What is an Input Tax Credit?

If you’re a business owner in Alberta, then you’re collecting GST from your customers and remitting it to the Canada Revenue Agency (CRA). However, you’re also paying GST to your vendors on legitimate business expenses. The amount your remit to the CRA can be offset by the amount you pay to vendors. This offset is the input tax credit (ITC).

Without input tax credits, many products that we buy every day would be taxed over and over. Think, for example, of a sandwich you buy at our local Calgary corner store – the shop that sells it charges GST, as does the catering company that made the sandwich, the bakery that baked the bread, the cheesemaker who made the cheese, the dairy farm that produced the milk to make the cheese… and so on and so on.

What input tax credits mean for businesses is that while you may collect a large amount of GST, you only actually have to give the government the difference between what you collected and what you paid out. For this reason, solid bookkeeping is very important. This is why our bookkeepers work closely with our clients to keep meticulous records of both the GST that is collected and the GST that is pay out.

Your bookkeeping records have to be extremely clear and detailed because when you make an input tax credit claim to the CRA, you will be required to provide proof that these expenses were incurred legitimately and paid out as reported. The clearer this is, the easier time you’ll have working with CRA in the event you have to undertake a GST audit. While these audits are never any fun, they are also nothing to fear if your records are in good order and you have kept track of receipts.

Here’s a tip: when you receive a receipt from a supplier or service provider, make sure that the amount of GST is itemized on the receipt and that the vendor’s GST number is recorded on the receipt. You can save time and money by breaking out the GST and making a note of it on your cheque stubs so your bookkeeper doesn’t have to rifle through receipts or back it out.

Nobody likes paying tax, so it’s really important to keep on top of those receipts and see your bookkeeper regularly to be sure that you are claiming as many input tax credits as you can and offsetting your GST remittance. Your bookkeeper can also help you to keep on top of your GST remittance schedule, whether it be monthly, quarterly or annual.

If you are thinking about using the services of a professional bookkeeper, give us a call at 403 272-5513 ext 616 ore email bookkeeping@registriesplus.ca  for a free consultation. We are currently offering a Spring Special startup package for $150 and monthly bookkeeping from $99. You may be surprised at how affordable professional bookkeeping can be.

Salary vs Dividend

One of the most common questions I get asked from entrepreneurs who are thinking about starting a small business is whether or not they should pay themselves a salary or a dividend. This is actually a fairly complicated question because the answer really depends on a number of factors. For example, do you want to operate with a fixed salary budget, do you want to retain earnings for the next operating year and do you have other shareholders that expect remuneration?

The problem is that new entrepreneurs don’t generally have any experience with business finances to understand what these factors are nor what they want to do about them. As a result, it can be a fairly lengthy and sometimes frustrating process to get to the answer of salary vs dividend.

Sometimes small business owners aren’t ready to go through the lengthy process and just want a general sense of things before getting too far into the decision. As a result, I’m often asked for my opinion based on my experience, so I’ll offer that today in this post.

Please keep in mind that I’m focusing on small businesses and startups and that I am not advocating this as a rule nor as advice.  If you want the right answer to the question of salary vs dividend, then you really have to work with your advisor to determine what’s best for you based on your needs and goals.

That said, my opinion is that paying a salary or wage is likely a good place to start for most small businesses for three reasons:

  1. The size of the potential tax savings from dividend payments can be smaller than you think: It’s true that dividends are taxed more favorably. However, you have to keep in mind that you have to pay corporate tax. If your business generated $100,000 in profit, then ~$15,000 will be paid as corporate tax. If the remaining $85,000 is paid as a dividend, then you still have to pay taxes on this amount. In many cases, the after tax income isn’t that far off from what it would be if you paid the full $100,000 as salary.
  2. Salary qualifies you for other benefits: If you pay yourself a salary, then it’s treated as personal income. This means you can contributed to CPP and RRSPs. It also means you’re eligible for other tax deductions like child care expense deductions. Finally, the salary is a tax deduction for your corporation.
  3. Filing tax on personal income is easier: If you pay salary equal to your gross profit, then your corporate T2 is simpler because there is no Net Income. Also, filing your T1 is simpler because you have a T4 and you follow a standard tax situation that’s just easier. Income splitting and dividends are a bit more complicated and often require assistance from an experienced tax filer.

The reason I think many small businesses prefer the salary approach is because it’s what they’re use to. They understand what it means to have personal income. They like contributing to RRSPs. The want to participate in CPP. It’s just more natural for them, so they default to what they know. At least initially. As they become more familiar with being an entrepreneur, they start to think differently and become more open to other approaches.

Whether or not salary or dividend is the way to go ultimately depends on what you want, so there really is no right or wrong answer to the question.

Bookkeepers vs Accountants; which do you need?

When most small business owners look for help managing their finances, they assume their only option is to work with an accountant. It’s true that they will likely need one to finalize financial statements, provide tax-saving advice and to complete tax returns. However, many small and even medium sized business owners are pleasantly surprised to learn that bookkeeping services are lower cost alternative to managing the month-to-month finances of their companies.

Using bookkeeping services can save companies thousands of dollars each year, so let’s take a look at the differences between the two functions to help you feel confident that combining bookkeeping services with your accountant is the way to go.

The main difference between the two functions is that they are used at different stages of the financial cycle.

Bookkeeping is the function of recording daily transactions

How well your daily transactions are recorded is one of the keys to building a strong business foundation. This is why bookkeeping is so important. It’s comprised of

  • Recording financial transactions
  • Posting debits and credits
  • Generating invoices
  • Maintaining and balancing general ledgers and accounts
  • Managing payroll
  • Preparing interim financial statements

Maintaining a general ledger is one of the main components of bookkeeping. The general ledger tracks the amounts from sales and expenses. The complexity of this task depends on the size of the business and the number of transactions that are completed daily, weekly, and monthly.

Accounting is the function of optimizing business decisions through data

Accounting is a high-level process that makes sense of information from the financial statements to support sound decision making for the business owner. This is much more subjective than bookkeeping, hence why it requires a highly trained professional. The process of accounting includes:

  • Preparing adjusting entries
  • Finalizing financial statements (i.e. Notice To Reader)
  • Suggesting ways to optimize the business based on the financials
  • Completing and filing income tax returns
  • Aiding the business owner in understanding the impact of financial decisions

The accountant will help business owners better understand profitability and cash flow implications. This is why business owners will often look to accountants for help with strategic tax planning, financial forecasting, and tax filing.

Why use both?

Some business owners get peace of mind by having both functions completed by their accountant. The fact is that that peace of mind comes at a fairly high price. Many accountants hire bookkeepers to take care of the monthly transactions and record keeping, yet charge rates that are reflective of an accountant’s time, which can be around $100/hour. The alternative is to hire a bookkeeping service provider who will charge around $50/hour for the same work. If an average small business requires 10 hours of bookkeeping a month, this is a savings of $500. Over the course of a year it’s a savings of $6000, which could go straight to the owner’s salary vs their accountant’s.

Calgary Bookkeeping by Registries Plus is offering a spring special to help small business owners transition to using bookkeeping services. Learn More

How to Choose Accounting Software

If you are just starting up your business, then one of the bigger decisions you’ll make when it comes to administration is the choice of which accounting software to use. There are a range of options, but the leading choices boil down to Quickbooks and Sage.

A few things you’ll want to consider when evaluating options are functions, setup and help.

Functions – both packages have similar features. Things like ledgers, inventory, order management and payroll, so it really boils down to ease of use of these features. In our opinion, it’s very close but we think Quickbooks is a bit easier to make adjustments and to manage payroll, so we give it a slight edge. That said, there are a lot of people who prefer Sage because it does a great job of inventory management. Overall, both options are very robust and have strong user interfaces, so it’s hard to pick on this front alone.

Setup – We give Quickbooks the edge in terms of setup, mostly because we like to use the online software which makes it a lot easier for us to get our clients up and running. The desktop version of both packages use similar setup procedures, but in our experience Quickbooks is a bit more forgiving if you make a mistake and need to go back to fix something.

Help – This is the main reasons we prefer Quickbooks. The training, online support, help wikis and other online resources from Intuit are really amazing. If you’re a small business owner and you prefer to do your own bookkeeping, then you can count on needing help at some point with your software. Intuit makes it really easy to get the help you need. Sage has similar resources, but we’ve just found Intuit to have a better understanding of what’s needed in terms of support.

One last consideration is whether or not you want to invest time to do your own bookkeeping. While it does save you a bit of money, it also takes you away from driving your business and working with your customers. Our recommendation is to use a bookkeeper so you can focus on your business, but if you’re set on doing it yourself, then we’d suggest you consider working with a bookkeeper initially to setup your software with you and ensure you have your procedure right. This will save you a lot of time and headache down the road.

At Bookkeeping by Registries Plus, we can help you install and setup either Quickbooks or Sage and get your off on the right foot. Call us today for a free consultation.