Monthly Archives: January 2012

As accountants, we can never get enough of record keeping. We know our clients are nowhere near as interested, but time and time again we see how solid record keeping adds value and profit. In a recent blog we showed you how keeping track of customer profitability helps increase your own profitability. Today we’d like to offer more ideas on how effective record keeping can add value to your operations.

Let’s say you’re starting your own business and you feel you’re on the right track. You have a good business model and a strong plan for moving forward. Maybe you’ve implemented it effectively and have started to reap the rewards. But how do you know if you really are on the right track?

Most businesses use their annual financial statements as their scorecard to determine effectiveness. By doing that, you’ll learn how successful you’ve been in monetary terms, but there’s no insight about how well you could be doing. Following your annual budget is much the same. It’s useful in assessing operations against what you’ve planned for, but doesn’t help in evaluating relative performance.

So you probably want a solution, huh? A great tool we use to establish relative performance easily and economically is benchmarking. It involves pitting your operating results against others in your industry. We know no two businesses are identical, but these comparisons give useful insight. You can see where your performance ranks lower than your competitors in certain operational areas.

By figuring out where your performance is poor, you can drill down to see if you can get better. You can focus on particular operational areas, analyze them and develop strategies for improvement. But how do you get useful operational information about your competitors?

It’s a no brainer if any of them are publicly traded. There’s a wealth of public filings for you to review and analyze.

For non-publicly traded companies, seek out your trade organizations and publications. Trade associations often survey their members, and results are available to members. Trade journals publish information pieces about specific companies in the industry. There are useful insights to be found if you’re up for a dig.

And of course (perhaps it’s another no brainer) – the Internet’s a great source. Companies will direct you to articles written about them and their published white papers offer invaluable insight into operations.

One strategy we find particularly helpful for our clients is accessing databases that keep track of operational information by industry category code (SICC). There are several databases like that.

They only give information about industry averages, but don’t let that stop you. It can be helpful in figuring out the areas where your performance is subpar, and giving you direction about the areas that need more attention.

Canada Stock Trading – Canada stock trading website provide services for online stocks trading and guide to buying Canadian stocks.

Some places to look at include sales levels, gross profit percent, specific operating costs as a percentage of sales, accounts receivable turnover, days of inventory, accounts payable level, and debt-to-equity.

In evaluating the effectiveness of your business performance, well-designed record-keeping and information systems are crucial. They get the right information to the manager on time, and allow for regular monitoring and adjustments that help increase your bottom line.

You’ve probably heard about those smart couples who are able to split their income to save on taxes. If it seems mysterious and complicated …we’ll make it less mysterious, at least. Good tax planning means understanding how your life fits with the rules of the Canadian Income Tax Act. Income splitting presents a big opportunity within those rules, if you can put up with some complicated requirements.

The Canadian tax system is based on progressive tax rates – i.e., when your income goes up, so does the amount of tax that you hand over to the government. In Ontario, you’re looking at (approximately) the following tax rates:

• 20% on income from $10,527 to $40,000
• 35% on income from $40,000-$82,000
• 43% on income from $82,000-$127,000
• 46.5% on income above $127,000.

Say you and your spouse each earn $75,000 a year. Your total taxes would be around $34,000. But if you earn nothing and your partner earns $150,000, the tax would be about $50,000. That’s an extra $16,000.  You can see why taxpayers would want to “split” income among family members.

You can probably also see why the government doesn’t want that to happen. There are a slew of rules aimed at preventing income splitting. They include:

• Indirect payments (For example, if your employer pays part of your salary to your spouse, that amount is included in your income)
• If you give or lend money to your spouse or children (we’re talking minors), any income earned from it will be taxed in your hands. There’s a caveat – for minors, any capital gains earned on money transferred will be taxed in the children’s hands, not the parents
• Income earned by minors from certain types of investments (including dividends on shares in private Canadian and foreign company shares, income from a partnership or trust that provides services to a business carried on by a relative, or from capital gains earned on the disposition of a corporation’s shares to a person who doesn’t deal at arm’s length with the minor) will be taxed at the highest personal tax rate
• Income earned on loans to adult children, if one of the main reasons for the loan was to achieve income splitting

These are just a few examples – there are more rules. It’s meant to give you a sense of the challenges that exist in trying to income split. (We told you it was complicated.) But there are still opportunities if you’re accumulating funds for investment purposes.

Here are a few of them:

• The higher-income spouse can pay daily family living expenses, so the lower-income spouse can save more of their salary. Income from the savings will be taxed at the lower-income spouse marginal tax rate.
• If you run a business you can pay a reasonable salary to your spouse and children for services they perform on your behalf.
• The attribution rules above apply to income from property, not business. If you lend business assets to your spouse or child and they earn business income, it’ll be taxed in their hands.
• Consider making a loan to your spouse or a trust on behalf of your minor children for investment purposes. As long as they pay you interest at a rate equal to the CRA prescribed rate, there will be no attribution of income earned from those monies. Currently, the prescribed rate is 1%. Any income above 1% would be taxed in the spouse’s or minor children’s hands. The interest must be paid by January 31 of the following year, or the attribution rules apply.
• Once they’re 17, you can give your children funds to invest. As long as they’re invested in a one year or longer-term deposit or other investment that pays income annually, your children owe the taxes.
• Any income your family receives under the Child Tax Benefit Program, including Universal Childcare Benefit Payments, can be put in an “in trust” bank account for your child. Any income earned there would be taxed in the child’s hands.
• If you’re earning income eligible for the pension income tax credit, you may be able to split it with your lower-income spouse by filing a joint election.
• You can pay children over 18 for child care for younger siblings. This creates a tax deduction for the lower-income spouse and allows the child to grow savings taxable at the lower rate.

It’s a long and yes, complicated list, but an illustration that you really need to take a look at the big picture and how it applies to your family when you’re tax planning. In the right circumstances, you may be able to save big.

Whether you pay your taxes as an individual or as a business, year end tax planning is likely to be very high in the list of priorities.

The questions about taxes could easily be numero uno from all the questions we receive in regard to personal and small business accounting: How do I pay the least amount of tax legally allowed? At Silver+Goren, that’s a question we work very hard not just to answer, but to deliver tangible results. Unfortunately, there isn’t one easy answer that can be wrapped up with a bow. It all depends on who’s asking.

You need to find the best strategy for paying the least amount of tax, and that means understanding each individual situation and then developing a targeted plan.

We’ll take a closer look at one common example: child care expenses. A lot of our client families have two working spouses– and they need child care help.

The Income Tax Act allows you to claim a deduction for child care expenses if you’re employed, running a business, carrying out research and receiving a grant, or going to secondary school or an educational institution in a full- or part-time program. The spouse with the lower net income can deduct child care expenses to a maximum of two thirds of that lower income based on the following guidelines:

• $10,000 for each child eligible for the disability tax credit
• $7000 for each child under the age of 7
• $4000 for each child under the age of 17

Those deductible payments can be made to anyone living in Canada except the parents of the child, a related person under 18, or someone the parents claim a deduction for as a dependent.

In the right circumstances, paying a grandparent or child over 18 to babysit can substantially reduce the overall family tax burden as long as the amount paid is reasonable for the services provided. The overall tax reduction could be as much as 25% of the amount of childcare payments made.

When you’re making your decision, you need to think of the impact of those payments on the babysitters involved. For a grandparent, you need to consider things like the Old-Age Pension or  Guaranteed Income Supplement Property tax credit. For an older child, it could affect applications for student loans.

The setup doesn’t work for all families and all situations, but in the right circumstances, it can be extremely beneficial.

The key in paying the least amount of taxes is to understand how your individual situation fits within the requirements of the Income Tax Act…and work with it to make the most of that situation.

Related article: Read more about the legal ways of wealth retention through tax minimization or contact our office for consultation.

Most small businesses design their record-keeping system to meet basic needs. Government compliance usually tops the list – HST, payroll and corporate income tax. Businesses also keep track of accounts receivable and accounts payable, and facilitate business performance management, like monthly income statements and balance sheets.

Have we bored you yet? Not a sexy start to a blog, we know. Unfortunately, that’s usually the case with record keeping. Most small business people see it as a necessary evil and a chore. They invest the minimum amount of energy and attention as possible, and look at it as a necessary cost instead of a means to increase profits and create business value.

Here’s one record-keeping area that’s often overlooked and which can add serious profit: customer profitability. Obviously, customers are the lifeblood of any business. They provide the cash critical for survival and growth.

Yet not all customers are created equal. Here’s one of our favourite places to apply the Pareto Principle: 20% of your customers will likely produce 80% of your profits…and a different 20% of your customers will produce 80% of your grief and headaches. If you build a strong record-keeping system, you can easily weed out who’s who, and make more appropriate decisions.

So just what do you need to do in order to monitor effectively? In his excellent book Take No Prisoners, Marvin Davis listed a number of areas that we believe you should keep track of (or, at least for your high-volume customers):

• How much margin do you receive from each customer?
• Does the customer cover all variable costs?
• Does the customer cover all fixed costs?
• Does the customer contribute a profit?
• Is the customer’s sales growing or declining?
• Can I improve my profitability on this customer by fine tuning what I’m selling?
• Does the cost of servicing this customer, and meeting their demands, exceed what you’re making? This includes keeping track of things like special discounts, freight costs, cooperative advertising, post sales service and special warranty costs.
• Do you perform most of the work for this customer during your busy or slow season?
• Does the customer pay bills on time or are there always collection problems?
• Are there continual threats of legal action?
• Do the quality demands of the customer exceed those of your other customers?
• Is the customer abusive to your staff?
• Is the customer honest?

All of the above are key questions to ask when measuring the impact of customer’s relationships on the overall business performance.  By accumulating this type of information you’ll see which customers are actually draining instead of generating profits. Analysis like this should be done frequently, maybe every six months for major customers.

Relationships change over time. No question it’s hard to stay on top of these changes when you’re busy with the day-to-day challenges of running your business. Sometimes the best and most profitable thing you can say to your customer is….goodbye.