Business Solutions
If you are planning to start a business, this reference guide should be of assistance to you. This guide should enable you to successfully handle many of the problems encountered in starting and running a business. With foresight and good planning, you will become a successful business person. When in doubt, remember to seek professional advice. The benefit will far outweigh the cost.
SELECTING THE LEGAL ENTITY FOR YOUR ENTERPRISE
One of the first major decisions you will have to make as you start your new business is the form of legal entity it will take. To a large degree this decision may be dictated by the way you have organized your operations and whether you intend to work on your own or in conjunction with others.
The form of entity you choose can have a significant impact on the way you are protected under the law and the way you are affected by income tax rules and regulations. There are three basic forms of business organization. Each has its own benefits and drawbacks and is treated differently for legal and tax purposes.
Sole Proprietorship
A sole proprietorship is typically a business owned and operated by one individual. A sole proprietorship is not considered to be a distinct legal entity under the law, but rather is an extension of the individual who owns it. The owner has possession of the business assets and is directly responsible for the debts and other liabilities incurred by the business. There is recourse for the personal assets of the proprietor. The income or loss of a sole proprietorship is included on the T1 personal tax return and is combined with the other earnings of the individual for income tax purposes.
A sole proprietorship is perhaps the easiest form of business to own and operate because it does not require any specific legal organization, except of course the normal requirements such as licenses or permits. A sole proprietorship typically does not have any rules or operating regulations under which it must function except those related to the industry it plans to operate in such as real estate, insurance, etc. The business decisions are solely the result of the owner’s abilities.
Partnership
A partnership can take two legal forms, general or limited. In a general partnership, two or more individuals join together to run the business enterprise. A partnership must usually register with the Provincial authorities. Each of the individual partners has ownership of company assets and responsibility for liabilities, as well as authority in running the business. The authority of the partners, and the way in which profits or losses are to be shared, can be modified by the partnership agreement. The responsibility for liabilities can also be modified by an agreement among the partners, but the partnership creditors typically have recourse to the personal assets of each of the partners for settlement of partnership debts.
A limited partnership is comprised of one or more general partners who are personally liable for partnership debts and one or more limited partners who contribute capital and share in the profits or losses of the business. The limited partners do not take a part in running the business and are not liable for the debts of the partnership.
The rights, responsibilities and obligations of both the limited and general partnership are typically detailed in a partnership agreement. It is a good idea to have such an agreement for any partnership, whether it’s limited or general.
A partnership is a legal entity recognized under the law and as such it has rights and responsibilities in and of itself. A partnership can sign contracts, obtain trade credit and borrow money. When a limited partnership is small, most creditors require a personal guarantee from the general partners.
A partnership of more than five partners must file an information return with CCRA (formerly Revenue Canada) annually. A partnership does not file an income tax return; the information from the information return or financial statements is combined with the personal income of the partner on their T1 personal income tax return to determine the overall individual partner’s tax liability.
Corporation
A corporation is a separate legal entity, which exists under the authority granted by Provincial or Federal law. A corporation has substantially all of the legal rights of an individual and is responsible for its own debts. It must also file income tax returns and pay taxes on income it derives from its operations. Typically, the owners or shareholders of a corporation are protected from the liabilities of the business. However, when a corporation is small, creditors often require personal guarantees from the principal owners before extending credit. The legal protection afforded the owners of a corporation can far outweigh the additional expense of starting and administering a corporation.
Ontario corporations must file annual income tax returns with CCRA and the Ontario Ministry of Finance and possibly other provinces in which it does business.
Incorporating a business allows a number of other advantages, such as the ease of bringing in additional capital through the sale of equity, or allowing an individual to sell or transfer their interest in the business. It also provides for business continuity when the original owners choose to retire or sell their interest. Should you decide to incorporate your business venture, you should seek the advice of competent legal counsel and your Chartered Accountant.
REGISTERING WITH THE TAX AUTHORITIES
A very significant task for the new business owner is ensuring that the business is properly registered with the appropriate taxing authority. In addition, the business must comply with the extensive tax and information filing requirements imposed by the various government agencies. Penalties are commonly assessed if the required forms or returns are not filed on a timely basis or are not properly prepared. The following, while not an all-inclusive list, summarizes the most common registrations and requirements for most business:
- Canada Customs and Revenue Agency (CCRA) -www.ccra-adrc.gc.ca (1-800-959-5525)The CCRA is the Federal agency responsible for all tax, customs and trade administration in Canada. The following are some instances where registration with the CCRA is required:
- Partnerships with over five (5) members and all corporations are required to register and are assigned identifying numbers by CCRA.
- Any business with employee deductions, regardless of the legal form, must also apply for an employee remittance account number.
- Businesses carrying on commercial activities with annual sales in excess of $30,000 must register for GST and receive a registration number. In certain situations, it may be advantageous for a business to register even if they are not required to do so.
- In an attempt to simplify matters, CCRA has developed the Single Business Registration Number whereby account numbers for Corporate Tax, Payroll Deductions and Goods and Services Tax utilize the same number followed by two letters to differentiate the type of account. The business registration number can now be applied for online atwww.businessregistration.gc.ca
- Ministry of Finance – Ontario – www.gov.on.ca/FIN/hmpage.htmlPotential registrations include:
- Corporate income tax (1-800-263-7965 or (905) 433-6500) In Ontario, only corporations need to file separate income tax returns. The income from partnerships and proprietorships is included under business income on an individual’s T1 personal tax return.
- Retail Sales Tax (1-800-263-9229) The Ministry of Finance requires all businesses engaged in retail sales to obtain a Provincial Sales Tax Vendor’s Permit and to charge and remit to the Ministry, the appropriate sales tax amounts.
- Employer Health Tax The Ontario Employer Health Tax (EHT) is assessed on all employee wages in excess of certain maximums.
- Workplace Safety and Insurance Board – www.wsib.on.ca (1-800-387-0750)Employers are required to register with and report wages, and in certain situations, amounts paid to sub-contractors, to the Workplace Safety and Insurance Board and to pay the appropriate assessments on the reported amounts.
TAX CALENDAR
The following summarizes some of the more significant tax filing requirements:
- Proprietorship and partnership income is included in the personal income tax return on a calendar year basis. The T1 for self-employed individuals or partnerships has a June 15 filing deadline with any income tax amounts due April 30. Instalments must be remitted quarterly (March, June, September, December) where required.
- Generally, corporations must remit taxes in monthly instalments and pay the final amount within 2 or 3 months of the fiscal period end depending on size. The return must be filed within 6 months of the fiscal year end.
- Dependent on size, monthly, quarterly or annual filings. Annual filers may be required to pay instalments on a quarterly basis. The return and payment are usually due the month after your filing period ends.
- Normally monthly filings and remittances are required, but can be less frequent for smaller businesses.
- Instalments on a monthly, quarterly or annual basis and an annual filing of an information return are required. Certain exemptions may apply.
- Monthly, quarterly or annual filings are required based on insurable earnings. In addition, a reconciliation form is required if you pay your premiums monthly and for all employers closing an account.
- Along with the employer portion for Canada Pension Plan (CPP) and Employment Insurance (EI) deductions, the employee deductions (Tax, CPP and EI) are remitted to CCRA by the 15th day of the following month. For larger employers, the remittance dates are advanced to as frequently as four times a month. An annual information return (T4) has a deadline of the last day of February following the calendar year the wages were paid.
ACCOUNTING AND BOOKKEEPING
Most operators of a new and growing business have a flair for the environment in which the business operates. They may be a great salesperson, an outstanding mechanic, engineer, lawyer or inventor. Unfortunately, most people do not like to keep their accounting records. As an owner of a business, you must remember that your company’s books and financial statements represent a score sheet which tells you how you are progressing, as well as an early warning system which lets you know when and why the business may be going amiss. Financial statements and the underlying records will provide the basis for many decisions made by outsiders such as banks, landlords, potential investors and trade creditors, as well as taxing authorities and other governing bodies. The necessity for good, well-organized financial records cannot be over-emphasized, especially since CCRA requires you to keep your records and invoices for 6 years. One of the greatest mistakes made by owners of small businesses is not keeping good financial records and making improper or poor business decisions based on inadequate information.
Quality financial information does not necessarily translate into complicated bookkeeping or accounting systems. Far too often, owners of businesses become overwhelmed by their accounting system to the point where it is of no use to them. An accounting or bookkeeping system is like any tool used in your business; it needs to be sophisticated enough to provide the information you need to operate your business and simple enough for you to run it (or supervise the bookkeeper). Questions you should ask in developing an accounting and financial reporting system are:
- Who will be the users of the financial information?
- What questions do I need answered to manage the business?
- What questions should be answered for government or regulatory taxing authorities?
As your business grows, you should work closely with your accountant to ensure that your accounting system is providing you with the appropriate information.
Chart of Accounts
The basic road map into any accounting system is the chart of accounts. It is this chart, which helps establish the information which will be captured by your accounting system and what information will subsequently be readily retrievable by the system. This tool, like the rest of the accounting systems, needs to be dynamic and should grow as the size and needs of your business change.
To help establish a good working chart of accounts, you need to answer some questions in conjunction with your Chartered Accountant as to how your business will operate and what is important to you. Some of these considerations might be:
- Will your business have inventory to account for? If so, will it be purchased in final form or will there be production costs?
- Are fixed assets a significant portion of your business?
- Will you sell only one type of product or service or will there be several types?
- Will you have accounts receivable from customers, which you will have to track?
- Are you going to sell from only one location or will you do business in several provinces?
- Will the products or services you sell be subject to sales tax (GST and PST)?
- Do you need to track costs by department/location?
- What type of government controls or regulatory reporting are you subject to?
Each one of these questions can have several answers and will probably generate more questions. Each answer will have an impact on how the chart of accounts is structured. It may seem that developing a chart of accounts is not particularly high on your list of things to do as you start a new business; the amount of time and money that a well-organized accounting system may save you can be significant as the need to generate information for various purposes increases. An example of a basic chart of accounts follows this section.
Cash or Accrual Accounting
One of the decisions to be made as you start a business is whether to keep your records on a cash or accrual basis of accounting. The cash basis of accounting has the advantage of simplicity and almost everyone understands it. Under the cash basis of accounting, you record sales when you receive the money and account for expenses when you pay the bills. The increase in your cash balance at the end of the month is how much you made.
Unfortunately, as we all know, the business world is not always so easy. Sales are made to customers and you sometimes must extend credit. Your business will incur liabilities which are due even though you may not have received the invoice or have the cash available to pay them.
Most users of financial statements such as bankers and investors are accustomed to the accrual basis and expect to see them prepared using this method. Once you become familiar with them, they provide a much better measuring device for your business operations than cash basis statements.
For certain taxpayers, it may be possible to keep books for income tax purposes on a different basis than for financial statements. It may be more advantageous (less tax) for you to do so. Your Chartered Accountant can advise you on the advantages and feasibility of doing this in your particular circumstance.
Accounting Records and Record Keeping
Another question, which the owner of a business must answer, is “Who will keep the books of the business?” Will you or your spouse do it, will the receptionist or a secretary double as a part-time bookkeeper, will you have a bookkeeper that comes in periodically, or will the volume of activity be such that a full-time bookkeeper will be required?
Very often the owners of a business decide to keep the books themselves and underestimate the commitment they have made to other phases of the operation and the time required to maintain a good set of financial records and books of account. As a consequence, the record keeping is often low priority and must be caught up later. This approach, though rarely planned, can require a substantial expenditure of time and money. While it is important for the owners of a small business to maintain control and stay involved in the financial operations of the enterprise, this can be achieved by maintaining close control over the cheque signing function and by scrutinizing certain records. Your enterprise’s Chartered Accountant can help develop a good program of record keeping duties for you, your employees, and any outside bookkeepers you may engage.
The Importance of Computers
The computer is probably the single most valuable invention for bookkeeping and accounting since the advent of double entry bookkeeping. If your business includes any of the following, then a computer would be a useful tool in your business:
- Many repetitious or routine tasks.
- Lots of paperwork; i.e. payroll cheques, invoices, purchase orders, mailing labels.
- Lots of general correspondence.
- Written reports, contracts, newsletters, catalogues or brochures.
Your Chartered Accountant knows about both your business and computers so he or she can take much of the confusion out of the selection process by assisting you in the purchase and installation of your computer software needs.
There are a number of very good, easy to use accounting software systems, which are commercially available, but none of them will solve the problems of inaccurate or poor quality financial records. All they will do is generate bad information faster. If you want to use a computer-based accounting package, either in your own business or through your Chartered Accountant, it is imperative that you generate accurate information to be entered into the system.
The real value of the computer becomes apparent once it is running smoothly in your business. Your Chartered Accountant can then function in the capacity for which he or she was trained, not as a “number cruncher” but as your business advisor, consultant, and strategist. Both of you can focus not on producing reports for various regulatory agencies but on analyzing your business to make it more profitable.
Illustrative Chart of Accounts
Current Assets:
Long Term Investments:
Property, Plant and Equipment:
Intangible Assets:
Current Liabilities:
Other Liabilities
Shareholder’s Equity
Sales and Related Accounts:
Operating Expenses:
Other Revenue:
Other Expenses:
Income Tax:
HIRING OF STAFF
One of the major decisions to be made in the growth of a business is the hiring of staff. In Ontario, employment practices regarding occupational health and safety, minimum wages, working hours and the like are regulated by the Ontario Ministry of Labour.
A summary of a number of the important labour issues are administered by the Ontario Ministry of Labour – Employment Standards Branch who can respond to queries on a number of matters.
(www.gov.on.ca/lab/english/es/)
Minimum Wages
The Provincial government establishes and revises periodically a minimum hourly wage, which must be paid by employers. There are a number of special categories such as for students and liquor servers. The Employment Standards Branch can provide a list of the current minimum wage by employment category.
Vacation Pay
Vacation pay benefits apply to full-time, part-time and student labour. Generally, new employees receive a vacation pay entitlement of 4% of total wages. Employers and employees each have certain rights regarding the timing of the vacation time to be taken.
Other Issues
- Public Holidays
- Termination pay
- Overtime pay
- Pay equity
- Special rules for agricultural and transportation workers
Workplace Safety and Insurance
Within 10 days of hiring a non-shareholder employee, most new businesses are required to register with the Workplace Safety & Insurance Board; certain industries are exempt.
Employer Health Tax (EHT)
The tax is applied to all wages paid in Ontario in excess of $400,000 in a year. The program is administered by the Employer Health Tax division of the Ministry of Finance.
Employee Source Deductions – Tax, EI, CPP, etc.
In addition to the above, the employer must obtain an employee payroll source deduction account as part of obtaining a Business Number from the CCRA.
SELECTING A FISCAL PERIOD (YEAR END)
Unincorporated Businesses
Although a non-calendar fiscal year can be adopted for accounting purposes, individuals and partnerships with one or more individual members must report income for income tax purposes on a calendar-year basis. The easiest way to accomplish this is to adopt a December 31 year end. The implications of choosing a non-calendar fiscal year end should be reviewed with your tax advisor before proceeding.
Incorporated Businesses
Incorporated businesses are not required to report income on a calendar year basis and as a result are free to choose a non-December 31 year end, provided it does not exceed 53 weeks from the date of incorporation. The fiscal period need not be established at the time the business commences. It may be established when the first tax return is filed for the business.
There are a few tax advantages to choosing one fiscal year end date over another for an incorporated business. Fiscal periods ending after July 5 can offer some flexibility in terms of timing the payment of any owner-manager remuneration.
The Annual Business Cycle
Choosing a fiscal period when the business is at the lowest point in its business cycle can reduce the amount of accounting for inventory, accounts receivable, accounts payable, etc. This can make the year end accounting easier for all concerned.
Related Businesses
If there are other related businesses, there may be some economies realized in having a common fiscal period for these businesses. On the other hand, tax advantages may be realized by having different fiscal periods. All aspects should be considered when selecting the appropriate year end for the business.
FINANCING MATTERS AND THE BUSINESS PLAN
The business plan is critical to the new business. This plan is the blueprint to financial viability of the planned enterprise. Your accountant can assist in drafting the projected financial results and perhaps in establishing a budget.
The importance of controlling and having adequate cash flow will quickly become apparent when drafting the plan. Suppliers wish to be paid within the time allowed and should the business be continually late in payment or unable to pay because of excessive investments in inventory, equipment etc., the continued existence of the business could be threatened. With the use of computerized spreadsheets, cash flow forecasting using various assumptions is not a difficult task.
One of the first sources of financing a new business is the capital of the owner, friends and relatives. Other sources of external financing include most commonly the chartered banks, credit unions, trust companies and the Business Development Corporation. Venture capital loan corporations typically will take an ownership position in the company.
Leasing is a form of financing normally associated with the acquisition of capital assets.
Your Chartered Accountant can often introduce you to these financial institutions and in many cases be familiar with the lending policies of the institution.
REGISTRATION AND REGULATORY BODIES
The government, in the interest of protecting public safety, restricts the creation of certain businesses by requiring regulatory licenses or certification. Examples include the regulations and certification requirements of those involved in automotive sales, restaurants, servicing and repairs. The Ministry of Consumer and Business Services (www.cbs.gov.on.ca) can advise of these regulations, if any and can be reached at (416) 326-8555 or 1-800-268-1142
Municipal restrictions should also be addressed. Through their licensing, zoning and bylaw regulation, restrictions can be placed on locations in which a business is allowed to operate. The clerk’s office in the municipality can advise on these matters.
INSURANCE
Business insurance is an often-overlooked cost of a new business. Insurance, like any other service or commodity, must be measured on a cost-benefit basis. Your Chartered Accountant and insurance agent can assist in making that determination. Co-insurance in which the insurance company and the insured share the risk may be the most cost-effective alternative.
In addition to conventional types of insurance against loss due to fire, theft, and product liability, other types to consider are:
Business Interruption Insurance
Should the business be unable to operate for a period of time, without business interruption insurance the cash flow harm could imperil the continuation of the business.
Employee Bonding
This is important to businesses with employees who have access to significant cash. In some cases, Regulatory bodies will require this type of insurance.
Umbrella Coverage
This type of insurance covers losses exceeding the normal coverage and usually pertains to liability of various sorts to protect the net worth of the owner or the business.
Wage Loss Replacement
In many situations, owner-managers may wish to consider wage loss replacement coverage other than Workplace Safety and Insurance to ensure adequate coverage at reasonable cost.
Telephone Numbers, Addresses and We websites
CCRA Tax Services Offices and Tax Centres
St. Catharines
32 Church Street
P.O. Box 3038
St. Catharines, ON L2R 3B9
Hamilton
150 Main Street West
P.O. Box 2220
Hamilton, ON L8N 3E1
St. John’s, NF
Tax Centre
290 Empire Avenue
St. John’s, NF A1B 3Z1
1-800-932-1728
Summerside, PEI
Tax Centre
275 Pope Road
Summerside, PE C1N 5Z7
1-877-427-1321
Sudbury
1050 Notre Dame Avenue
Sudbury, ON P3A 5C1
Business Enq. & Registration
1-800-959-5525
Corporations Income Tax (Ontario)
Ministry of Finance
Corporations Tax Branch
P.O. Box 622
33 King Street West
Oshawa, ON L1H 8H5
Tel: (905) 433-6500
Tel: 1-800-263-7965
Fax: (905) 433-6998
St. Catharines
Government Info Centre
301 St. Paul Street, Ground Floor
St. Catharines, ON L2R 7R4
Tel: (905) 704-2111
Fax: (905) 704-2003
Hamilton
Government Info Centre
119 King Street West, Lobby
Hamilton, ON L8P 4Y7
Tel: (905) 521-7825
Fax: (905) 521-7851
Employer Health Tax Regional Offices
Ministry of Finance
Employer Health Tax
213 King George Road
Brantford, ON N3R 6S8
Tel: (519) 754-4849
Tel: 1-800-461-3806
Fax: (519) 758-2239
Ministry of Finance
Employer Health Tax
77 City Centre Drive, Suite 200
Mississauga, ON L5B 1M5
Tel: (905) 273-9490
Tel: 1-800-265-9969
Fax: (905) 949-3389
Ministry of Finance
Employer Health Tax
33 King Street West
Oshawa, ON L1H 8P5
Tel: (905) 436-4561
Tel: 1-800-265-9005
Fax: (905) 436-4474
Employment Standards
Ontario Ministry of Labour
Main Office
400 University Avenue, 14th Floor
Toronto, ON M7A 1T7
Tel: (416) 326-7160
Fax: (416) 326-6546
District Offices
Niagara District Office
Schmon Place
301 St. Paul Street, 8th Floor
St. Catharines, ON L2R 7R4
Tel: (905) 704-3994, 1-800-263-7260
Fax: (905) 704-3011
Hamilton District Office
1 Jarvis Street, Main Floor
Hamilton, ON L8R 3J2
Tel: (905) 577-6221, 1-800-263-6906
Fax: (905) 577-1324
Peel South District Office
1290 Central Parkway West, 4th Floor
Mississauga, ON L5C 4R3
Tel: (905) 273-7800
Fax: (905) 615-7098
Business Registration
Ministry of Consumer and Business Services
Companies Branch
393 University Avenue, 2nd Floor
Toronto, ON M5G 2M2
Tel: 1-800-361-3223
Retail Sales Tax
Ministry of Finance
Retail Sales Tax Office
1600 Champlain Avenue, 2nd Floor
Whitby, ON L1N 9B2
Tel: (905) 432-3332
Tel: 1-800-668-5810
Fax: (905) 435-3535
Ministry of Finance
Retail Sales Tax Office
119 King Street West, 15th Floor
Hamilton, ON L8N 3Z9
Tel: (905) 521-7504
Tel: 1-800-263-9229
Fax: (905) 521-7868
Workplace Safety & Insurance Board
Head Office
Simcoe Place
200 Front Street West
Toronto, ON M5V 3J1
Tel: (416) 344-1007
Tel: 1-800-387-0080
Local Offices
Lake-Carlton Plaza
301 St. Paul Street, 8th Floor
St. Catharines, ON L2R 7R4
Tel: (905) 687-8622
Tel: 1-800-263-2484
Fax: (905) 687-7117
Standard Life Building
Plaza Level
120 King Street West
P.O. Box 2099, Station LCD 1
Hamilton, ON L8N 4C5
Tel: (905) 523-1800
Tel: 1-800-263-8488
Fax: (905) 521-4502
Important Websites
Canada Customs and Revenue Agency (CCRA)
www.ccra-adrc.gc.ca
Business Number Registration
www.businessregistration.gc.ca/
Ministry of Finance – Ontario
www.gov.on.ca/FIN/hmpage.html
Ontario Ministry of Labour – Employment Standards Board
www.gov.on.ca/ca/lab/english/es/
The Ministry of Consumer and Business Services
www.cbs.gov.on.ca
Workplace Safety and Insurance Board
www.wsib.on.ca
CHECKLIST FOR NEW BUSINESSES
- Source Deductions
- Workplace Safety and Insurance
- Employer Health Tax
- Business Licenses
- Zoning and Bylaw Regulations
- Building Permits
- Fire and Liquor Regulations
- Licensing requirements in regulated industries
- Food and Drug Act