list -> how to leave everything to the last minute and how this ultimately costs you more.
Well, we have more for you, and this time, #3 on our list, we look at how to use your business as your piggy bank.
This is all satire, of course.
3 – Use your Business as your Piggy Bank!
The money is there, it’s all yours, and there are no tax consequences to using it as you see fit, right?
When you take money out of your business, many things are happening.
Creating a Tax Complication
Taking money out of your business without appropriate planning may create a taxable situation for you. If you owe money back to the company at the end of the year, it needs to be repaid. If those funds aren’t repaid, they must be resolved next year. That means you’ll need to take it as a salary or payout a dividend.
If you resolve the Shareholder Loan balance through a bonus or salary, the corporation must pay CPP and Income Tax on the gross amount you’ve been paid. This means the income on your T4 in relation to the Shareholder Loan will be greater than the amount you withdrew. It needs to be grossed up because the income tax and half the CPP are supposed to come from your gross income.
If you resolve the Shareholder Loan balance through a dividend, you must keep a few things in mind. Dividends are paid from the company’s after-tax profits and haven’t had income tax taken off at the source. This means you’ll need to pay the tax out of pocket. Also, if there are multiple shareholders in the company, you’ll need to ensure that each shareholder receives their rightful dividend per share. Of course, this doesn’t apply to all situations, but it’s often something that can be overlooked. Furthermore, if you don’t have retained earnings to support the dividend, it can create additional liability for you as the dividend recipient.
Spending More Time
When you’re spending business funds personally, these transactions still need to be recorded in the books. This may mean clarifying why the funds were spent. You’ll need to spend more time with your bookkeeper reviewing transactions, and your bookkeeper will need to allocate them appropriately. Which means they’re spending more of your money.
Spending More Money
In addition to requiring your bookkeeper to do work that doesn’t relate to your business, you might need the help of an accountant to prepare and file the appropriate tax slips, which might be late. You will pay more for your bookkeeping and accounting than you need to, and you may also face penalties or interest from CRA.
Business Expenses Only
The best method for ensuring you and your bookkeeper aren’t spending unnecessary time (and money) on your bookkeeping is only to spend money on business expenses.
Some of the top items we regularly see come through businesses include:
- Meals – This includes “Working lunches” when you’re on the road or order in at the office. CRA expects you to bring your lunch from home regularly. “Meals & Entertainment” expenses occur when you take a prospective or existing client out intending to generate more revenue. Remember to write who you met with on the receipt and why to avoid headaches during a CRA review (this is how most audits start.)
- Coffee – While it’s reasonable to have coffee, tea, cream and sugar available to make at the office for meetings, your morning Starbucks or Tim Horton’s run is personal in nature. It isn’t a business expense.
- Non-business travel – Just because you paid for the family vacation on the corporate card doesn’t make it a business expense. Adding a meeting to a family vacation does not make the trip deductible. The critical question is, “Is this trip necessary to generate income?” If it isn’t, it’s personal.
- Personal vehicle expenses – Many entrepreneurs run ALL their fuel, tolls, and other vehicle expenses through the business when the vehicle is personally owned. If you own the car, these are shareholder loan transactions. You need to keep a mileage log and charge the corporation back for the personal vehicle’s business use. If the corporation owns the car and you’re taking it home at night or using it for personal reasons, those are taxable benefits that must appear on your T4. In essence, keep a mileage log and submit only appropriate expenses. CRA is aware people will buy lotto tickets, smokes and snacks at gas stations on company cards.
- Gifts – When you buy gifts for a client, they’d better be for the client. Write on the receipt which client the gift was for and their contact information. If you buy gifts in bulk, be sure you can show who they went to and what their contact information is.
But, My Buddy Says…
We hear this all the time:
“But my buddy buys a new truck every year! My friend says I can write off my pet food!”
Don’t listen to non-professionals when it comes to your personal finances. Often, people will misinterpret or flat-out take inappropriate deductions. Just because someone else is unethical does not make it okay for you to do so.
Besides, those “Cash” jobs under the table, those extra “Business expenses” run through the corporation – they mean the person isn’t paying their fair share of taxes – which increases yours.
In our next blog post, we look at #4 on our list -> making things unnecessarily complicated. Watch for that blog post on how to pay more for bookkeeping services!