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 04/29/2009 12:53:30 AM · #1
I know many people on DPChallenge own their own small business--most likely a small proprietorship. I am currently setting up my books (Canadian sole proprietorship in Alberta with a GST #), and have some general accounting questions for those familiar with Canadian business and tax laws.

1. How do I split things like bill payments that are for the business AND personal? Especially when I don't yet know how to split the amounts (for example, gas and oil).

2. Do you include some of your personal things on your books? Income, obviously, but what about personal debts and bill payments?

3. Can I change the frequency I have to remit GST to the government? I chose annually when I signed up, but I think I'd like to go quarterly.

4. What type of things would go under "Costs of goods sold?" As far as I can tell, when I buy my prints, frames, etc. from my lab, they are expenses, and when I sell them to the client, they are sales. Does this cost of goods sold account get involved somehow?

5. Would an account that handles discounts, coupons, and credits (that is, they decrease total sales) best be described as a contra account? Or, is there another place it should be? What about returns allowances?

6. How do you book your capital cost allowances? In fact, by what parameters do you define your CCAs? I currently consider any one expense over $500 to be something that must be capitalized, but I have no reason for this.

7. Stemming from #6, how do you handle your CCAs throughout the year? Do you handle percentages yourself, or do you let you accountant/tax preparer do it at tax time?

Thank you for any input you may have (even if only for one or two points).
 04/29/2009 08:22:59 AM · #2
While I don't know how Canada varies from the US, accounting methods are pretty standardized worldwide.

You keep books for two reasons - for the government's tax man and for yourself so you know where you stand, what's making money or losing money, etc.

1. while in the US a sole prop is essentially you so there is no 'need' to keep personal and biz seperate, I keep them completely seperate. Car expenses can be done by miles (keep a log in the car of business trips) or by percentage (again, you need a way to record how much is personal and how much is business, so miles is the easiest way). Household costs (utilties, taxes, mortgage, repairs, etc) are done on a percentage of square feet dedicated (keep word there) to the business. So if you have a 1200 sf house and use a 300 sf room for the biz (and nothing else) then 25% of your house expenses are deducted from teh business income

2. hell no. That's called 'co-mingling' and is illegal. here in the US the business tax form is called a Schedule C - all the business related income and expenses are recorded on that and the bottom line - profit or loss - is then moved to the 1040 (standard annual federal income tax form)

3. The government sets the frequency. the more you make the more often they want paid.

4. cost of good sold is exacelty the - what you paid for what you resold. So prints, frames, albums etc. "Materials" is another one of these but for things that are used a little here and there - tape, hanging wire, delivery bags, etc. You spend the money sp it's an expense that is deducted from your sales. Cost of goods sold is a way to identify what you sold to clients instead of say, advertising or CS4 upgrade, etc. You need enough categories to make the tax man happy, but you can have more - I have my COGS broken down into wedding, sports, online, seniors, babies, family, misc (and sales the same way) so I know how much money each area is making me.

5. returns/coupons is purely an internal account - the government could care less about it. It's just you lowering your sales price or giving away a product. It's NOT an expense you can deduct (as far as the taxman is concerned) As for returns...who's gonna return a print?

6. Expense - deducted in this tax year. Capital Item - depreciated over multiple years. The gov't will have rules on this. Here in the US computers are captial items but software is not. Office furniture is a capital item, as is a camera and a lens. Office supplies (paper, toner, pens, etc) are expenses. Talk to a tax accountant about what is or is not a capital item. Generally you can capitalize/depreciate anything you want, but it's better for you tax-wise to expense as much as possible. Talk to a tax acct!

7. Talk to a tax accountant.
 04/29/2009 10:50:08 AM · #3
Having lived the experience of having a sole proprietor business, I can help a tad, albeit not that much.

Originally posted by geoffb:

1. How do I split things like bill payments that are for the business AND personal? Especially when I don\'t yet know how to split the amounts (for example, gas and oil).


Assuming you have only one vehicle and that you use it mostly for business the process is rather simple. You keep a copy of all your receipts for gas, oil, general maintenance, cleaning and record your total mileage for the year. Assuming you used the vehicle 75% of the time for business purposes, you could claim 75% of the total cost as an expense on your taxes. If you purchased a vehicle for your work, you can claim a portion of the payments,as well as the depreciation.

Originally posted by geoffb:
2. Do you include some of your personal things on your books? Income, obviously, but what about personal debts and bill payments?


NO... there must be a clear distinction between personal and business issues. Income generated by the business must be recorded and you should be prepared to make quarterly tax payments. If you don\'t make quarterly payments, you will incur interest charges.

Originally posted by geoffb:
3. Can I change the frequency I have to remit GST to the government? I chose annually when I signed up, but I think I\'d like to go quarterly.


You would be better served to do it quarterly, otherwise you might have to cough up a rather significant amount of cash to the tax department. Also, you must remember that any delay in payment brings about accrued interest charges. You should go to the Revenue Canada website and get the information relating to the percentage of GST that is due.

Originally posted by geoffb:
4. What type of things would go under \"Costs of goods sold?\" As far as I can tell, when I buy my prints, frames, etc. from my lab, they are expenses, and when I sell them to the client, they are sales. Does this cost of goods sold account get involved somehow?


In this instance I would defer to the comments made by Prof_Fate.

Originally posted by geoffb:
5. Would an account that handles discounts, coupons, and credits (that is, they decrease total sales) best be described as a contra account? Or, is there another place it should be? What about returns allowances?


Issues of this ilk would best be discussed with a competent tax accountant. I would hate to dole out erroneous information that could lead you astray. Lord knows the tax department is not too forgiving.

Originally posted by geoffb:
6. How do you book your capital cost allowances? In fact, by what parameters do you define your CCAs? I currently consider any one expense over $500 to be something that must be capitalized, but I have no reason for this.


Again, this is something I would discuss with a competent tax accountant.

Originally posted by geoffb:
7. Stemming from #6, how do you handle your CCAs throughout the year? Do you handle percentages yourself, or do you let you accountant/tax preparer do it at tax time?


I hate to be repetitive, but again, this is something I would discuss with a competent tax accountant.

I initially tried to do all of this by myself and got completely mired in paperwork. At the suggestion of a learned friend, I went and spoke to an accountant who now handles all of my tax issues. Make certain you remit your GST on time and that you have a full appreciation of what your income will be for the year and make tax payments by quarterly instalments, otherwise you may be in for a very big surprise at the end of the tax year... In my case, I found out I owed the Tax Department some $12.000.00 over and above what had been deducted at source and what I had paid by instalments.

The very best of luck to you in your endeavours.

Ray
 04/29/2009 12:21:45 PM · #4
Originally posted by Prof_Fate:

7. Talk to a tax accountant.


This may seem like an expense you would rather do without, but if, or more likely when, you get into trouble for not getting help before there was a problem, it will be much more expensive than the costs of dealing with the issues you could have avoided.

Also if you aren't familiar with cost based accounting, buy a program like Quickbooks Pro. You can do the same stuff on Excel or any spread sheet program, but the Quicken products have saved my bacon more than once.
 04/29/2009 01:10:53 PM · #5
Definitely talk to a tax accountant.

Even once you determine that something should capitalized and depreciated over a number of years, the amount that can be claimed depends on which category the item falls into. Software is special and is sort of capitalized and depreciated at a rate of 50% for tax purposes. Office furniture and computers are class 8 which I believe has a rate of 30%. These things change over time. Also, even though furniture and computers are in the same class you may want to keep them separate as there are provisions in the tax law related to when a category becomes completely empty.

These are the things that a tax accountant will help you with.
 04/29/2009 03:03:50 PM · #6
Don't forget that if yours is a home based business that you can offset a portion of the costs of operating your business such as heating, cooling, property taxes, repairs and the like.

As I mentioned before, you really should avail yourself of the services of an accountant at least in the beginning, and maintain a good set of books with a software program such as that previously suggested.

The very best of luck.

Ray
 04/29/2009 03:20:20 PM · #7
A tax accountant will more than cover his costs in money he saves you and peace of mind is just a bonus!

I always did my own taxes and that of my mother too. No big deal - till I started a part time business. I tried to do the taxes and came up owing $800 or so. Ouch! I sought out a guy I knew from college that went into his dad's CPA firm. He charged me $80 (this is going back some 12-15 years now) and got me a refund of $350. That's an $1,100 swing in my favor for a cost of $80! I've never looked back - he's got my business forever!
 04/29/2009 10:17:10 PM · #8
Thanks for responding, Chris. All very useful.

Originally posted by Prof_Fate:
1. while in the US a sole prop is essentially you so there is no 'need' to keep personal and biz seperate, I keep them completely seperate. Car expenses can be done by miles (keep a log in the car of business trips) or by percentage (again, you need a way to record how much is personal and how much is business, so miles is the easiest way).

How would you put this on your books, though, when you don't know the percentage until the end of the year? Let's say you buy $50 of gas; you can't charge all $50 as a business expense, because some of it's personal, and yet you can't figure out how much is a business expense until your year is up. I hope this makes sense, as it's the biggest problem I'm running into.

Originally posted by Prof_Fate:
2. hell no. That's called 'co-mingling' and is illegal. here in the US the business tax form is called a Schedule C - all the business related income and expenses are recorded on that and the bottom line - profit or loss - is then moved to the 1040 (standard annual federal income tax form)

Okay, that makes sense. The reason I asked is because one of the sample chart of accounts I came across included an "owner's compensation" class of accounts, which included accounts such as "cheques to spouse", "personal utility bills", "personal vehicle repairs", etc.

Originally posted by Prof_Fate:
3. The government sets the frequency. the more you make the more often they want paid.

In Canada, we can choose how often to remit GST. However, I'm not sure it can be changed once it's initially set.

Originally posted by Prof_Fate:
4. cost of good sold is exacelty the - what you paid for what you resold. So prints, frames, albums etc. "Materials" is another one of these but for things that are used a little here and there - tape, hanging wire, delivery bags, etc. You spend the money sp it's an expense that is deducted from your sales. Cost of goods sold is a way to identify what you sold to clients instead of say, advertising or CS4 upgrade, etc. You need enough categories to make the tax man happy, but you can have more - I have my COGS broken down into wedding, sports, online, seniors, babies, family, misc (and sales the same way) so I know how much money each area is making me.

Perfect. That makes sense.

Originally posted by Prof_Fate:
6. Expense - deducted in this tax year. Capital Item - depreciated over multiple years. The gov't will have rules on this. Here in the US computers are captial items but software is not. Office furniture is a capital item, as is a camera and a lens. Office supplies (paper, toner, pens, etc) are expenses. Talk to a tax accountant about what is or is not a capital item. Generally you can capitalize/depreciate anything you want, but it's better for you tax-wise to expense as much as possible. Talk to a tax acct!

I guess what I meant to say here, is how do I handle capital items in terms of bookkeeping? I'm not so much concerned with percentages and determining how much tax to deduct, but simply which account to book these items to. I think I figured that out today, though: I'll just create separate accounts for expenses and CCAs.

Originally posted by Prof_Fate:
7. Talk to a tax accountant.

Fair enough. I will certainly be doing this. My big concern right now isn't so much with handling my tax return, but rather with bookkeeping and getting set up for next year's tax return. I'm interested in how people's books are set up, and how to streamline things so that I can work efficiently in the future.

Thanks again for all your help. I am very grateful.
 04/29/2009 10:20:24 PM · #9
Originally posted by RayEthier:
I initially tried to do all of this by myself and got completely mired in paperwork. At the suggestion of a learned friend, I went and spoke to an accountant who now handles all of my tax issues. Make certain you remit your GST on time and that you have a full appreciation of what your income will be for the year and make tax payments by quarterly instalments, otherwise you may be in for a very big surprise at the end of the tax year... In my case, I found out I owed the Tax Department some $12.000.00 over and above what had been deducted at source and what I had paid by instalments.

Thanks for all your advice, Ray. I definitely have a specialist do my taxes; I'm more interested in the bookkeeping end of things, and getting things best set up for him to work every March. Accounting has always fascinated me, but I was really struggling with the terms and wordings as I was first getting started. I think I'm finally starting to understand the software (MoneyWorks), and I have my chart of accounts almost done, so we'll see how things go.
 04/29/2009 10:23:52 PM · #10
Originally posted by BrennanOB:
Originally posted by Prof_Fate:

7. Talk to a tax accountant.


This may seem like an expense you would rather do without, but if, or more likely when, you get into trouble for not getting help before there was a problem, it will be much more expensive than the costs of dealing with the issues you could have avoided.

Also if you aren't familiar with cost based accounting, buy a program like Quickbooks Pro. You can do the same stuff on Excel or any spread sheet program, but the Quicken products have saved my bacon more than once.

Hi Brennan,

Thanks for the advice. I'm using MoneyWorks to handle my books, and things are definitely getting easier with each psasing day.

Originally posted by cpanaioti:
Definitely talk to a tax accountant.

Even once you determine that something should capitalized and depreciated over a number of years, the amount that can be claimed depends on which category the item falls into. Software is special and is sort of capitalized and depreciated at a rate of 50% for tax purposes. Office furniture and computers are class 8 which I believe has a rate of 30%. These things change over time. Also, even though furniture and computers are in the same class you may want to keep them separate as there are provisions in the tax law related to when a category becomes completely empty.

These are the things that a tax accountant will help you with.


Thanks Colette. I don't even plan to get into deduction allowances for capital costs; I was more interested in how to book them for my tax specialist. I will certainly be speaking to a CGA to figure things out and to go over my books once I get things started.
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