Accounting And Business Structuring In Edmonton - Rutwind Brar LLP

Organizing your business takes a great deal of guidance, planning, consideration.

Sole proprietorships, partnerships, family businesses … each bring with them both challenges and opportunities that can impact your financial security. Ensuring that you set your business up for success from the beginning can mean the difference to your bottom line. For planning, consideration, and guidance many professionals have entrusted Rutwind Brar to identify the right solution for their business that is a custom fit.

We can help you identify the advantages and opportunities that exist through:

  • Incorporation
  • Sole proprietorship
  • Holding companies
  • Share structure
  • Income splitting, and even
  • Payroll set up

Is your business account closely integrated to your family finances? We can help you to ensure that your family business provides for the financial security of yourself and your loved ones both now and into the future. Whether your focus is on financial security or simply to save where possible on your annual taxes, at Rutwind Brar, we can help you establish a structure for best results. Contact Us today to explore your options as you establish your company’s structure.

Blog posts about Structuring Your Business

corporate accounting

Basic Accounting Concepts Every Business Owner Should be Aware Of

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When you run a business, your focus should be on operations and not on spending extensive time managing your business accounts. However, there are still some basic concepts of corporate accounting that you should be aware of. Knowing the following corporate accounting terms can help you better understand your business expenses, incomes, and financial position at any given point.

Accrual Based Accounting and Cash-Based Accounting

Accrual and cash are the two methods of accounting and only differ by the time when the expenses and incomes are recorded or recognized. In the accrual-based accounting, the income and expenses are recorded when the transaction takes place. Even if the payments aren’t received, or expenses are not paid, they are recorded in the books of account.
On the other hand, in the cash method, the incomes and expenses are recorded when the actual movement of cash takes place.

Cash Flow

Cash flow is a term that explains the flow or movement of cash and cash equivalents, basically real and virtual money, to and from your organization. The movement of funds includes various incomes from customers and clients or direct sales and expenses such as operating costs, production costs, and daily cash payments. There are two situations of cash flow that every organization faces. Positive cash flow is when there is an increase in liquid assets that enable you to make investments, settle debts, pay loans, and clear tax liabilities. Negative cash flow occurs when there is a decrease in liquid assets, which prevents you from clearing your liabilities.

Balance Sheets

A balance sheet is a type of financial statement that summarizes the assets and liabilities along with the shareholder’s equity in your business at a specific point in time. Balance sheets with these three sections help you understand the business assets and liabilities owed at specific points in time, generally at the end of every month, quarter, or year. Balance sheets are also described as the “snapshots of an organization’s financial condition.”

Gross Profit v/s Net Profit

The gross and net profits are ratios for you to assess your company’s financial stability and overall health.

  • Gross profit is calculated using the following equation:
    Gross Profit = Sales – Cost of Good Sold
    Here, the sales is the total revenue generated by selling the goods
  • Net profit is calculated using the following equation:
    Net Profit = Total Income – Total Expenses
    Here, the income is the total revenue generated, and expenses include the total costs or expenses associated with selling the goods (operating expenses, transport and other expenses, interest, taxes, etc.)

    Tax Liabilities

    Tax liability is the amount of taxation or money that your company has to pay in compliance with the current Canadian taxation laws. Taxes are imposed on various incomes, direct or indirect. The direct incomes include revenues generated from the sale of goods and payments from customers and clients. The indirect income includes revenues that you earn from a secondary source such as dividends and bank interests. If you do not report and pay the taxes owing in accordance with current Canadian taxation laws, you may become subject to additional interest and penalties.

    Every business owner should be aware of the basic business and corporate accounting concepts. However, you don’t have to be an expert. To handle these as well as other, complex accounting and financial management tasks, you can hire expert chartered accountants. Our professionals focus on providing accurate business numbers with the help of best corporate accounting software and methods.

accountants edmonton

Small Business Accounting Tips

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As a small business owner, you may decide to conduct your own business accounting. But, there are certain things you must know about accounting to minimize potential risks. Some important small business accounting tips offered by a professional chartered accountant in Edmonton are listed below:

Record Every Transaction

Recording every business transaction is crucial. All business transactions, whether a small payment made using petty cash, salaries paid to your employees, or a lump sum payment received, must be recorded. Without an accurate record, you cannot evaluate your profitability and cash flow needs.

Preserve Every Receipt and Invoice

This may seem like a big task to perform on a regular basis, but it will save time and prevent accounting confusions in the future. Preserving every receipt and invoice will give proof of every business transaction. You can take a look at the receipts in the future and get information about the transactions. If you should be audited by CRA,  they will require your receipts and invoices. An auditor will request complete information about your business expenses as they relate to the period under audit. Therefore, maintaining receipts and invoices in a file that you can refer to is crucial as any unsubstantiated expenses will be denied by the auditor.

Develop a System

To keep track of all the revenues and related expenses, you must select the best-suited system of accounting for your business. A manual record keeping system is outdated and time-consuming. You can either digitize the process with the help of Excel spreadsheets or use DIY accounting software such as Quickbooks. Or, you can hire an accountant in Edmonton who will help create a customized accounting system.

Keep your Finances Separate

If you mix up business and personal finances, things can get complicated. Accounting and maintaining records of mixed transactions can be very confusing. Hence, it is best to keep personal and business finances separate and use them for their respective purposes only. Set-up a separate bank account for your business transactions so that they can reflect in one place. Although, it isn’t legally necessary for a sole proprietor or a small business to have a business bank account, having a separate bank account keeps records distinct and will make life easier during the tax season.

Another helpful small business accounting tip is to hire an accountant in Edmonton so that you can concentrate on your business and leave the stress of accounting to a professional. Hiring an accountant in Edmonton helps you save time that you can invest in your business operations, expanding your business, and earning bigger profits.

Tax, Tips and Traps 117: Tax Ticklers…some quick points to consider…

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A review of the Income Tax Act is to be completed by June 30, 2017. The Federal Government has noted it plans to implement initiatives aimed at simplifying the system.

• Does your corporation make sales to other corporations in which you or another relative has an interest? If so, your access to small business tax rate may be affected.

• Curious about how the new federal Liberal Government has performed against their election promises? How about what may be forthcoming? The website,, tracks the progress on their promises. It notes whether the promises have been achieved, broken, in progress, or not yet started.

• How will the 2016 Federal Budget tax changes impact you? Find out using this Parliamentary Budget Officer calculator found at

Are You Prepared for Your First Corporate Tax Return?

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Are You Prepared for Your Corporate Tax Return?


For many, filing their annual taxes is a stressful situation, especially for your business. The great news for new business owners preparing for their first corporate tax return is that there is a lot that you can do to reduce the anxiety as well as save yourself some money through some proper preparation.


Organization is key

The more organized your financial documents are, the easier it is for your accountant to review and identify any potential tax savings you can access. Taking this step pro-actively can also save time and reduce the billable hours required to prepare your return. These simple steps can go a long way to submitting an organized package.

  1. Gather all of your receipts and sort them by month.
  2. Print all monthly bank statements as well as your credit card statements
  3. Attach receipts to the related invoices and/or statements to verify your expenditures.
  4. Provide a copy of your monthly income statements and balance sheets

Your receipts and statements simply serve as supporting documentation to verify your income statements and balance sheet. Collectively, this documentation serves to illustrate your sales, expenses, assets and liabilities that all factor into your tax bracket and eligibility for various exemptions.


What information do you need to provide?

Whether you are preparing your return on your own or you are working with an accountant, you will need to include the following information. When working with an accountant, ensuring that you provide this information when you submit your documentation can save delays in preparing your return.

  1. Your business registration number
  2. The address of the head office for your business
  3. The address where your records are stored
  4. The fiscal year-end of the business


At Rutwind Brar, we work with corporate tax returns for businesses of all sizes and can help you to best maximize your return and retain as much of your income as possible. Before you file your first corporate return, we welcome the opportunity to meet with you to ensure that you are prepared for tax season and are equipped with the best advice possible.






What Impact Will the Federal Budget Have On Your Taxes?

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What Impact Will the Federal Budget Have On Your Taxes?

There was a great deal of speculation leading into the recent announcement of the Trudeau government’s 2017 budget. As a business owner, you may be wondering what that means for your company’s bottom line. While there is still active debate among political analysts about the specific impacts, there are a few items that we do know will influence business.

In 2016, the Trudeau government vowed to decrease corporate taxes for small business from 11% to 9% over four years. To date, they have fulfilled the proposed decrease for year one, lowering the tax rate to 10.5%. However, much to the dismay of organizations such as the Canadian Federation of Independent Business, future reductions as outlined have been deferred.

Where business will most feel the impacts of the administrative changes implemented by the Liberal government is the payroll tax, which business analysts assess will be the most damaging for small business owners. Additionally, a 3% increase in employer costs for employment insurance will have a financial implication as well that may create some obstacles for merchants with small to mid-sized operations.

Incentives are being offered for skills training to help prepare employees for available jobs, but that may not be a benefit enjoyed by all employers. Though trades-based positions and skilled labour roles may see a significant increase in qualified domestic candidates for these jobs through this program.

While most experts and critics agree that the 2017 budget doesn’t offer much new, but rather a clarification of the platform introduced in 2016, there are some changes that you may want to consider for your business both now and over the next two years. If you have questions about what tax implications may be in store for your industry as it relates to the budget, we can work with you to identify the challenges and propose solutions.

At Rutwind Brar, our team stays on top of changing regulations and legislation to ensure that our client portfolios are adapting to change. Let’s talk today about what this budget means for you and your business.






Where Did The Money Go?  The Worst Scandals in the World of Corporate Accounting.

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Where Did The Money Go?

When you look ahead to what you envision for your company, the media attention that you may aspire to achieve is distinction in the business pages as a business success story that you hope will serve as an inspiration to others.  Certainly, nobody wants ever to find themselves the subject of front page news as occurred in these incidents, rated among the ten worst corporate accounting scandals of all time.  Some of these names and companies have been forever tarnished as a result of their misdeeds.

  1. Tyco (2002)

Tyco experienced a company decline and the loss of investor confidence when it was discovered that its CEO Dennis Kozlowski had been involved in a series of unethical business transactions using company money that were not included in the company’s financial reports.  It is alleged that Kozlowski as well as other key administrators within the organization stole $150 million from the firm and mis-represented the company’s income by an estimated $500 million.  Kozlowski and others involved in the scandal did receive time behind bars as a result of their actions.

  1. Health South (2003)

The largest healthcare provider in the United States for outpatient surgery and diagnostic and rehabilitative care found itself with a diagnosis of guilty after an extensive investigation by the Securities and Exchange Commission in 2003.  At the direction of company CEO and chairman Richard Scrushy, earnings were allegedly overstated on a quarterly basis from 1999 to 2002, inflated by $1.4 billion to meet the expectation of the company’s stockholders.  Scrushy was charged with accounting fraud and later indicted.

  1. Satyam (2009)

Collusion among the leadership at Satyam Computer Services resulted in the conviction of eleven people, including the company’s chairman Ramalinga Raju.  Upon his resignation from the company in 2009, Raju admitted to manipulating accounts in the value of $1.47 billion dollars.  In the wake of the scandal, just months after the fraudulent activity was made public, the company was acquired in whole by a competitor, while the court action played out over the next six years to convict the disgraced directors.

  1. Waste Management (1998)

Dean Buntrock, the CEO and founder for Waste Management as well as his auditing firm were found to have falsely lengthened the depreciation time of their assets which was discovered when a new administration team assumed control and conducted their own audit of the books.  The fraud, which amounted to $1.7 billion in fictitious earnings landed before the courts in a class action lawsuit which settled for $457 million and the auditing firm was levied a hefty ten figure fine.  To prevent further incidents of the same nature, the company’s new CEO has established an anonymous reporting channel for employees to come forward with any improper or dishonest behavior at any level of the organization.

  1. American International Group (2005)

Three years before the American International Group (AIG) was bailed out by the American federal government to the tune of $180 million in 2008, they found themselves embroiled in another significant financial crisis when they were alleged to have been responsible for a large-scale accounting fraud amounting to $3.9 billion.  An investigation by the New York Attorney General resulted in criminal charges for some of the executives and a fine levied in the amount of $1.6 billion.

  1. Freddie Mac (2003)

Slapped with a $50 million fine, one of the United State’s largest home mortgage financing companies was found guilty of mis-stating an estimated $5 billion in earnings.  Four senior directors with the firm were also found guilty for their individual involvement and issues civil fines for restitution amounting to more than $275,000.

  1. Lehman Brothers (2008)

Lehman Brothers was a global investment company with a 158 year legacy in the industry at the time it declared bankruptcy in 2008.  The company’s involvement in the sub-prime mortgage crisis, as depicted in the recent Hollywood blockbuster “The Big Short” included hiding more than $50 billion in loan transactions disguised as ad sales.  Their bankruptcy filing is regarded as the largest of its kind in American history and is believed to have contributed to the further downward spiral of the markets that followed their demise.

  1. Bernie Madoff (2008)

Bernie Madoff was a respected stock broker and financier with his own firm for 48 years until his career came to a sudden halt when it was discovered that he had manipulated investors out of a total of $64.8 billion.  His criminal activity resulted in the largest Ponzi scheme in history – an elaborate con where investors are paid out from the investments of new contributors instead of from the legitimate performance of their fund or operation.  While most of the scandals appearing on this list were perpetrated by individuals, their scandal is worn by a parent company.  Not in this case, the name Bernie Madoff has become infamous in investment circles and has even been lampooned in mainstream pop culture.  Madoff was sentenced to 150 years in prison in 2009.

  1. Enron (2001)

Through slick financial reporting, under the direction of Jeffrey Skilling, elaborate loopholes were created to hide billions of dollars in debt from poor management and development projects.  As a result, shareholders lost an estimated $74 billion and thousands of e16mployees and investors lost their retirement savings.  When the company was forced into bankruptcy after being discovered, the company set the bar for the largest company to do so up to that point in history.  They would later be eclipsed by Lehman Brothers in 2008.

  1. World Com (2002)

The media reported a stock market “jolt” in 2002 when World Com, an American telecommunications company announced that it had fired its Chief Financial Officer and Vice President after discovering evidence of improper accounting.  In the following weeks, it was identified that the mismanagement had resulted in $180 billion in losses for its investors through inflated reporting of assets as high as $11 billion.  In the ensuing controversy, 30,000 jobs were lost.

If You Are Newly in Business, Taxes Don’t Have To Be Stressful.

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When you have been lured by the romantic concept of becoming your own boss, you will find yourself introduced to much more than you anticipated as it relates to the administrative and financial responsibilities as a business owner.  For many, their first tax reporting period can be stressful – ensuring that you have compiled all the required documentation and can safely sign off on your return as complete without any errors can lead to many long hours and sleepless nights.  But ensuring compliance with the Canada Revenue Agency doesn’t have to be a menacing obstacle.  At Rutwind Brar, we have helped many new business owners just like you to navigate their initial tax filing with ease.


How can you avoid the pressure of the annual tax deadline and maintain the focus on your core business where your passions lie?  Here are a few simple tips to help you:


  1. Early preparation can be helpful

    While many procrastinate on their tax returns each year, often finding themselves scrambling to get their personal and business returns filed by the deadline, you don’t have to wait until the last minute.  As a business person, you know that the requirements are in place, so you can prepare your documentation and file your returns in advance of the deadline.  At the very least, you may initiate the conversation with your accountant or tax advisor months in advance to ensure that you are thorough and ready to file with confidence

  2. Deductions are legitimate

    Depending on the nature of your business, any expense that is related to that venture may be eligible as a tax deduction.  The advice of an accountant can be a saving grace in this area as they can help you to identify deductions that you perhaps didn’t realize you could claim while helping you to avoid over-reaching by including expenses that might raise red flags with the Canada Revenue Agency.  Knowing how to effectively document the real costs of running your business can mean a difference of thousands of dollars to your annual bottom line.

  3. Losses are par for the course

    Most businesses report losses in their first year of operation and it is common that companies may not turn a profit for several years.  While it is true that reporting annual losses year over year may seem perilous, a clear business plan which identifies your performance is on target for the long term goal should inspire confidence from the Canada Revenue Agency as well as other key stakeholders associated with your venture.

  4. What if you owe taxes?

    If business is booming, you may find yourself in a situation where you owe taxes to the government.  It may seem daunting to file a return which shows that your tax bill puts you in financial difficulty as you try to keep things afloat.  It is important to recognize that you can arrange payment terms with CRA that lessens the impact on your monthly cash flow and ensures compliance.  If you can’t pay in full up front, know that you’re not alone and others are implementing solutions to help them address the same situation.

  5. Getting audited isn’t really that common

    Ask anyone in business what their greatest fear is and being audited is probably high on the list of worries that many entrepreneurs may identify.  In truth, some statistics report that only about 1.6% of businesses ever find themselves subject to an audit.  Should you find yourself in this position, the best strategy is to be open and responsive to the CRA and respond promptly to notices, providing the copies of any requested documents.
    If you should find yourself facing an audit, this may be a time when you want to consult with an accountant if you haven’t already made the sound business choice to retain one to assist with your overall business accounting.  A certified accountant can help you to prepare for your audit response to facilitate the best possible outcome.


Do you still have tax questions related to your new business?  Our team at Rutwind Brar can help you to address your concerns about the upcoming tax reporting period and ensure that the process is as stress-free as possible.  Give us a call and make an appointment to talk with one of our business tax experts.


What Should You Hold Onto After Filing Your Tax Returns

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What Should I Hold Onto After Filing My Tax Returns?

If you have ever been afraid to dispose of financial records because you are not sure about if you might need to draw upon those documents at a later date, you may feel overwhelmed by the sheer volume of paperwork that you have accumulated over your adult life. If you’re looking to de-clutter or downsize, here are some handy tips about what documents you should retain and what you can safely destroy.

While it is generally considered that a three year time frame is reasonable to retain your personal tax returns, if the Canada Revenue Agency has a suspicion of fraud, they may elect to look deeper into your past. However, as a guideline, you may consider the following retention schedule for your personal financial records.

Completed tax returns

If you ask your accountant or tax preparer, they may recommend that you never dispose of your completed tax returns. In the event that there is a dispute at any time in the future about the status of your filing, you have the documentation to prove that you have. If you choose to destroy any of your returns, best practice holds that you should retain your returns and financial records for a period of seven years – and you may be mandated to do so for commercial returns.

Supporting documentation

The receipts and hard copy invoices and documents that support your annual return should be retained for as long as you hold onto the completed return for that year. When you dispose of your returns, you might also choose to take the same action with your supporting documentation for that tax year.

Special circumstances

If there is ever an special circumstance in your income tax reporting when deductions for bad debts or securities may be claimed, you should hold onto the paperwork that supports your eligibility for those claims at a later date as applicable. Working with a Chartered Professional Accountant, they can help to identify which documentation may be valuable for this type of scenario.

Real estate documents

You should ensure to retain documentation related to any property you own for the duration of time that you hold the property. Should you sell the property or dispose of the real estate through any other means, it is recommended to retain the records of that transaction for a period of three years after it has been documented as part of your tax return. As a homeowner, receipts showing investment and improvements in the home or any re-financing you pursue may become relevant at the time of sale for tax purposes, so keep meticulous records of your properties.

Investment records

If you have invested in stocks and bonds or other securities, you should retain accurate records that reflect any purchase, sale or redemption of these products and ensure timely reporting on your tax returns as applicable by jurisdiction. These records must be retained for at least as long as you hold these assets in your portfolio and for a period of at least three years after the sale or transfer of these items has been documented on your annual tax return.

Retirement Savings Accounts

There may be tax benefits and implications associated with your retirement savings accounts, so you should retain accurate records of these investments as well as any withdrawals that you make from these accounts which are considered to be additional income for your household. While you cannot often access your locked in retirement accounts, it is important to always have a record of their performance as it may relate to your overall financial picture.

If you are going through your records and considering disposal of any financial records, first consult with your accountant to ensure that you are not putting yourself at risk by failing to retain any critical items. Our team at Rutwind Brar can help you identify what you should retain and what might be safely destroyed without compromising your financial situation in the present or the future.

Tax, Tips and Tricks Issue 116

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Registered Education Savings Plan (RESP): Distribution of Funds

Amounts paid out of an RESP may be taxable, non-taxable, or may trigger a repayment of Government support. The taxation status of a receipt depends on whether it is considered an Educational Assistance Payment, a Refund of Contributions, or an Accumulated Income Payment.

Educational Assistance Payment (EAP) – An EAP is a taxable amount paid to a beneficiary (a student) from an RESP to help finance the cost of post-secondary education. An EAP consists of the Canada Education Savings Grant, the Canada Learning Bond, amounts paid under a provincial education savings program, and the earnings on the money saved in the RESP. The student includes the EAPs as income on their income tax return for the year the student receives them.

Refund of Contributions – The promoter can return contributions tax-free to the subscriber or beneficiary when the contract ends, or, at any time before. These payments are not considered income to the recipient. That said, a refund of contributions may, in some cases, trigger a repayment of Government support.

Accumulated Income Payments (AIP) – An AIP is an amount paid to the subscriber that relates to the income earned in an RESP. An AIP does not generally include: EAPs; payments to a designated educational institution in Canada; the refund of contributions to the subscriber or to the beneficiary; transfers to another RESP; or repayments under the Canada Education Savings Act or under a designated provincial program. An AIP is included in the income of the subscriber and is generally subject to an additional 20% tax rate, except where the amount is eligible for a rollover to another registered plan.

Action Item: Consider the financial consequences, tax or otherwise, on withdrawing funds from an RESP.

To read the rest of issue 116, download your copy here!

Tax, Tips and Traps Issue 115

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Losing the Small Business Deduction (SBD): Intercompany Payments

The 2016 Federal Budget proposed a number of measures to prevent the ability to multiply access to the $500,000 SBD limit, addressing several strategies which the Government perceived as inappropriate. Broad restrictions in eligibility for the SBD on payments between private corporations in general have been introduced. The restrictions as proposed are so broad that they will affect many corporations and structures where multiplication of the SBD was not a goal or even a consideration.
The measures will apply to taxation years that begin on or after March 22, 2016. For example, a corporation with a December 31 fiscal year-end will first be subject to these restrictions in the year ending December 31, 2017. A corporation with a March 31 fiscal year-end will first be affected in the year ending March 31, 2017.

In general, these new Specified Corporate Income (SCI) rules will restrict access to the SBD on any active business income (ABI) earned from providing services or property to another private corporation (PayerCo) where there is common ownership. Such income will not be eligible for the SBD.

Consider the situation where ServiceCo provides services to PayerCo, and PayerCo pays a fee back to ServiceCo.

Payments will be restricted by the SCI rules where an interest in PayerCo is held by any of: ServiceCo (the corporation providing the service and receiving the fees); any shareholder of ServiceCo; or, any person who does not deal at arm’s length with any shareholder of ServiceCo.

There is no de minimis ownership interest threshold – based on the draft legislative proposals of July 29, 2016, even one share of thousands will cause these restrictions to apply. In addition, even indirect interest can trigger the SCI rules. For example, if you own 10% of ServiceCo, and your brother-inlaw owns one share of thousands issued by PayerCo, these rules could apply.

An exception: if all or substantially all of ServiceCo’s active business income (which CRA generally considers to be 90%) is earned from providing services to arm’s length persons other than PayerCo, ServiceCo will not be subject to the SCI rules. The Budget also proposed that PayerCo may be permitted to assign a portion of its own unused SBD limit to ServiceCo to make the payments SCI (a special form must be filed to make the assignment).

Examples of Corporations Potentially Affected Consider a corporation, OpCo, held by four unrelated shareholders which pays management fees (or some other type of active income) to four HoldCos each owned by one of the four shareholders (whether in whole or in part).

Under the proposals, the management fees earned by the four HoldCos would not generally be eligible for the SBD, unless OpCo allocated a portion of its own $500,000 limit amongst the HoldCos. In other words, OpCo and the four HoldCos must now share access to a single business limit, assuming the HoldCos do not have ABI from other sources. Historically, each of the five corporations (OpCo and the four HoldCos) may each have had full access to the $500,000 SBD depending on their ownership and business structure.

As a second example, consider Dr. A, whose professional corporation (PC) carries on a dental practice. Dr. A’s spouse owns a second corporation (HyCo), which carries on the hygiene practice at the PC’s dental clinic. PC and HyCo are not associated, either by share structure or by de facto control. Currently PC and HyCo each have full access to the SBD. Under the proposals, if HyCo provides its services to the PC, HyCo’s income would be ineligible for the SBD, unless one of the exceptions noted above applies.

The proposals are quite broad and there are many existing corporate structures which are, or could be, exposed to these provisions. While the proposals may change during the process of becoming law, it is clear that many existing structures will be affected.

Action Item: Review your current corporate structures to determine if the small business rates will remain applicable, and whether any change in historical planning is appropriate


To read the rest of issue 115, download your copy here!

Tax, Tips and Traps Issue 114

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Tips And Gratuities: Employer’s Responsibilities to Withhold CPP & EI

Gratuities or tips received by employees are income earned from employment. However, it must be determined whether these tips are pensionable and/or insurable, that is, whether the employer should be withholding CPP and/or EI. This depends on whether the tips are considered to have been paid by the employer. Administratively, CRA looks at whether the tips are controlled by the employer or are considered to have been paid by the customer (a direct tip).

A December 16, 2015 Tax Court of Canada case examines whether tips paid to a restaurant’s workers were subject to CPP and EI. The restaurant’s annual revenues were approximately $6.5 million and the tips totalled $1 million. The workers divided the tips under a formula which varied over time, with all workers, including the “front-of-the-house” employees (servers and the related support staff), and “back-of-the-house” employees (kitchen staff, managers, and the catering sales coordinator) participating. The employer had withheld and remitted CPP and EI on tips paid to the “back-of-the-house” employees, so only “front-of-thehouse” employees were under Appeal.

The Employer testified that, although they deposited and paid out the tips, they considered these funds to be held in trust for the employees (likening it to GST/HST held for the Crown). The “back-of-the-house” staff were entitled to a portion of the tips, computed as a percentage of revenues, under their employment contracts. The “front-of-thehouse” employees’ contracts were silent on the matter of tips, and they shared actual tips from patrons, less the portion paid to the “back-of-the-house” staff. Their tips were paid out (in cash for some time, eventually transitioning to cheques) separate from their wages and outside the payroll system.

Taxpayer loses

The Court found that CPP and EI applied to tips paid by the employer. The Court found that “mere distribution” of the gratuities by the employer, with neither control nor ownership, is sufficient to constitute payment by the employer. The Court also noted that CRA’s published interpretations differentiate between controlled and direct tips, but that this may not be the correct test – the only determinant is whether the employer paid the tips to the employees. As the employer had paid the tips to the employees, CRA was correct to assess CPP and EI.

Action Item: Consider whether your business is properly withholding and remitting CPP and EI on tips and gratuities earned by your workers.


To read the rest of issue 114, download your copy here!


March 20, 2020

Response to COVID-19

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