The Importance of Having an Accountant for Your Business
There are a number of reasons to operate your business through a corporation (check out our blog about reasons to incorporate here), but the tax benefits that are available to corporations is one of the most important.
Accordingly, if you are trying to decide whether or not you should retain an accountant for your corporation/business, the answer is that you absolutely should. An accountant understands the tax benefits and credits that are available to you. In addition to minimizing your taxes, maximizing your savings, reducing costly mistakes and ensuring compliance, working with an accountant will give you peace of mind and save you time that is better spent on what you know best – your business.
Of course there is a cost to working with an accountant. When you incorporate, you are creating a new person at law and this new person has its own identity, its own tax number, and has to file its own tax return. By incorporating, you have automatically taken on a new obligation. In addition to filing a personal tax return each year, you will also have to file a tax return for your new corporate person.
In order to understand why you need an accountant, it’s important to understand some of the general Tax Benefits available to corporations:
- Tax Deferral. By forming a corporation, you can control the money you pay yourself. Effectively, you control the amount of personal income you’ll have to declare each year on your personal tax return. If you were operating your business as a sole proprietor, all of your taxable income (ie. Your revenue less expenses) would be reported on your personal tax return in applicable financial year, and tax would be payable at your personal marginal tax rate.
- Small Business Deduction. If your company qualifies as a Canadian Controlled Private Corporation (meaning that it is not controlled by non-Canadians or public corporations), you may be able to take advantage of the small business deduction. The small business deduction is a reduced rate of tax (or a tax credit) that is applied on the first $500,000 of the Corporation’s active business income.
It is important to note that not all CCPC’s qualify for this small business deduction. For example, corporations which are considered personal service corporations will not be entitled to the small business deduction. In addition, you may have to share the small business deduction limit (ie. the $500,000) with associated companies. Even if you don’t qualify for the small business deduction, there are other reasons to incorporate, including other tax benefits (see article).
- Lifetime Capital Gains Exemption. The lifetime capital gains exemption is a forward-looking consideration when you’re starting your business. Generally speaking, you have to pay capital gains tax on the proceeds of sale of investments, including for example the sale of real estate (other than your principal residence). In addition, the proceeds of sale of the shares of a corporation that a Canadian (PR or citizen) has owned for a minimum of two years may be exempt from capital gains tax on a maximum of approximately $800,000 during each individual’s lifetime.
- Income Splitting. You may also be able to benefit from certain income splitting arrangements with family members. The basic premise is simple – by issuing family members shares of the corporation, dividends can be paid to lower income earning family members. Those family members will then declare the dividend income on their personal tax returns. Since they are lower income earners, they will pay less tax on that money. The concept is simple, but it’s not that easy. In the past a higher tax was applied on income that was split by parents with their children so the parents could reduce their personal taxes. New rules that were enacted in 2017 expanded the tax that can be applied on split income to adults. Nevertheless, income splitting is still available in certain circumstances and understanding whether or not tax will apply on split income is an important tax consideration.
So why do you need an accountant.
The simple answer is that taxes are hard to understand and figure out and the chartered professional accountant is going to be able to help you navigate this and see the forest through the trees!
An accountant will understand if you can split income with family members or rely on the small business deduction to reduce your corporate taxes. They will let you know whether an association will be created when you incorporate a second company and they will help ensure that you keep your accounting/financial records in good order.
Often people will incorporate on their own and then realize the cost to fix the initial mistake in their articles of incorporation is more than they would have paid if they worked with us from the start. Similarly, you don’t want to incorrectly rely on the small business deduction if you’re a personal service corporation, or pay a dividend to a family member and realize later that the tax on split income had to be applied. Mistakes on taxes can be costly. Reassessments by CRA done years after your tax return has been filed may not only result in additional tax payable to CRA but could result in interest payable on the difference between what you actually paid and the reassessed amount you should have paid during that period.
In addition, your relationship with an accountant will continue through your corporation’s life and is an important relationship to foster. Your accountant will act as a trusted advisor for your business as it grows. They will be able to look at your personal and corporate financial records and offer tax planning advice, including when you should pay yourself, how much you should pay yourself, whether or not you should pay family members, whether you should freeze certain assets for estate planning purposes or distribute assets to minimize taxes.
When should you engage an accountant?
The best time to engage an accountant if you don’t already have one, is at the incorporation stage either before or quickly following the incorporation. If you have decided to incorporate without speaking to an accountant first, that’s ok. You can read our articles about whether or not to incorporate here.
However, if you are incorporating, having an initial consultation with an accountant to determine what tax accounts you should register for (ie. HST/Payroll), what the year end for your corporation should be and to set up your administrative bookkeeping processes will minimize costs and mistakes and maximize savings. If you get an accounting consult for your start-up, you may not need to speak to an accountant until your tax return is due.
A bookkeeper is also an important part of the accounting process, and most accountants will be able to introduce you to bookkeepers who are familiar with the monthly bookkeeping requirements for your business. While many still use spreadsheets to track accounting, web-based accounting software can make it easy to enter the necessary data and have a bookkeeper simply complete monthly reconciliations. At the end of the day, when it comes to bookkeeping, sometimes the question is not can you do it on your own, but will you? Similar to an initial investment with an accountant, it may also be worth paying a bookkeeper to help set up your backend accounting processes, billing, expense reporting, sales and inventory tracking, etc. Even though at the start, you may not need a bookkeeper on a regular basis, as your business grows, your bookkeeping could take a backseat and that can be costly.
Keep in mind that when it comes to corporations, bookkeepers and accountants serve different roles, both of which are valuable. If you are worried about accounting costs as you start your business, speak with an accountant to understand their fees and scope of work. You will be able to keep fees down by understanding how to record revenue, track and file expenses, reconcile on a monthly basis and record all other financial transactions of the business.
How to find the right accountant.
It can be hard to know whether your accountant is the right one for you. You want an accountant who understands your business needs and whose advice you can trust and rely on.
In addition to relying on online reviews or finding someone who provides services in your area, getting recommendations from a trusted friend, colleague or professional can be quite valuable.
At Ordower Law we have built relationships and work with a number of accountants across Ontario and work closely with them in connection with incorporations, annual compliance, tax reorganizations and purchase/sale transactions. The accountants we know understand the accounting needs of small and medium sized businesses and are responsive to new clients. Whether you simply want to have contact information for someone you can call when you have to file your tax return, you want an initial consultation to get your backend bookkeeping processes set up, or you want to retain an accountant for future tax filings, we are happy to make the introductions.
We strongly believe that having proper accounting practices in place and a trusted Chartered Professional Accountant in your corner will help support the continued growth and success of your business.
Let us know if you would like an introduction to an accountant by clicking here.
For more general information on incorporating in Ontario or starting a business in Ontario, please view our guide here: Incorporate in Ontario and Canada- Everything You Need to Know.
