Is YOUR Investment in Your Business Secured?

When you start your business, you likely apply for a loan; the Bank makes you sign a General Security Agreement, pledging the assets of your business (and likely personal assets) to cover the loan in case something goes wrong.

In other words, the bank is a secured creditor.

The Canada Revenue Agency holds Directors of a Corporation and owners of Sole-Proprietorships accountable for ‘Trust Funds’ – GST/HST and Payroll Taxes. Therefore, CRA is also secured.

Often if you lease equipment or finance equipment through a bank or other third party, they too will likely require a General Security Agreement to protect their interests.

But what about the money you personally invested in your business?

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Introducing LedgersShield – Safeguarding our Clients from the cost of Audits


Does even the thought of being audited by CRA send shivers down your spine?

Do you lose sleep at night worrying that sooner or later, the CRA or another government body will come calling?

Do you worry about the inherent additional accounting fees associated with an audit?

It is a very common misconception that you will be audited only if you are non-compliant in reporting taxes to the various government authorities.  In fact, this could not be further from the truth!

Several things can cause your business to be selected for audit, such as:

  • Late filing of income tax returns
  • Late filing or non-filing of GST returns
  • Filing multiple returns at once
  • Late filing of T4’s and related payroll information
  • Employee complaints to the Ministry of Labour
  • Worker’s Compensation Claims
  • Significant change in your business income or expenses
  • CRA Anonymous Tip Program
  • Random Chance

Face it, it is inevitable; sooner or later, you are going to face an audit by one or more of the government revenue agencies.

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Shareholder Agreements – a MUST for Your Business

When more than 50% of marriages end in divorce, what would make one think that a business partnership is any different?

Many friends and family members enter into business together with the best of intentions; however, when working along side someone 8 hours per day, 5 days per week, things change…

If this type of situation arises in your business, do you have a Shareholders’ Agreement to protect yourself?

Firstly however, why an Agreement?

The Shareholders’ Agreement provides a framework to navigate within regarding the shareholder’s rights and obligations, and the protection of the interests of all the shareholders in the event of changing circumstances.

What should your Agreement Include?

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The Most Valuable Asset Your Business has – Your Accountant!

Whether your business is just starting out or you have been operating for 20 years, your accountant is one of the most important members of your team.

A good accountant can assist you in making business decisions, developing business plans and tax planning. They can work with you to obtain financing, control labour costs, monitor your gross margin and protect you from government related (tax) issues; all improving your bottom line.

Choosing the right accountant can, however, be a difficult task as anyone can use the term ‘accountant’.

CRA has many times rendered rulings against business owners for having ‘inexperienced’ and ‘unqualified’ accountants and bookkeepers. In fact, one recent case saw a Tax Court of Canada Justice State:

“Mr. A. as the business owner, did not exercise diligence in hiring his spouse to perform the accounting and bookkeeping tasks of the business, therefore, we find Mr. A. liable for the taxes, interest, and penalties as assessed”

This may be an extreme case, but the point is:

The business owner is almost always liable and accountable for the financial affairs of the business.

With so many choices, how do you go about choosing an accounting professional that best meets the needs for your business?

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What Prompts a Tax Audit?

For some, it is their greatest fear, for others, a fact of life. The letter from CRA saying they want to review your tax returns.

There are only 2 ways that a taxpayer can be selected for an audit:

1. Random Change
2. Targeted Selection Process

We’ll ignore random chance and give you the details for the Targeted Selection Process (TSP).

The TSP is based upon risk factors; the CRA looks for those that are more likely to owe more taxes based upon some specific criteria and experience:

10% of randomly selected taxpayers face an additional tax bill of more than $5,000 while 35% of TSP taxpayers owe more than $5,000 in additional taxes.

Filing online vs. paper filing has absolutely no bearing on being selected for an audit, what does matter though are:

1. Errors on tax returns; an occasional error is normal, multiple errors and repeated errors will get you an audit.

2. Self-Employment; taxpayers that are employed and have T4’s, RRSP Receipts etc. have a very low risk of being audited – CRA gets their tax information directly from the employers; mistakes are highly unlikely.

Individuals that are self-employed however, pose a much better opportunity for the CRA, especially those that are in cash oriented businesses (home renovations, contractors, etc.).

Here are some interesting statistics from a CRA report to Parliament:

CRA conducted 366,260 audits in one year resulting in $2.5 Billion in additional taxes, interest and penalties. (small business audits)

CRA conducted about 63,000 GST/HST audits in this same period resulting in assessments of more than $600 million.

They conducted 20,635 audits on ‘underground economy’ businesses – resulting in addtional tax, interest and penalties of more than $284 million.

98% of tax evasion cases prosecuted by the CRA result in Convictions! And the rate of conviction has NEVER fallen below 94%

When it comes to your small business, what will trigger the CRA to consider an audit?

1. Major Changes in Income or Expenses; CRA likes things to be predictable, when things change dramatically, they will ask questions.

2. Repeated Losses; really? For how many years do you think your business can sustain losses before CRA will question it?
3. Expenses that are different than others in your industry; if you claim $10,000 in travel and all of your competitors don’t claim travel, CRA will question it.

4. Underreported Earnings; CRA conducts very detailed statistical analysis of businesses. If you are in a certain industry, they know what your margins should be; if you are way off, they will question it.

5. Large Charitable Donations; Your business is not doing well, but you donate $10,000 to charity? They will question it.

6. Home Office Deductions; There are very specific criteria required to claim home office expenses, if you don’t meet the criteria, they will come calling.

7. Discrepancies between GST Returns and Tax Returns; yes, they do check! If your revenues do not match or your expenses are not the same, they will question it.

8. Shareholder Loans; if the loans appear on your financial statements (as a receivable) for 2 consecutive years, expect a call! CRA does not like Shareholder loans that should be considered income and taxable.

9. Errors and Missing Information; If you get dividends, investment income, or rental income, CRA knows this. If you negelect to report it on your tax returns, they will call.

10. Divorce! – Yes, there is nothing worse than a disgruntled spouse. One call to CRA declaring that you have hidden income, over-reported expenses etc. will get you Audited!
There are a few other ways you can get yourself audited, but your best defence is a good accountant and accurate, detailed records!
Don’t skimp on a bookkeeper, it could end up costing you tens of thousands of dollars in addtional taxes, interest and penalties.

Next Month: What to do if you are audited.