In part one of this article we explored the key elements a small contractor should be focusing on to be successful. As small business owners we get pulled in so many directions and all at the same time. As a result many of the items covered in part one do not get done and that makes it even more difficult to complete the elements we will explore in this part of the article. Most of the time the Canada Revenue Agency (CRA) will leave you alone unless you raise flags. This is usually done by missing deadlines, not making timely payments, or filing inaccurate information.
There is a big difference between something being urgent and something being important.
You can spend 40 hours per week doing urgent and important work, like quoting jobs and scheduling and doing the work. The next urgent thing we do is the invoicing. Suddenly your 40-hour week has become 60 hours and you still haven’t looked at many items that are important but less urgent. And that’s where we get into trouble. The things we can put off to tomorrow rarely get done.
In part one of this article I explored a number of very important (but not so urgent) items you should be implementing in your business. Have you spent any time implementing any of those ideas or did other urgent matters get in the way? There is no great sense of urgency in dealing with those items, but they are critical to your future success. If the urgent matters are taking all your time then the important but less urgent matters will get left behind. Not only will this stop you from growing your business but it will likely get you into big trouble, particularly with the CRA. Their issues only get urgent when you have fallen behind in filing and paying the required amounts to them.
You need to ensure you stay current with the CRA or else much of the good work you have done in becoming self-employed is for naught. Penalties, interest, accounting fees, and the time taken to bring yourself and your business into compliance will be very significant. By the time the CRA starts to play hard ball, you will likely be more than one year in arrears and won’t have the cash to satisfy their needs.
There are only three types of business structure for Contractors:
• Companies/corporations
• Sole proprietorships
• Partnerships
In this article, we will deal with the latter two. Sole proprietorship and partnerships are the same with one exception—instead of one owner there are at least two owners. In the partnership, the owners share the revenue and expenses in accordance with their share of the ownership. Let’s look at what you need to do to stay in compliance with CRA and Workplace Safety and Insurance Board (WSIB) / WorkSafeBC (WSBC).
You do not get a choice of year-end. Your year-end is December 31 and the information is included in your personal tax return along with all the other relevant information.
The form used for providing the business information is called a T2125 – Statement of Business or Professional activities. For each business or profession you must complete a separate T2125. To reduce your accounting fees, you should print out the form and provide the information to your accountant in the same layout as the form.
A T5013 is for partnerships where annual income plus expenses are $2 million or more or where assets are over $5 million.
If your annual billings are greater than $30,000 you must register for GST/HST. As a registrant you claim back the GST/HST you paid and collect the tax on your sales, remitting the net figure.
The personalized GST/HST return (Form GST34-2) will show the due date at the top of the form as part of the pre-printed personal information. The due date of your return and payment is determined by your reporting period. If you are an annual filer you may have to pay equal quarterly installments, payable within one month after the end of each fiscal quarter.
With employees you have to follow the normal rules for payroll. This does not apply to the proprietors. Their income tax is based on their portion of the net income and will likely be subject to quarterly remittances.
Your tax return is due by June 15 because you are self-employed; however, the tax due is payable by April 30, and interest will accrue from that date. Try to complete your return by April 30, or at least pay the tax.
T5018 is a form for proprietorships and partnerships where more than 50 per cent of your income is derived from construction must complete and file with CRA regarding payments to subcontractors. If you are a subcontractor, the contractors you work for will file T5018s with the CRA advising them of the income you earned.
It is essential from day one to set aside money for income tax and GST/HST or at the end of the year you may fall into arrears. It often takes several years to catch up and in the interim penalties and interest will build and likely, too, will your accounting fees.
Reduce the risk of an audit by always filing your returns on time and paying the amounts due on time. If you can’t pay, you should still file and avoid the penalties.
If your spouse is a partner in the business, you split the income in accordance with whatever ownership you each have. However, if you decided to pay your spouse or children a salary then put them on salary the same way you would other employees. There is no age limit for deducting EI premiums; they apply to all employees except for family members, as you are likely not dealing at arm’s length (double check with your accountant for your particular case). However, CPP premiums are only deductible starting at age 18.
Are you registering for WSIB/WSBC benefits? It is most likely you have to provide coverage for your employees. Also, as a proprietor you should try to get coverage as this is the most inexpensive type of disability coverage available. Check with your provincial authority.
Talk to your accountant about what expenses you can write-off.
Most deductions you can claim are easy to identify. An expense directly related to your business is straightforward. Capital assets over $500 in cost should be set up and depreciated. Your accountant can do that for you.
Look for the marginal expenses to get the best write-offs. Making up expenses or claiming expenses that have obviously nothing to do with your business is fraud. However, there are certain expenses you can claim that might not be so obvious.
The first one is the calculation of business-use-of-home expense. This is clearly spelled out in the T2125 Part 8.
Personally owned vehicles that are used for business also have a business write-off component. You need to separate out the mileage for business and pleasure. If you are working out of home, once you leave home for work purposes that portion of the trip is business related. If you are not working from home then the portion of the trip to your place of business is personal use.
Check with your accountant to see if you can write off your Internet cost. If you go on vacation but do visit clients/prospects or suppliers or go to a trade show or convention, the part of the trip that relates to business should be a reasonable deduction.
You can only write off 50 per cent of the business related amounts for meals and entertainment and likewise only claim 50 per cent of the GST/HST as an Input Tax Credit. Record on the receipt who you paid for and a very brief summary of the work discussed. “E.G. bought accountant lunch, discussed taxes”.
One advantage of the proprietorship is if you lose money you can deduct the loss from other income.
The biggest concern for sole proprietors and partnerships is that there is no legal distinction between the individual and the business. All the business liabilities and exposure are yours personally. If you are in a partnership and your partner goes broke, you will likely be liable for all the debts of the business, not just your portion. If you are going to stay in business you should seriously look at incorporating in order to limit your personal exposure.
Avoid letting these very important, but less urgent, activities of your business fall behind and your chances of success increase significantly. They are critical to your success. It’s not too late to make this your 2017 New Year’s resolution.
