Category: Featured

19/11/2016 - 0 Comments - Featured

Leveraging the New Brunswick Small Business Investor Tax Credit to Raise Capital for Your Business

Securing necessary funding for a startup or a business expansion is often a challenging endeavor. It is common for founders to have aspirations that exceed their own access to capital. In turn, they must secure funding from other parties. The main sources of capital for small businesses come from lenders or investors, so small businesses often end up raising capital through a combination of debt and equity. Lenders usually have priority rights over investors, so investors ultimately take on more of the business risk.

Small Business Investor Tax Credit Program

To help reduce exposure for the investor and to help the founder attract investment money, the province of New Brunswick offers a generous tax incentive called the SBITC (short for Small Business Investor Tax Credit). The SBITC Program provides the investor with a non-refundable provincial tax credit that can be claimed on the investors tax return. What this means is that the tax credit can be used to offset or eliminate the investor’s provincial tax otherwise payable. If the tax credit exceeds the investor’s provincial tax payable for the current tax year, the remainder can be carried back up to three years or carried forward up to seven years.

Individuals may invest between $1,000 and $250,000 in any particular year and will receive a tax credit of 50% of the total investment, for a maximum tax credit of $125,000. Corporate investors need to invest at least $50,000 and up to a maximum of $500,000. However, the tax credit for corporate investors is equal to 15% of the total investment, for a maximum tax credit of $75,000.

To qualify for the tax credit, the rules of the program must be followed. The program defines eligibility requirements for the business seeking investment, the investor, and the characteristics of each investment. The main criteria are highlighted in the sections that follow. For the full set of criteria, readers should seek professional advice or refer to the SBITC website and the SBITC Act and Regulations.

Eligible Business

The business must be a private corporation or a Community Economic Development Corporation (CEDC) incorporated or registered to conduct business in the province of New Brunswick. This includes most businesses in New Brunswick with the exception of those that are traded publicly or otherwise required to file a prospectus under the NB Securities Act.

As the name implies, the program is available to small businesses which the province defines as businesses with total net assets not exceeding $40 million. This test includes assets from any other businesses that the province considers associated to the business applying under the program. So with that, it’s not likely any Irving companies would qualify for the program.

The main business activity of the business must be to generate income essentially from the sale of products or services. More specifically, the business must use the majority of its assets to generate what the province refers to as active business income. In other words, businesses that are primarily engaged in property rentals or investment holdings are generally not eligible to apply under the SBITC Program.

Under the SBITC program, the business is required to pay at least 75% of total wages to New Brunswick residents. This requirement is lowered to 50% of total wages for those businesses that export more than 50% of their products and services outside the province. This satisfies the essence of the program which is to generate investment and to create jobs in New Brunswick.

Eligible Investment

The business must raise a minimum capital of $10,000 and there must be at least three investors involved in each capital raise. The shares purchased by the investor must be issued directly from the eligible business rather than purchased from another individual. The business must show a primary purpose for raising the capital other than to take advantage of the SBITC tax credit. If the Minister finds the later to be true, the application will be denied.

The investment shares must be fully paid for when issued and the eligible business must not provide any financial assistance to the potential investor. This means the eligible business may not advance loans, repay shareholder advances, or pay significant dividends to any potential investor before or during participation in the year SBITC program. It is acceptable however, for an eligible investor to be paid a reasonable salary for services performed.

The Minister will review the records of the eligible business and any associated businesses each year during the program to verify that such payments have not been made. The Minister will also look back 12 months prior to the date of application.

The investment shares must be no-par value shares which basically means the shares will participate in the growth in value of the eligible business. The basic premise here is that the investor participates in the growth in value of the business which also means the total investment, net of the tax credits received is at risk. The shares can be voting or non-voting, common or preferred.

Eligible Investor

The eligibility of the investor is fairly straightforward. Individuals must be at least 19 years of age and be a resident of New Brunswick. Corporate investors must be incorporated or registered to do business in the province of New Brunswick. The investor may not use any form of government financial assistance to pay for the investment. I would presume the onus is on the investor to prove the source of funds. Aside from that, the amount the investor can invest is restricted to the amounts as mentioned previously.

Getting Started

There are several steps involved in applying for the SBITC Program and a number of forms that need to be completed. First, the eligible business fills out an application which is available on the SBITC Program website. Existing businesses must submit three years of financial statements, reviewed or audited by a Chartered Professional Accountant (CPA) along with the income tax return for the most recent tax yearend. For startups, the business must submit pro forma financial statements.

The business must also submit an investment plan that explains the amount of capital to be raised and how the business intends to use those funds. The plan must identify each eligible investor along with the number of shares to be subscribed for and the amount to be paid. Other items that need to be disclosed include main business activities, percentage of assets used in each business activity, number of employees currently employed, total wages paid to residents of New Brunswick during the previous tax year, and the total value of goods and services exported outside the province.

Aside from the application process, it is important that the business has authorized an appropriate class of shares with certain share characteristics that meet the objectives of the business and its investors. Beyond the application process, participating businesses will need to file an annual report with the province which includes reviewed or audited financial statement for each yearend during SBITC Program which usually spans five yearends.

Any business considering applying under the SBITC Program should consult with their advisors to guide them through the entire process. For more information about the Small Business Investor Tax Credit Program and to access the required forms, refer to the following website: http://www2.gnb.ca/content/gnb/en/departments/finance/taxes/credit/program.html

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13/01/2016 - 0 Comments - Featured

We all have heard about cloud computing, cloud accounting, big data and all the other buzz words being talked about over the last few years. Some argue that marketing forces are to blame for all of this hype. Others attest this is the new age of computing. What cannot be denied, is that there are more options available for accounting software to run your business now than ever before. The question most of us are asking nowadays is: should I install accounting software on my desktop or subscribe to a web based solution?

The answer to this question is unequivocally, yes!

There is no one solution that fits all scenarios. It is a question of fact. Each business has unique system and business requirements that must be evaluated in coming up with the right answer. For many businesses, a cloud accounting solution makes the most sense. Yet for many others, a desktop installation provides the optimal solution. In some cases, a hybrid model provides the best of both worlds.

This article will discuss some key considerations that may help you decide which option is best for your business.

Performance and Usability

For most of us performance is a key consideration to choosing an accounting solution. Typically, a desktop accounting application will outperform a cloud solution in terms of speed. This can have an impact on our productivity, especially for those of us who enter large volumes of transactions. With a desktop application our data does not have to leave our computer. Calculations are performed and the results are rendered locally. With cloud accounting solutions our data and our user interface must be sent to our computer through an internet connection. The slower the connection, the longer we have to wait.

Yet, the performance gap is getting smaller every day with increasing internet bandwidth coupled with advances in web-based technology. Cloud accounting solution providers are refining their software architectures to make use of local data caching, transmit data more efficiently, and to create more elegant user interface designs.

Security and Privacy

Many of us worry about storing data in the cloud, and these concerns are justified. The privacy and security of our personal and financial data should be an overriding factor in the evaluation of an accounting solution. What might surprise the majority of business owners is cloud accounting solutions are potentially far superior to desktop accounting solutions in terms of security.

Solution providers of cloud accounting software tend to invest millions of dollars into infrastructure and security protocols that make our data safer in the cloud. This doesn’t mean we should trust just any cloud accounting solution with our data. It is important to understand the security measures and service levels that are provided for by any solution we consider.

It is true that some online systems are breached from time to time. However, the data residing on our desktops is also susceptible to unauthorized access since the typical small business does not have a large budget to invest in infrastructure and security.

Availability and Convenience

When it comes to availability each option has some advantages over the other. For cloud based solutions, the availability of our system and our data is only as reliable as our internet connection. When our internet connection goes down, we temporarily lose access to our accounting information. For mission critical situations reliability can be enhanced by provisioning a secondary internet connection or by maintaining a continuous backup of our data on premise.

One advantage of a cloud based solution is that we can access our data from any computer from anywhere in the world where the internet is available. This is great where we have a mobile workforce or multiple locations. And while it may be true for some of us that business and pleasure do not mix, for the rest of us knowing we can access our system while vacationing in Punta Cana gives us much needed piece of mind.

Another advantage of a cloud solution is that we typically do not have to worry about backups and recovery; the solution provider takes care of that for us (I can recall far too many occasions where a customer had lost all of their accounting data because of a hard disk failure). While the risk of data loss can be mitigated for a traditional desktop solution with proper backup procedures, things do not always go as planned. Not to mention the additional effort and self-discipline that is required.

Maintainability

The one thing that internet based solutions have in common with desktop software is this; both systems need to updated and maintained on a regular basis. We can all appreciate how a rapidly changing industry such as accounting can drive changes to the functional requirements of our accounting software. Some of these changes are driven by accounting policy while others are the result of regulatory changes in sales taxes, payroll taxes and other government programs.

In this arena, cloud accounting solutions present a distinct advantage because the solution provider can roll out these updates without any action required on our part. We don’t have to worry about downloading and installing updates at least twice a year. We also do not have to worry about compatibility issues with other programs running on our computer, or the need to repair or reinstall accounting software to get it working again. On the other hand, with cloud solutions we are at the mercy of the solution provider with respect to the timing of these updates. We give up some control.

Hybrid Solutions

What is interesting about all of the things we have discussed here is this: cloud solutions are gaining more ground as compared to desktop based solutions every day. It is only a matter of time before cloud solutions completely replace desktop-only solutions. In the meantime, we can observe the use of hybrid models that move us gradually from desktop-only solutions towards cloud solutions.

Several hybrid solutions are available today. At the low end of the spectrum, we have our traditional desktop applications that we can run on a virtual server in the cloud. At the high end, we have the new app model where the application interface runs on our tablet or smartphone and connects over the internet to our data residing in a world class data center. These hybrid solutions often provide us with the advantages from each model. As we adopt these hybrid solutions we are in fact adopting cloud based technologies.

Moving Forward

To decide which solution is best for our accounting needs, we should reach out to a professional who understands this space. We can talk about our own specific needs and concerns, and gain an understanding of the pros and cons of the solutions that are becoming available. Wait too long and we may be forced to make a change before we are ready.

What do you think? Are there any advantages or disadvantages that you have experienced by moving to a cloud based accounting solution? I look forward to learning about your experiences!

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08/01/2016 - 0 Comments - Featured

Now that tax season is behind us, and many of us are enjoying our refunds, we can move on with life and not worry about our taxes for another year. On the other hand, now is a good time to reflect on our taxes and consider how we might improve our tax situation for next year and the years to follow. Before you make any final decisions, you should know the hidden secret of income tax.

How much is my refund?

There is a widespread belief that the objective to filing our tax returns is to maximize our tax refunds. Some taxpayers evaluate the performance of their tax accountant based on the size of the refund they can generate for them. Others who prepare their own returns will test different scenarios to determine which one leads to the biggest refund. This can be an effective strategy as long as one does not arbitrarily break the rules. For example, whether you claim marital status as single or common law is not a choice but a matter of fact.

So what is the secret?

While it makes sense to legally maximize our tax refunds, the secret to income tax is rather to minimize our tax liabilities. One might assume that by maximizing our tax refund we are in fact minimizing our tax liability. This may be true in many cases, but there are subtle differences that should be considered. Maximizing your tax refund is typically a short-term approach that focuses only on the current year. Minimizing your tax liability is more of a long-term plan.

Okay, but what is the difference?

To further illustrate the difference, consider RRSP contributions. The more you contribute (within your contribution limit) in a particular year, the higher your refund will be until you have eliminated your federal tax payable to zero. This would be your approach if your objective was simply to maximize your tax refund. The problem with this approach is that your return on investment from your RRSP contributions (expressed as your marginal rate of tax) diminishes as you pull your net income down into lower tax brackets.

The more effective solution is to contribute enough to your RRSPs to bring your income down into the next lowest tax bracket. This way you enjoy the maximum marginal rate of return from your RRSP contributions for the current year. The unused contribution room is carried forward and you can continue this technique in the years that follow until you run out of room or you hit retirement. This is a fairly simple concept that most taxpayers understand.

What else can I do?

With this example in mind, we can think about other techniques that can be used to minimize our tax liabilities. Having your employer withhold an additional $50 in federal taxes from each pay will certainly increase your refund (or reduce your tax bill) at the end of the year. However, this approach does nothing to reduce your taxes and more importantly it leaves you with less of your own money throughout the year. I call this, a bad idea.

A better alternative is to contribute the same $50 into a tax free savings account each pay period. This technique will keep the money where it belongs. Why give it to CRA before you have to? Didn’t you know CRA does not pay interest on your tax refund? While the money is in your name, it will earn interest for you. And if that money is in a tax free savings account, the interest income is not subject to tax. If you need the money to pay your tax bill at the end of the year you can take it out and pay your taxes when they become due.

There are many other techniques available to most individuals that allow us to defer tax or avoid tax. Taxes can be deferred by pushing income from the current year into future years. Taxes can be avoided by splitting income with a spouse, making charitable donations, or claiming certain other tax credits. Other techniques available to small business owners include incorporating the business, setting up an investment holdings company, and utilizing a family trust.

Where do I start?

The key to any of these techniques is to focus on minimizing our lifetime tax liability rather than on maximizing current year refunds. This is where it pays to work with a tax professional who can help you see the big picture. While you are at it, introduce your tax professional to your investment advisor. This can be a winning combination that helps you maximize your wealth.

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08/01/2016 - 0 Comments - Featured

Many new clients come to us with their tax information and ask how much it will cost to file a return. I tell them our standard rates which start at $125 for a single return and $200 for a couple. It can cost more if there is a lot of work involved, but for most people the basic fee is sufficient to do the job.

Almost without fail, the new client will explain they want us to prepare only one or the other of the couple’s returns; not both. I’m not sure if they are trying to save $75 or if it is just because they are embarrassed to ask a professional for help for what seems like a very simple task. However, we have learned that the situation is usually not as simple as some would think.

‘Til Taxes Do Us Part

We usually recommend strongly that we prepare both returns together for several reasons. We typically recover thousands of tax dollars as a result of optimizing the returns to the maximum benefit of the household. There are several strategies that may trigger tax savings for the household. I will list a few of them here with a brief explanation of how taxes can be reduced.

Medical Expenses

Household medical expenses can be claimed on the return of either spouse. Usually it is beneficial to claim medical expenses on the return of the spouse with the lower net income. As a rule, medical expenses must exceed 3% of a taxpayer’s net income in order to realize any possible tax credit. If each spouse claims his or her own medical expenses, the 3% net income threshold has to be satisfied on both individuals’ returns. By combining and claiming all medical expenses on one return the household needs to satisfy this threshold for only one individual. And by claiming medical expenses on the return of the individual with the lower net income, the threshold is lower which usually results in a larger tax credit.

Pension Income Splitting

Taxpayers earning certain types of pension or annuity income may be eligible to split some of this income with their spouse. While not always the case, this practice can result in significant tax savings where one spouse is in a higher tax bracket than the other. While the principle behind pension income splitting is straight forward, the formula to optimize the level of splitting is complex and requires several recalculations through trial and error until the maximum benefit is reached. Good tax preparation software makes this optimization very easy as long as the returns are coupled.

Family Tax Cut

New for this year, eligible couples with minor children may be able to shift up to $50,000 of income from one spouse to the other to realize up to $2,000 in tax credits.

Other Transfers

While the first three situations would seem to have the largest impact on tax savings, there are several other amounts that can be transferred from one spouse to the other. These transfers tend to benefit couples the most when one individual has eliminated his or her federal tax and the other spouse is still taxable. These amounts include the age amount, amount for children, the pension income amount, the disability amount, and up to $5,000 of tuition, education and textbook amounts. Finally, donations can be combined and claimed on either spouse so that the lower tax credit on the first $200 of donations has to be used up only once.

Tax Case 101

We ran into a great example of this situation just last week where a friend of mine brought in his wife’s return because his wife had retired during the year. He wanted to make sure her return was handled properly. He said he would do his own return because there was “nothing to it”. As it turns out, the couple had medical expenses, not to mention the pension income his wife is now earning. Our personal tax manager convinced this client to bring in his own return as well so we could file them jointly. Ultimately we saved this couple over $3 thousand dollars in taxes! Needless to say, they were very pleased with this outcome!

There are many other scenarios that may need to be considered depending on your unique situation. If you or your spouse has a tax return you feel may be over your head, and the other return is straight forward, you should strongly consider asking your tax professional to take care of both returns for you. The small increase in fees could result in huge returns!

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07/01/2016 - 0 Comments - Featured

Running a small business these days, especially a startup business, can be similar to flying a passenger jet. Many business owners gauge the performance of their companies by how much cash they have in the corporate bank account. While this might seem like the intuitive approach to managing your business finances, it leaves your business open to significant risk of failure. Imagine trying to fly a passenger jet without a flight plan and without instrumentation.

Now I will admit that I don’t know much about flying. However, I do understand some important concepts that I believe can be adapted for the purpose of running a business. Two of these concepts are having a flight plan and using instrumentation to maintain your course.

A flight plan is critical to a successful flight. It sets out the departure and arrival times, the altitude, path and velocity among other aspects. Without a flight plan your passengers would not know when to board or when to expect to arrive at their destination. Sounds like a National Lampoon’s Vacation to me! Or worse, your flight path could cross over with another resulting in a potentially sudden and tragic failure.

Even with a flight plan, it can be difficult to keep a passenger jet on track without proper instrumentation. Sure the passengers are all on board, but without knowing your speed, direction, altitude or how much fuel you have left how do you know you will arrive at your destination before hitting empty?

Every business needs a well thought out plan and a dashboard to keep on track with that plan. We have all heard about the rate of failure for small businesses. A plan helps you identify the direction your business is headed; how much investment is needed to ride the growth curve; when the business expects to provide a return on this investment; and how much cash is needed to sustain monthly operations. Not knowing these answers is leaving the fate of your business to chance.

Like the instrument panel in a passenger jet, an accurate and relevant dashboard is necessary to make sure the business is on the right path. It can show how fast you are growing and how much cash is available to fuel the business. This information can help validate whether the business is attracting enough of the right type of customers to meet its short-term financial obligations. Running out of cash is like running out of fuel; eventually you crash.

It is important to review the dashboard frequently. It is not enough to wait until the end of the year to look back at what has already happened. Instead, the dashboard needs to show how the business is performing along the way. Some information should be reviewed monthly, while other information must be reviewed weekly or even daily. The information should include some leading indicators that help predict where the business is headed.

Finally, consider the importance of having the right information available at the right time. You wouldn’t want to see what your altitude was five minutes ago, or rely on a faulty reading on your rate of descent while landing a passenger jet. Nor would it be useful to know how much cash was on hand two weeks ago, or rely on an incorrect receivables listing while negotiating payment terms with a key supplier.

Surprises can be nice when they involve chocolates or flowers; however, when it comes to flying an airplane or running a business we are always better off when things happen on purpose, rather than by accident. How well does your business run? Have you encountered any uncomfortable surprises? It may be time to implement a plan and a dashboard to help you manage your business. Do you have a story about your business you would like to share? I look forward to reading about it.

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