<![CDATA[Scott Park and Co Inc. - Blog]]>Sun, 10 May 2026 16:09:56 -0700EditMySite<![CDATA[New Standards for Compilation Engagements]]>Fri, 03 Dec 2021 19:00:27 GMThttps://www.parkandco.ca/blog/new-standards-for-compilation-engagements
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Scott Park, CPA, CA

A new standard for compilation engagements called Canadian Standard on Related Services (CSRS) 4200, Compilation Engagements has been issued by the Auditing and Assurance Standards Board of Canada. This new standard is a significant update to what was previously called a “Notice to Reader” engagement and is effective for compiled financial information for periods ending on or after December 14, 2021.
 
The new standard will affect the work we do for you when you engage us to help you complete your year end financial statements and related tax return.
 
Following the new standard will require us to spend more time on your year end. The standard setters believe that the changes they have made will help users of compiled financial information have a better understanding of the level of work we have performed as well as the underlying basis of the compiled financial information presented.
​Users
One of the main changes under the new standard is that Scott Park & Co Inc. is required to ask you about the intended use of the compiled financial information including whether that information may be used by a third party. If it’s possible you will be providing the compiled financial information to third parties, it is important to understand who the users will be before accepting the engagement. The most common example of a third party is a lender (i.e. banks).
 
Basis of Accounting
Another key change is that a basis of accounting needs to be selected by management and disclosed in a note to the compiled financial information. This will assist users in understanding how the compiled financial information is prepared. The basis used in compiled financial information (such as a cash basis with certain accruals at year end) typically differs from a general purpose framework (such as Canadian accounting standards for private enterprises). We would be happy to assist you with deciding how to describe the basis of accounting, here is an example for an investment holding company:
 
The basis of accounting applied in the preparation of the balance sheet of ABC Company as at Month-Day, 20XX, and the income statement for the year then ended, reflects cash transactions with the addition of:
  • amounts receivable
  • investments recorded at cost
  • rental property recorded at historical cost and amortized on the same basis as for income tax purposes
  • accounts payable and accrued liabilities
  • current income taxes payable as at the reporting date
 
Where the financial information is intended for use by third parties, the third parties will have to either:
  • agree with the basis of accounting, or
  • be in a position to request or obtain further information from you
 
In the circumstances where neither of these criteria are met, the relevancy of a compilation engagement should be discussed with us.

Additional Procedures
Scott Park & Co Inc. will be required to discuss and document our understanding of your business and operations, the nature of your accounting systems and the maintenance of your accounting records in more detail than we have previously. Any significant judgments that Scott Park & Co Inc. assists you with (such as estimating an allowance for potentially uncollectible accounts receivable) will need to be discussed with you so that you can accept responsibility and understand the impact of these matters on the compiled financial information.
 
New Report Format
A new Compilation Engagement report (replacing the former ‘Notice to Reader’) will be utilized, an example is provided in the separate engagement letter we will provide to you. The new report provides greater detail as to the specific responsibilities of management and Scott Park & Co Inc. as your accounting practitioner. A compilation engagement still does not provide any form of assurance on the compiled financial information.
 
Contact Us
The summary above is a high-level overview of the changes under the new standard for compilation engagements. We look forward to having a conversation about how these changes will impact our year end process with you. If you have any questions or need further information, please feel free to reach out to us.
 
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Disclaimer: The blogs posted on Scott Park & Co Inc. website provide information of a general nature. These blog posts should not be considered specific advice since each person's personal financial situation is unique and fact specific. Please contact us prior to implementing or acting upon any of the information contained in one of our blogs. Scott Park & Co Inc. cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.
]]><![CDATA[Self-Employed and Facing CERB Repayments?]]>Wed, 16 Dec 2020 21:06:54 GMThttps://www.parkandco.ca/blog/self-employed-and-facing-cerb-repaymentsPicture








​Scott Park, CPA, CA
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Many Canadians, especially self-employed individuals, have recently received a letter from the Canada Revenue Agency (CRA) indicating that they may not be eligible for the Canada Emergency Response Benefit (CERB) that they received and encouraged the recipient of the letter to repay the CERB amounts before December 31, 2020. This has caught many Canadians off-guard and has them very worried about making CERB repayments with money that they don’t have. 
CERB Eligibility
In order to be eligible for the CERB program, recipients must have had employment or self-employment income of at least $5,000 in 2019 or in the 12 months prior to applying.
 
The letter goes on to say that self-employed income is “net pre-tax income”, which means gross business revenues minus business expenses.
 
But many self-employed Canadians point out that the online CERB application wording was not clear and did not mention that applicants had to have more than $5,000 of “net self-employed income” to qualify. Instead, many people applied on the basis that their “gross self-employed income” was more than $5,000.  
 
The CRA has gone on the record stating that the letters it sent out are meant to “explain what qualifies as earned income to be eligible for CERB, and what does not.” It adds that those receiving such letters “should not interpret it as a determination that they have definitively been deemed ineligible for the CERB.”
 
Remedy
Under the Income Tax Act, there is no requirement or obligation for a taxpayer to claim expenses.
 
Therefore, self-employed Canadians who have received CERB benefits and have filed their 2019 tax returns should be able to easily amend their 2019 tax return by filing a T1-ADJ in order to reduce their expenses that they reported so that their net self-employed income is above the $5,000 threshold.
 
By doing so, the CERB recipient may have to pay some taxes, but they would be able to keep all of the CERB benefits that they received. It is a much better option to pay a little bit of tax rather than repaying the whole CERB benefit, which is likely to be thousands of dollars for many Canadians.
 
Tax Tip: If you find yourself in this situation, it is recommended to contact a local CPA accounting firm to discuss your specific situation and help with filing a T1-ADJ.
 
 
Disclaimer: The blogs posted on Scott Park & Co Inc. website provide information of a general nature. These blog posts should not be considered specific advice since each person's personal financial situation is unique and fact specific. Please contact us prior to implementing or acting upon any of the information contained in one of our blogs. Scott Park & Co Inc. cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.
]]><![CDATA[Tax Benefits of Donating Shares to Charity]]>Wed, 30 Oct 2019 18:22:27 GMThttps://www.parkandco.ca/blog/tax-benefit-of-donating-shares-to-charity
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Scott Park, CPA, CA

If you are someone that already donates to charities, good on you. But instead of cash, if you hold shares on which you have capital gains, you should be aware of the tax benefit of donating shares. Philanthropy and tax planning go hand in hand.
Avoid Capital Gains Tax
When capital property is donated, there is a disposition for tax purposes, which may result in a capital gain.  The fair market value (FMV) of the property donated is used as the proceeds of disposition, and as the amount of the donation. A taxpayer will normally pay tax on 50% (one-half) of any capital gain realized on the disposition (including a donation) of assets that have increased in value. However, if a taxpayer donates publicly trades shares or mutual funds to a registered charity, the CRA allows capital gains to be 100% completely excluded from taxation.
 
Someone thinking of donating shares should always check CRA’s List of Charities to confirm whether a Canadian charity is registered.
https://apps.cra-arc.gc.ca/ebci/hacc/srch/pub/dsplyBscSrch?request_locale=en
 
Donations From a Corporation
If a donation of shares is made from a corporation, it qualifies for a tax deduction instead of a tax credit. Secondly, when a person donates through a corporation, they are also eligible to utilize the Capital Dividend Account (CDA). The CDA is a notional tax account that tracks the non-taxable portion of capital gains. Thus, the CDA will be increased by 100% of the capital gain realized by the corporation on the donation of shares as mentioned above. Amounts paid out of the CDA are tax-free to the shareholder.

​Donating shares results in a win-win for you and the charity. You would get a larger tax benefit and the charity would get a larger charitable donation in lieu of selling the shares yourself, paying the tax and then making the donation with the after-tax cash.
 
Tax Tip: If you are an individual, your donation should be made by the end of November or earlier to avoid the busy season. If the donation is made by a corporation, it should be made at least one month before the fiscal year end. You should also consult with the registered charity to ensure they are setup to be able to accept the donated shares in the first place.  
 
 
Disclaimer: The blogs posted on Scott Park & Co Inc. website provide information of a general nature. These blog posts should not be considered specific advice since each person's personal financial situation is unique and fact specific. Please contact us prior to implementing or acting upon any of the information contained in one of our blogs. Scott Park & Co Inc. cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.
]]><![CDATA[Executors of Estates – What You Need To Know If Beneficiaries Are Not Canadian Residents]]>Thu, 22 Aug 2019 21:12:35 GMThttps://www.parkandco.ca/blog/executors-of-estates-what-you-need-to-know-if-beneficiaries-are-not-canadian-residents
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Scott Park, CPA, CA

When there is a Canadian estate and all of the beneficiaries are residents of Canada, the administration and settlement of that estate is generally straightforward. However, when there is a non-resident beneficiary (e.g. someone that lives in the US), this creates additional tax issues for the executor to deal with. 
Types of Distributions
The distributions from an estate are either from income earned by the estate or from capital property.
 
Income Distributions
The Income Tax Act (“ITA”), imposes Canadian income tax of 25% on the gross income distributed to non-residents of Canada, unless a tax treaty provides for a lower tax rate.  This means that the estate, administered by the executor, is responsible for remitting the withholding tax to the CRA before the 15th day of the following month after the income is distributed to the non-resident beneficiary. The executor must complete NR4 Summary and Supplementary slips to report the income paid or credited to the non-resident beneficiaries and remit the tax withheld. Withholding tax on interest income paid to an "arms length" non-resident was eliminated as of January 1, 2008. However, interest paid to a "non-arms length" non-resident (i.e. related person) would still be subject to the withholding tax.
 
Capital Distributions (Taxable Canadian Property)
Under Canadian tax rules, there is generally no rollover on a distribution of capital property by an estate to a non-resident beneficiary. The estate will be deemed to have disposed of the property at proceeds equal to fair market value and the non-resident beneficiary acquires the capital property at that amount. There may be capital gains to be reported by the estate. But the non-resident beneficiary is deemed to have disposed of the capital interest for proceeds equal to its cost amount, thus no tax liability for the non-resident beneficiary.

However, non-resident beneficiaries can still transfer Canadian real property on a roll-over basis since this type of property would remain subject to the Canadian tax rules. Also, a non-resident beneficiary is considered to be disposing of their interest in a Canadian estate in return for a cash distribution, which is not considered a taxable gain, and likewise not subject to income tax, but may have to be reported to the CRA.

A non-resident beneficiary’s interest in a Canadian estate may derive more than 50% of its value from Canadian real property. If this applies, section 116 of the ITA considers the interest in the estate to be “taxable Canadian property” (“TCP”). The TCP rules imposes an obligation to obtain a clearance certificate on a non-resident person who disposes of certain taxable Canadian property. The obligation will apply to a non-resident with respect to a disposition of a capital interest in an estate that occurs because of a distribution of capital by the estate to the non-resident. By virtue of the non-resident beneficiary’s interest in an estate, under s.116, the estate is considered the "purchaser" of taxable Canadian property (i.e. the capital interest in the estate) and the non-resident beneficiary is considered the "vendor". The non-resident beneficiary must report the disposition on Form T2062, Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property.
 
Certificate of Compliance (Form T2062)
If a non-resident of Canada receives a distribution from a Canadian estate and more than 50% of the FMV of the estate came from Canadian real property, then the estate is required to report that distribution to the CRA within 10 days of making the distribution. The non-resident seller must complete Form T2062 and send it by registered mail to the CRA along with all the necessary supporting documents. Each non-resident seller must file a separate Form T2062 to reflect their portion of the transaction. This is necessary as the ITA assumes a deemed disposition of the capital interest of the estate by the non-resident beneficiary and a deemed acquisition of the interest by the estate.  The Canadian executor is required to either withhold and remit 25% of the gross distribution to the CRA or obtain the clearance certificate. Therefore, to eliminate the requirement to withhold 25% of the gross amount distributed to the non-resident, Form T2062 should be filed with the CRA.

Non-Compliance Penalties
Failure to file or submit the T2062 on time (within 10 days of the disposition of TCP) to the CRA would be subject to a penalty of $25 per day. There is a minimum penalty of $100 and a maximum penalty of $2,500.
 
Tip: It is recommended that an executor should engage a lawyer and an accountant especially when there are non-resident beneficiaries of an estate.   
 
 
Disclaimer: The blogs posted on Scott Park & Co Inc. website provide information of a general nature. These blog posts should not be considered specific advice since each person's personal financial situation is unique and fact specific. Please contact us prior to implementing or acting upon any of the information contained in one of our blogs. Scott Park & Co Inc. cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.
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]]><![CDATA[New Requirements for Tracking Corporate Ownership Information of Federally Incorporated Companies]]>Fri, 14 Jun 2019 18:27:04 GMThttps://www.parkandco.ca/blog/new-requirements-for-tracking-corporate-ownership-information-of-federally-incorporated-companies
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Scott Park, CPA, CA

​The federal government has implemented changes to the Canada Business Corporations Act (“CBCA”),  which come into effect June 13, 2019 for federally incorporated companies. The CBCA sets out criterion for identifying individuals who have significant control over a corporation. It also sets out a requirement for corporations that meet certain criteria to keep a register of these individuals. The purpose of these beneficial ownership registers is to offer better corporate transparency to strengthen Canada’s anti-money laundering regime.
An individual may have significant control over a corporation if the individual has any of the following interests or rights, or any combination of them, in respect of a significant number of shares (more than 25% of voting rights or value) of the corporation:
​
  •  the individual is the registered holder;
  • the individual is the beneficial owner; or
  • the individual has direct or indirect control or direction over
 
A group of two or more individuals whose joint holdings meet these criteria are considered to be an individual with significant control.
 
Once those having significant control of a corporation are determined, the registry must include the following information for each of these individuals:

  • their name, date of birth and address
  • their jurisdiction of residence for tax purposes
  • the day on which they became or stopped being an individual with significant control
  • a description of how the individual has significant control over the corporation, including a description of any interests and rights they have in shares of the corporation
  • a description of the steps the corporation takes to keep this registry up-to-date each year
  • any other prescribed information
 
Adding to the burden, the registry needs to be reviewed and updated each fiscal year. If changes occur at other times in the year, the register must be updated accordingly within 15 days of the change.
 
Failure to comply with the requirements to maintain a registry may be subject to a $5,000 penalty. A director or corporation who “knowingly authorizes, permits or acquiesces” in not fulfilling this requirement or who provides false or misleading information in the registry may be subject to a fine of up to $200,000 and/or imprisonment of up to six months.
 
Tip: It is always recommended that a corporation retain a lawyer’s office to be the registered and records office in order to maintain the corporate annual report filings and records books as required under the federal CBCA or provincial laws.
 
 
Disclaimer: The blogs posted on Scott Park & Co Inc. website provide information of a general nature. These blog posts should not be considered specific advice since each person's personal financial situation is unique and fact specific. Please contact us prior to implementing or acting upon any of the information contained in one of our blogs. Scott Park & Co Inc. cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.
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]]><![CDATA[Start-ups: Leasehold Improvement Costs & Claiming GST ITC's]]>Mon, 26 Nov 2018 20:52:09 GMThttps://www.parkandco.ca/blog/start-ups-leasehold-improvement-costs-claiming-gst-itcs
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Scott Park, CPA, CA

It is very common for start-up companies to have to incur upfront costs for leasehold improvements or renovation costs on a store front or an office space even before they officially open their doors to the public. For businesses in the start-up phase, cash flow may be very tight, therefore every cent counts. It is important to for new business owners to be aware of the topic of GST and how it can positively impact their business from a cash flow perspective.  
What is an ITC?
GST/HST that is paid on eligible expenses are called input tax credits (ITC’s).
 
Are you Eligible to Claim ITC’s?
You may be eligible to claim an ITC on a GST/HST return if all of the following apply:
  • You bought property, goods or services that you will use in the course of your commercial activities
  • GST/HST must have been paid by you in respect of the property, goods or service
  • You are a GST/HST registrant with CRA
  • You keep sufficient documents (i.e. receipts, bills, invoices etc.) to prove the amount of GST/HST paid prior to making the claim on a GST/HST return
  • You claim the ITC’s on a GST/HST return within 4 years of paying the GST/HST
 
How to Claim ITC’s
You can only claim ITC’s on a GST/HST return after you become a registrant. GST/HST paid on purchases prior to being a registrant cannot be claimed.
 
Example: let’s say a business was incorporated on January 1, 2018 but was not registered for a GST/HST account with CRA until April 15, 2018. The business incurred leasehold improvement costs to their restaurant space of $105,000 ($100,000 + $5,000 GST) during this period. Also, during this period, the business did not have any sales and did not charge and collect GST/HST from customers.
 
Tax Tip: using the example above, the business should have registered for a GST/HST with CRA  on January 1, 2018 in order to be able to claim all of the ITC’s they incurred between January 1, 2018 to April 15, 2018 to get a refund of the $5,000 in GST that was paid. 
 
An important consideration for every entrepreneur starting their own business should be to consult with a professional accountant from the beginning. The benefit of an accountant’s advice around these sorts of tax matters outweigh the cost.
 
 
​Disclaimer: The blogs posted on Scott Park & Co Inc. website provide information of a general nature. These blog posts should not be considered specific advice since each person's personal financial situation is unique and fact specific. Please contact us prior to implementing or acting upon any of the information contained in one of our blogs. Scott Park & Co Inc. cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.
]]><![CDATA[Benefits of Hiring an Outsourced Accounting Team]]>Thu, 16 Aug 2018 21:48:24 GMThttps://www.parkandco.ca/blog/benefits-of-hiring-an-outsourced-accounting-team
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Scott Park, CPA, CA
 
For most businesses, there comes a point when it’s time to hire a professional to handle the financial function of your business operations. If you are at this point in your business, then congratulations! You have grown your business to the stage where you should be handing off some of those hats you wear as a business owner. Although your initial thought may be to hire a full-time or a part-time bookkeeper, a smarter decision may be to outsource your bookkeeping needs to a team of professional accountants. Here are the top reasons why you should consider outsourcing your accounting and tax needs to a professional accounting firm.
No Risk of Losing Staff or Incurring Training Costs
Do you have the time it takes to post the job, interview candidates and find the right person? Furthermore, if you’re not an accountant how will you know if you’re asking the right accounting specific questions?
 
For almost every business out there these days, it seems that one of the biggest challenges is finding, hiring, and training new employees. This is a costly process. Qualified people are constantly in high demand but are in short supply. If you are lucky enough to find an employee that is a good fit many times they eventually move on for different reasons or other opportunities. However, since your business does not stop, you will find yourself back at square one trying to fill the position again. When you outsource your accounting needs, there is no worrying about hiring or losing staff, or following the employment standards act since you will have a team of professionals at your service.

Manage Costs
By outsourcing your accounting, you only pay for the service you receive. This will ultimately reduce your costs. Many professional accounting firms have monthly fixed pricing plans for bookkeeping packages. This provides you with cost certainty; you know exactly what you’re getting and how much it will cost you. On the flip side, if you had to pay either a part-time or full-time bookkeeper on payroll, are you confident that you will get everything that you need for the amount of salary or wages you will be paying?
 
Double Checking Work
By outsourcing your accounting, you’re getting a team of professionals working for you. An accounting firm will have their own internal systems and quality checks in place to ensure that the work that they do is reviewed by multiple people to catch any mistakes and errors.
 
More Collective Brain Power
By outsourcing your accounting, you’re not just getting one person’s expertise. You’re getting the collective brain-power of the entire accounting firm. You’re getting the background and skill set of their staff, which is an invaluable source of knowledge. This certainly comes in handy when you run into a particularly challenging or extraordinary situation with your business.
 
Up to Date on Compliance and Tax Issues
By outsourcing your accounting, you can rely on the professionals to ensure your books are up to date for all the various compliance tax filings. This will avoid unnecessary interest and penalty charges that may happen when things are missed or filed late. Also, a CPA accounting firm is required to maintain a certain level of professional development and they will be up to date on the most recent tax changes that happen each year.
 
Grows with Your Business
When you’re just starting your business, it’s likely that you only need one staff person to handle the financial function of your business operations. As your business grows and you become more profitable, you’ll likely find yourself needing more help. Or perhaps your business is seasonal in nature and you don’t require the same level of accounting help throughout the year. By outsourcing your accounting needs, your team of accounting professionals can grow as you grow.
 
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Disclaimer: The blogs posted on Scott Park & Co Inc. website provide information of a general nature. These blog posts should not be considered specific advice since each person's personal financial situation is unique and fact specific. Please contact us prior to implementing or acting upon any of the information contained in one of our blogs. Scott Park & Co Inc. cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.
]]><![CDATA[Employees vs Contractors]]>Thu, 05 Jul 2018 19:33:22 GMThttps://www.parkandco.ca/blog/employees-vs-contractors
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Scott Park, CPA, CA

Why It Matters
There may be a temptation among business owners to label a worker as an independent contractor instead of an employee. Paying a worker as a contractor would provide a business owner with less paperwork and administration ease in the short-term, but it could lead to very costly consequences on unremitted payroll taxes, CRA penalties, Worksafe BC insurance premiums, benefits, and severance later on. The best advice is to get it right at the beginning to avoid future issues.
How Issues Can Easily Arise
If someone is paid as a contractor, the employer does not withhold and remit income taxes and worksafe BC insurance premiums. The contractor is responsible for these taxes. However, it may be a common situation where the contractor does not deal with these taxes and instead comes back to the employer asking for help in paying these liabilities.
 
A second example could arise when a worker that requests to be a contractor for tax purposes, is let go by the employer because their services are no longer required and the contractor’s request for Employment Insurance (“EI”) is rejected by Service Canada because they are self-employed. The worker often makes a claim against the employer saying they did not understand they would not be covered for EI and they were really employees.
 
How to Determine the Working Relationship
It is important to consider WHAT is being done as opposed to HOW someone wants to be classified.
 
If there is a contractor services agreement between the payer and the worker, then CRA will scrutinize this agreement to determine the intent of the business relationship. But the CRA also applies tests to determine if it is a business relationship or an employer/employee relationship.
 
The CRA looks at the following tests.
 
Control Test: Control is the ability, authority, or right of a payer to exercise control over a worker concerning the manner in which the work is done and what work will be done. If the payer has the majority of the control it would usually suggest an employer/employee relationship.
 
Ownership of Tools Test: Self-employed individuals often supply the tools and equipment required for a contract. As a result, the ownership of tools and equipment by a worker is more commonly associated with a business relationship.
 
Subcontractor Test: The ability of the worker to hire assistants or contract work out is evidence that there is a business relationship.
 
Opportunity for Profit/ Risk of Loss Test: Consider the degree of financial risk taken by the worker. Consider if there are any fixed ongoing costs incurred by the worker or any expenses that are not reimbursed. Usually, employees will not have any financial risk as their expenses will be reimbursed, and they will not have fixed ongoing costs. Self-employed individuals, on the other hand, can have financial risk and incur losses because they usually pay fixed monthly costs even if work is not currently being done.
 
Consider whether the worker can realize a profit or incur a loss, as this indicates that a worker controls the business aspects of services rendered and that a business relationship likely exists. To have a chance of a profit and a risk of a loss, a worker has to have potential proceeds and expenses, and one could exceed the other.
 
This factor has to be considered from the worker's perspective, not the payer's. It is for the most part an assessment of the degree to which the worker can control his or her proceeds and expenses.
 
Using Contracts & Agreements
The employee versus contractor issue is a minefield and employers and employees alike should consult their advisors before entering into a new agreement. 
 
Having a written agreement is a good first step. For business owners, it’s very important to have employment letters and employment agreements that are up to date with current labour laws.
 
Alternatively, it’s also necessary to have formal service agreements with contractors that are properly written. Avoid common errors of using language and terms from employment agreements. It is always recommended to consult with a lawyer to make sure the paperwork is properly drafted.
 
 
Disclaimer: The blogs posted on Scott Park & Co Inc. website provide information of a general nature. These blog posts should not be considered specific advice since each person's personal financial situation is unique and fact specific. Please contact us prior to implementing or acting upon any of the information contained in one of our blogs. Scott Park & Co Inc. cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.
]]><![CDATA[Incorporating Your Sole Proprietorship Business – Don’t Overlook the Goodwill Factor]]>Thu, 07 Jun 2018 23:07:31 GMThttps://www.parkandco.ca/blog/incorporating-your-sole-proprietorship-business-dont-overlook-the-goodwill-factor
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Scott Park, CPA, CA

Many Canadians typically start their own business as a sole proprietorship. This form of business is quite common because it’s the simplest way to structure a business while minimizing costs. As the business grows, the topic of incorporating the sole proprietorship becomes something to think about. Here’s what you need to know when converting your sole proprietorship business into a corporation, which could save you thousands of dollars in taxes.
Going From a Sole Proprietorship to a Corporation
When transferring your business assets from a sole proprietorship to a corporation you are considered to have disposed of the assets at fair market value. If the assets of the business have increased significantly since you started, this would normally lead to a significant amount of tax that you would have to pay personally. Therefore, when you are transferring assets from your proprietorship to your corporation, you should only do so under the provisions of Section 85 of the Income Tax Act (“ITA”). These provisions allow for transfers to a corporation on a tax-free basis.
 
The Goodwill Value
A business will typically have two categories of assets:
  1. Tangible/ physical assets (things like equipment, furniture, inventory, vehicles etc.); and
  2. Intangible assets/ goodwill (things like customer lists, supplier lists, trade names, trademarks, copyrights, licenses, contracts, brand recognition etc.)
 
The goodwill would be the collective intangible assets of the business. Goodwill is what someone would be willing to pay for the business up and above the price of the tangible assets. And since goodwill does not normally appear on the balance sheet of a sole proprietorship, it is perhaps the most common overlooked asset.
 
For the purposes of utilizing a Section 85 rollover, it is very important that the goodwill is valued and reported on the T2057 form. The goodwill can be a reasonable calculation performed by your accountant or by a Chartered Business Valuator (CBV) depending on the circumstances. Although some business owners may argue that there is no business goodwill to transfer to the corporation, it is a risky position to take. CRA could review the rollover transaction and deem a large gain on the transfer of the proprietorship goodwill if it is not specifically listed on the T2057 form. This would trigger unintended negative tax consequences that could result in thousands of dollars in taxes. This risk could simply be eliminated by just reporting goodwill on the T2057 election form.
 
The Section 85 Rollover
It is very important that the Section 85 rollover is done correctly, which is accomplished by having the proper supporting legal documents and filing the related Section 85 forms with CRA.
 
Although Section 85 rollover provisions are commonly used, this is a very technical area, so it is best to have a qualified CPA and business lawyer take care of the details. The combined accounting and legal fees can range anywhere from around $2,500 to $10,000 depending on the complexity of the transaction; however, it will save you thousands in taxes that would otherwise be payable to CRA.
 
If you don’t file a Section 85 rollover, either because you didn’t know, or because you didn’t want to go through the tough exercise of doing so, you’re in for a surprise. What will end up happening is that the CRA will reassess the transaction and bump up the sale price to the fair market value of the assets.
 
For example:
If the assets that you own, including goodwill, are valued at two-hundred thousand dollars, and you paid only fifty thousand dollars for them, then the CRA will impose capital gains tax on the gain of  one-hundred and fifty thousand dollars. This will happen only if you do not file the T2057 election form pursuant to Section 85 of the ITA to transfer your assets from your sole proprietorship to your corporation.
 
It is important to note that I am glossing over the specific rules of Section 85 and focusing on the bigger picture of this topic in order to keep things simple for this blog article.
 
Filing the T2057 Election
As mentioned above, the T2057 form applies to elections made under Subsection 85(1) of the ITA. Transferors must file this form separately from any income tax return at the tax centre where they file their tax returns.
 
The deadline to file the T2057 form is the earliest date on which any of the parties to the election (i.e. transferor and transferee) has to file an income tax return for the taxation year in which the transfer occurred otherwise late-filing penalties would be applicable.
 
 
Disclaimer: The blogs posted on Scott Park & Co Inc. website provide information of a general nature. These blog posts should not be considered specific advice since each person's personal financial situation is unique and fact specific. Please contact us prior to implementing or acting upon any of the information contained in one of our blogs. Scott Park & Co Inc. cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.
]]><![CDATA[Avoid the Do-it-Yourself Pitfalls of Incorporating a Business]]>Fri, 18 May 2018 18:31:57 GMThttps://www.parkandco.ca/blog/avoid-the-do-it-yourself-pitfalls-of-incorporating-a-business
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Scott Park, CPA, CA

​For many new entrepreneurs and start-ups, the decision to incorporate a business is an exciting yet potentially daunting step to take. The goal of every business owner is to hopefully make a profit, but let’s face it, the start-up capital or money needed to fund the operations of the business when things get started may be a little tight.  This typically forces the business owner to do things on their own to get things done even when they are out of their comfort zone or area of expertise. As a business owner, having a strong work ethic and do-it-yourself mentality is certainly a good thing; however, when it comes to something as important as properly incorporating your business it is best to avoid the pitfalls of doing it yourself. The problems can be fixed, of course, but not without time, effort and money.
 
Here are some of the common mistakes to avoid when incorporating.
Lack of Tax Planning Prior to Incorporation
Let’s say that a husband and wife decide to operate a business together. They plan to both be equally active in the business. This type of scenario is perfect for the husband and wife to split the income and profits of the business and to utilize tax planning opportunities such as their lifetime capital gains exemption. However, many times these topics are not even discussed with a professional accountant prior to incorporation, which could lead to missed tax opportunities for the business owner.
 
Inadequate Incorporation Documents
When you incorporate a company, it is very important to decide on how structure the business. The articles of incorporation will clarify the types of shares that the company can issue to its shareholders, how shareholders will be paid, and the voting rights that the shareholders will have.
 
Unless the share capital of the company is properly structured from the start, it will be necessary to perform various modifications, amendments, and re-structuring that will take time and potentially cost hundreds or even thousands to have it fixed down the road. It is best practice to create multiple classes of shares with different voting rights, in order to provide as much flexibility as possible. Another consideration is to provide for unlimited authorized share capital and allow for a range of directors in anticipation of future growth of the business.
 
Neglecting Your Corporate Records
The Business Corporations Act of BC is the law that governs various matters pertaining to corporations in B.C. This Act is lengthy and unless a new business owner is either an accountant or lawyer, it is likely they are not aware of all the things that must be followed to keep a corporation in good standing.
 
Company Records
Each corporation is required to keep a records book. For example, the records book should contain documents like the certificate of incorporation, notice of articles, articles of incorporation, share register, register of Directors’ and Officers’, and signed Directors’ resolutions etc. If a records book has not been created or there are corporate documents missing this can certainly lead to problems. For example, let’s say that the company ends up in court. If a document that is required to be kept in the records books is missing, lost or was never created then a court of law could make a declaration and impose a ruling as to what was or should have been contained in the record. This could lead to unintended negative consequences for a business owner.  

Filing Annual Reports
A company must file an annual report with the corporate registry. If it fails to do so for two consecutive years, the company will no longer be in good standing, it will be struck off the corporate registrars’ list and will be considered to be dissolved. Reactivating your corporation will set you back a few hundred dollars on top of the regular annual filing fee. This filing requirement is something often over looked by business owners especially when they do not have a lawyer to handle this simple filing.
 
Registered and Records Office & Inspection of Records
A company is required to have a records office. The records office is also required to be open during statutory business hours to allow for the inspection of records. If a business owner decides to use his personal home address as the registered and records office then, although it is unlikely, they do run the risk of having people show up at their door requesting access to the corporate records. Once the business is incorporated, it is best to establish a relationship with a law office and for an annual cost of say $300 to $400 they can file the annual reports and handle the duties of being the registered and records office for your company.
 
Not Giving Your Corporation a Name
If you are ready to incorporate but unsure about a company name, that’s OK. The corporation will be given a number that serves as the corporation’s legal identifier (e.g. 1234567 B.C. Ltd). You would still be able to operate under a trade name or a “doing business as” dba name; however, any legal contracts, bank accounts, cheque signings, leases, employment agreements etc. will need to be done under the corporation’s legal identifier.
 
A corporation’s name can be a valuable asset in establishing your brand and growing your business, so it is an important consideration from the start. There will also be a cost associated with changing the name of your corporation, so this is something to be aware of.
 
When it’s time to incorporate your business it’s best to discuss the financial and tax matters with a Chartered Professional Accountant prior to incorporation. The next step is to choose a business lawyer to handle the incorporation process.  The potential costs and pitfalls associated with the do-it-yourself incorporation approach will probably exceed what it would have cost to have a lawyer handle it from the start. This is one area of your business that should be left to the professionals.
 
 

Disclaimer: The blogs posted on Scott Park & Co Inc. website provide information of a general nature. These blog posts should not be considered specific advice since each person's personal financial situation is unique and fact specific. Please contact us prior to implementing or acting upon any of the information contained in one of our blogs. Scott Park & Co Inc. cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.
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