Starting a small business and understanding the relevant tax rules

Frances Cheng MBA, CFA, FRM, CFP, FCSI Investment Advisor and Financial Planner

BMO Nesbitt Burns

(905) 763 3764 Frances.cheng@nbpcd.com

Frances Cheng, MBA, CFP, CIM, FCSI

Over 10 years experience in corporate finance, institutional banking, investments and financial planning in Asia and in Canada.

Guest Speaker at different community forums

Guest Professor of Finance, Economics and Accounting at Kingston College.

Author of tax-planning articles. Assist affluent individuals manage their

wealth more effectively. Custom-made financial solutions to reach

an individual’s long-term objectives

My Services Uniquely available to you!

Full financial planning Tax Planning Analysis Estate Planning Analysis Investment Planning, Portfolio

Strategies, Trend Analysis, Fundamental Analysis

Insurance Planning Analysis Retirement Planning Analysis Education Planning Analysis

The Entrepreneur The Need for your products or service A self-evaluation of your

preparedness A basic understanding of your

business The development of a business plan $$$

Ask yourself : Why do you want to be in business? Are you confident you can succeed? Do you have any experience in the

choice of business, if not, how do you obtain it?

Are you a risk taker? Do you understand the implications of your decisions?

Should you maintain your current employment or will your business provide an adequate income by itself?

Is your family supportive and understanding?

Rewards, Risk and Pitfalls Management Planning The Business Plan Other Resources

New Business – Start from Scratch

Advantages Potential lower overhead

and lower start-up costs Greatest personal

freedom Ability to enter new

markets or introduce new products

Ability to change business practices or direction quickly

Disadvantages Greatest risk Requires

significant personal and business planning

Clientele must be developed

Buying an Existing Business

Advantages Limited risk Significant personal

freedom Established service or

product, clientele, method of operation, staff and name

Cash flow is being generated

Relationship established with suppliers and banks

Disadvantages Product/service may

be obsolete or market shrinking

No growth potential AR may be too high or

uncollectable Seller may have

hidden reasons for selling that have resulted in business deterioration over a period of years

Is Franchising For You? Check the franchisor’s credit

background Request and analyze the franchisor’s

most recent financial statements Obtain from the franchisor all the

public information available on its operations

Ask for a copy of the franchisor’s trademark application or registration

Is Franchising For You? Request a list of all franchisees with

their locations and telephone numbers

Complete the application or prescreening form

Obtain a full set of legal documents from the franchisor

Read the deposit agreement carefully and ensure it is refundable

Is Franchising For You? Visit the site and analyze the site,

available descriptive material, surrounding population, average annual income and age distribution.

Review the pro forma financial statements with an accountant

Obtain all information about franchising available from the bank

Is Franchising For You? Inform your spouse and family

completely about what you are doing Engage a franchise lawyer to review all

of the documents including trademark registration and the franchise agreement.

Decision will rest with you, as long as it makes sense

Seek professional help at all time www.cfa.ca (Canadian Franchise

Association)

Location Economic/business considerations Residential, social and cultural

opportunities of the community Zoning, building, transportation,

utilities, taxes, lease, approvals, Protection, neighbourhood,

restrictions, suppliers, your customers, your competition etc.

Funding Requirement : Initial costs include :

Land Building Fixtures Machinery Supplies Vehicles Pre-opening expenses Opening inventory

Funding Requirement : Daily operating costs include :

Rising inventories Payroll Rents Taxes Advertising AR

Sources of Funding Small business loan from

banks : Short term loans Long term mortgage loans Loans against inventory or AR Working capital

Sources of Funding Other sources of funding :

Insurance companies Trust companies Credit unions Commercial Credit and

Acceptance companies Venture capital loan companies Factoring companies

Business Term Loans Up to $250,000 Flexible repayment terms

(fixed/variable) Up to 5-year term on 15-year

amortization May qualify for government-

guaranteed loan

Options for Funding Public and private

placements of debt and equity

Loan underwriting and syndication

Securitizations Monetizations Trade finance

services

Multi-tiered financing

Acquisition financing

Term financing Project financing Leasing of capital

equipment Tax-efficient

structuring

Leasing Relatively high interest, totally tax-

deductible Also arranged for machinery,

vehicles and office equipment, to avoid heavy capital cost outlays

Reducing cost, defer GST & PST payments

Other alternatives ? Internal sources : inventory

control, cash management, credit management etc.

Friends are not usually the silent partners as originally perceived

Employees : Are they the right ones to ‘lock in’?

Bookkeeping Must keep adequate records

from the start MEOI publication : Record Keeping

Made Easy

Credit Control Maintain proper cash flow Risk can be minimized by :

Know your customer Make sure the terms are clearly understood Bill promptly Demonstrate that you expect prompt

payment Maintain dated AR Follow up on the payment if not received as

planned

Government Support COBSC 1-800-567-2345 www.cbsc.org/ontario

Venture Capital Companies providing VC take an

equity position, range from a minority to 40% range, I.e. board of directors and control over matters, dividends payout, major capex etc.

Provide advice and consultation, financial planning and control, underwriting, accounting and marketing.

VC prefers management with proven ability

Leasing Consult a qualified, reputable real

estate firm that specializes in commercial and industrial leasing

Leasing Retail Space Location & size If small space required, better in

an indoor mall, though at a higher rate per sq.ft., heavier traffic and greater exposure to impulse buyers

Good Space planning and analysis

Types of Leases Wholly net against percentage Wholly net : all operating costs

Heating, electricity, taxes etc. Metered directly or charged on a

proportionate share basis Against % : rate quoted as the greater

of either x dollars per s.q. or s.m. p.a. or a stated % of gross annual sales,usually 6-8% for most retailers

Industrial Space For light industrial use : no big

difference from that of most other business transactions

Rule of thumb : ratio of office to warehouse/mfg : 1 to 10

Total space requirement, physical space layout, ceiling height

Method of shipping-

Industrial Condominium Equity built-in, significant tax

advantages Not less than 500 s.m. I.e. your

space requirement is fairly constant

Owning your Premises Tax Benefits : deductions of

interest payments, financing plus CCA or dep’n.

Capital appreciation Equity build-up Cash flow : lease out surplus space

to tenants

Others: Company cars, trucks, fixtures and equipments Leasing to ease cash flow

problems Avoid significant capital outlay Cost of leasing deductible

CCA commonly used rates

Automobiles 30%

Computer hardware 30%

Computer software 100%

Furniture & fixtures 20%

Manufacturing and processing machinery

30%

Patents 25%

Leasehold improvements 5 yrs

Ratios Current Ratio

Current AssetsCurrent Liabilities 2 : 1

Quick Ratio

Cash+AR+quick assetsCurrent Liabilities 1 : 1

Operating Expenses Ratio Operating ExpNet Sales

Debt to Equity Ratio

Total debit (or Liab.)Networth 1.5 : 1

Ratios

R.O.E. Net IncomeEquity

Profit MarginNet ProfitsSales

Receivables days

Ratio of AR x 365 Sales

Inventory Turnover

Net Sales Inventory

Use of Professionals The Banker The Lawyer The Accountant The Computer system (from day 1) Business Research Aids

Business Reports : D&B Credit Bureaus/Equifax

The Registration, incorporations and Licences Sole Proprietorship Registration

MOCBS (416) 314 8880 www.cbs.gov.on.ca

Articles of Incorporation Corporate Services Section (416) 314

0096 NUANS Name research report

Co-operatives www.fsco/gov.on.ca Financial Services Commission of Ontario

The Registration, incorporations and Licences Partnerships and LP

Under Business Names Act Publications Ontario

What Form of Business Organization Is Suitable?

Sole Proprietorship Partnership Corporation

Sole Proprietorship Advantages

Low Start-up costs Greatest freedom

from regulation Owner in direct

control Minimal WC req’t Tax advantage All profits to owner

Disadvantages Unlimited

liability Lack of

continuity Difficult to raise

capital

Partnership Advantages

Ease of formation Low start-up costs Additional sources of

VC Broader mgt base Possible tax

advantage Limited outside

regulation

Disadvantages Unlimited liability Lack of continuity Divided authority Difficulty in raising

additional capital Hard to find

suitable partners

Corporations Advantages

Limited liability Specialized

management Ownership is

transferable Continuous existence Legal entity Possible tax

advantages Easier to raise capital

Disadvantages Closely regulated Most expensive

form to organize Charter

restrictions Extensive record

keeping necessary

Tax rules can be more complex

Licenses Municipal Licenses

Must conform to zoning and bylaws regulations

Fees, and application requirement contact the building of bylaw officer in the municipality

Resource-Based Tourist Establishment Licenses Under revised Regulation 1037 of

Tourism Act Ministry of Tourism and Recreation 1-800-561-3399

Liquor Licenses Alcohol and Gaming Commission of

Ontario www.agco.on.ca 1 800 522 2876

Import-Export COBSC 1 800 567 2345 Team Canada 1 888 811 1119 Toronto Region 1 800 461 2096

Delivery and Transport Licenses Motor Vehicle Transport Act

(Canada) Ministry of Enforcement Office Carrier Sanctions and Investigation

Office, Ministry of Transportation 1 800 387 7736 www.mto.gov.on.ca

Bonded Manufacturers and Bonded Warehouses The Excise Act Surety Bond : issued by an

insurance company,guaranteeing the performance of a contract.

Include : contract bonds, license and permit bonds, court and probate bonds

Insurance Bureau of Canada 1 800 387 2880

www.ibc.ca

Special Regulatory Licenses

MOCBS 1 800 268 1142

19 Regulatory Acts The Business Practices Act The Bailiffs Act The Consumer Protection Act The Consumer Protection Bureau

Act The Consumer Reporting Act The Collection Agencies Act

The Motor Vehicles Dealers Act The Motor Vehicle Repair Act The Paperback and Periodical

Distributions Act The Prepaid Services Act The Real Estate and Business

Brokers Act

The Prepaid Services Act The Real Estate and

Business Brokers Act The Travel Industry Act The Cemeteries Act The Funeral Directors

and Establishment Act The Condominium Act The Discriminatory

Business Practices Act The Debt Collectors Act The Theatres Act The Athletics Control Act

Food & Drug Act and Regulations Health Canada 416 973 1600 www.hc-sc.gc.ca

Canadian Food Inspection Agency Agriculture Canada

416 973 1438

Packaging and Labelling Industry Canada 416 954 1405 www.competition.ic.gc.ca

Product Safety Health Canada

Technical Standards Ontario Ministry of Consumer and

Business Services www.tssa.org 416 325 2000

Building Code Ministry of Municipal Affairs and

Housing 416 585 6666

Pollution Control Ontario Ministry of Environment

and Energy 416 325 4000 www.ene.gov.on.ca

Weights and Measures Under the Weights and Measures

Act Measurement Canada Office of

Industry Canada

Taxation

Provincial Tax Federal Tax

Ministry of Finance Tax Offices Toronto 416 222 3226 1 888 565 6433

Provincial Tax – Retail Sales Tax 8% : for most goods, labor cost on

installation, maintenance, prepared food products (>$4)

10% : on liquor, beer and wine if consume in restaurants (12% if purchased from retail outlets), admission for amusement (>$4)

5% : lodging, hotels, motels Tax Exempt : certain food products,

farm implements, and children’s clothing

Corporate Tax Under Ontario Corporations Tax

Act Income Tax : levied on taxable

income Capital Tax : levied on taxable

paid-up capital

Corporate Tax : Income Tax The general rate : 12.50% The effective rate : 6% on active

business income that qualifies for the federal small business deduction

Corporate Tax : Capital Tax The general capital tax rate : (Oct 1 2001) :

0.3% for corporations with taxable paid-up capital in excess of $2M but less than $2.4M

Flat rates of capital tax (I.e. $100, $200, $500) eliminated effective May 5 99.

Exempt : Family farm, fishing, credit unions (not F.I.), and certain mutual insurance corp.

Flat rate for mortgage investment corporation : $100

Corporate Tax : Capital Tax File Ontario Corporations Tax and

Annual Return (CT 23) within 6 months after its taxable year-end.

If total tax > $2,000, monthly tax installments. Otherwise, annual payment.

Gasoline Tax Direct tax collected by service

stations and remitted through their suppliers

No registration is required for gasoline.

Fuel Tax Direct tax collected by retailers and

remitted through their suppliers. Untaxed middle distillate fuel : coloured

red for non-taxable uses, e.g. heating, cooking or generating power in unlicensed equipment used for commercial, industrial or institutional purposes.

Use of coloured fuel in a licensed motor vehicle or in unlicensed recreation equipment is prohibited.

Fuel Tax Operators of diesel-powered

commercial motor vehicles traveling into or out of Ontario are required to obtain and place on their motor vehicles a Fuel Tax registration decal issued by the Motor Fuels and Tobacco Tax Branch.

Tobacco Tax Vendor’s permit issued under the

Retail Sales Tax Act Retailers must ensure their

wholesale supplies holds a wholesale dealer’s permit (penalties for purchasing from non-collectors).

Retailers will collect and remit 8% retail sales tax on all tobacco product sold.

Stocking or selling of cigarettes that do not bear an Ontario tax mark is prohibited (effective Nov 1 90)

Permits – Fuel and Tobacco Ministry of Finance Motor Fuels and Tobacco Tax

Branch 905 433 6389 Fuel Tax 905 433 6394 Tobacco Tax

Land Transfer Tax Exemption : May be available where

the transfer of land is from an individual to his family farm corporation or family business corporation

Retails Sales Tax may still be payable when chattels associated with the land are transferred.

Contact : Ministry of Finance 905 433 6361

Federal Taxes – GST Goods and Services Tax, base rate

7% Basic groceries, 0% Certain health care or financial

services GST exempt.

Annual sales > $30,000 is required to register under GST.

Input Tax Credits Businesses that are registered for

GST are able to claim a credit for GST paid or payable on business purchases.

To determine whether tax should be remitted or a refund claimed.

Excise Taxes Excise Tax applies before GST. May obtain information from local

district office “GST Guide for Small Business” “Simplified Accounting Methods for

Small Businesses” 1 800 959 5525

Federal Corporations Tax Monthly installments to CCRA. Due in 6 months after the

corporation’s year end.

Personal Tax Taxed on worldwide income Due Apr 30 of the following year Quarterly installments under some

circumstances Sole proprietorship and partnership

income is included on the individual tax return and taxed at normal rates.

Capital Gains Tax Only a portion of capital gains or

losses are included in income (currently 50%)

Losses can be offset previous gains, or carried forward to future years.

Exempt : personal principal residence

Source Deductions Business are to remit CPP, EI and

Income Tax on a regular basis. The frequency depends upon the pay period and the amount remitted.

Contact CCRA : Toronto 1 800 959 5525

Employment Health Tax (EHT) Under Employer Health Tax Act Based on employees who report for

work at a permanent establishment in Ontario and

Employees who do not report for work at a permanent establishment but who are paid from or through the employer’s permanent establishment in Ontario

Employment Health Tax (EHT) Since 1999 eligible employers are

exempt from tax on the first $400,000 of remuneration.

EHT for self-employed individuals has been eliminated

Contact : Ministry of Finance 1 800 565 6433

Labour Regulations

The Ontario Ministry of Labourwww.gov.on.ca

Employment Standards The Employment Standards Act “A Guide to the Employment

Standards Act” Who is covered by the Act and its

general application Hours of work, min. wage, home workers, public

holidays, overtime pay, vacation pay, equal pay for equal work, benefit plans, pregnancy leave and parental leave, termination of employment, severance pay, payments on termination, agricultural workers, domestics, lie detectors, retail business establishments, general administration etc.

Minimum Wage

General hourly rate $6.85

Hourly rate for persons employed to serve liquor in licensed premises

$5.95

Student, hourly rate, < age 18 who work 28 hours per week or less during the school term and more or less than 28 hours per week during school holidays

$6.40

Vacation Pay Entitled to 2 weeks vacation with pay,

if after one year of service, must be given at least 4% of total wages for the year.

If terminate before 1-year period, must pay 4% of total wages, within 1 week of termination.

Vacation pay benefits apply to full-time, part-time and student employees.

Equal Pay No differentiation pay between male

and female employees, for same kind of work except A seniority system A merit system A system that measures earnings

by quantity or quality of production or

A differential based on any factor other than sex

Source Deductions Required to remit CPP, EI and

Income Tax on regular basis. Same as Provincial source

deductions

Workplace Safety and Insurance Board Must register with Workplace Safety

and Insurance Board (WSIB), within 10 days of hiring your first full or part-time workers, include family members.

Sole proprietors, partners and executive officers are not automatically covered under WSIB, but you can apply for optional insurance.

WSIB Gain access to a province-wide network

of health and safety training and resources to help you and your workers avoid injuries and illnesses.

Protects your business from lawsuits by providing benefits for your workers.

Benefits include wage loss and disability benefits, health care costs in case of injuries and illnesses.

WSIB Help you manage the claims to

minimize lost productivity and contain costs.

Include a registered nurse to ensure your workers receive quality health care.

WSIB will determinate your rate group (share the premium within the group)

WSIB You need to provide :

An estimate of your yearly payroll Products you produce

WSIB : 1 800 387 0750 Or register through Ontario

Business Connects

Occupational Health and Safety Act Recently amended B 208 to

include training, education, research and consultation

Sources of Information Small Business Services :

www.ontario-canada.com www. enterprisetoronto.com

THANK YOU