Are You Ready For a Tax Audit?

Are you at risk? The Canada Revenue Agency (CRA) continues to audit the following key areas, as these areas seem to be the ones of greatest error or non-compliance by small and medium sized businesses:

Denied expenses – CRA denies unsupported and non-deductible expenses. It is important to have proper and adequate documentation to support the expenditures.
Taxable benefits – CRA scrutinizes automobile benefits and other expenses such as travel expenses and phone and internet usage to ensure taxable benefits are attributed properly to employees.
Shareholder benefits – CRA continues to seek out personal expenses paid for and deducted by the business that should be denied or taxed to the shareholder. Taxpayers should carefully document the business purpose of all expenses and have practices in place to closely monitor shareholder accounts and credit cards to avoid these reassessments.
International compliance / cross-border transactions – Many business are unaware of the tax and reporting implications of conducting business outside of their country and engaging in certain financing transactions outside of Canada, including sales taxes, payroll and employee withholdings, and corporate tax reporting implications. For Canada and the US, there is information sharing and new processes at boarder security to more closely scrutinize cross-border business travel.
Sales & commodity taxes (or Indirect taxes) – There have been a lot of changes in the sales tax rules in Canada over the last few years, with significant changes affecting large businesses, cross-border transactions, pensions, and financial institutions. Many businesses are unaware of how these changes affect them. The CRA also continues to find and disallow ITC claims for expenditures with inadequate or improper documentation.
Non-arm’s length transactions – Whether domestic or international, if there is insufficient proof/documentation for the validity of the transaction between non-arm’s length parties (such as management or administration fees), the expense can be denied (but yet, the income still taxed in to the other party – resulting in double taxation).
Aggressive tax planning/schemes – Aggressive tax planning and abusive tax avoidance schemes are a global concern. The CRA has invested millions in its program to reduce aggressive tax planning or abusive tax avoidance schemes that contravene specific anti-avoidance provisions of the law. The CRA now has the tools to detect, correct and deter the non-compliance of taxpayers using aggressive tax plans, and there will likely be more audit activity in this area.
As part of this scrutiny, the CRA has recently sent notice that it will be increasing its audits of individuals who have claimed business or property losses. If you do receive an audit request letter or request for information, don’t sit on it or stick it in a drawer somewhere hoping it will go away or take care of itself (yes, people do this). Take the letter immediately to your accountant or tax advisor to assist you in dealing with it.

Not dealing with the CRA requests in timely manner can cost you hundreds or thousands or even more in additional taxes, interest and penalties, which can cripple a small business. But CRA auditors are people too – just doing their job, serving you, the taxpayer, as their client. You may have done everything correctly, or you may have made honest mistakes (CRA audits can be a great opportunity to learn and boost your tax management controls and practices). But be prepared. Talk to your accountant and ask them what your risks are and how you can reduce them.

[author] [author_image timthumb=’on’][/author_image] [author_info]Linda Spencer is a CPA, CA, Canadian Tax Specialist and Money, Marketing & Soul business coach. Her mission is to eliminate stress and anxiety around money and taxes, by empowering heart-centered small business owners with the tools, knowledge, strategies and mindsets to put them in the driver seat of their financial success and wellness.[/author_info] [/author]

road over water

8 Things You Need to Know as CFO of Your Small Business

Let’s face it, as a small business owner, you wear many hats – one being that of Chief Financial Officer (CFO).  And as the CFO of your business, you are focused on strategy, planning and operating your business in a way that optimizes your profits and cash flow, and ultimately your financial value.  As CEO (Chief Executive/Operating Officer), you have the big picture vision, the dream.  But as CFO, you are the gate-keeper, the one that ensures the investment in the big picture vision is sound.

This is why I am sharing with you 8 key things that top CFO’s are concerned with to help you make better business decisions and avoid the top small business money mistakes.

  1. Revenue / Sales

The key to any business success is SALES!  No sales, no cash, no business.  So as CFO, you need to understand your sales numbers, as well as your products and target customers, so that you can recommend and take courses of action to ensure that you are going to hit/exceed your sales targets…things like return on marketing, cost of client acquisition and retention, pricing strategies and policies.  The key here is knowing your market and having a good sales and marketing system, as well as having good customer service…after all, it’s easier to get repeat business and referrals than it is new business from strangers.

  1. Vision for the Future

So many entrepreneurs operate by the seat of their pants, looking at short term gains with no real vision for the future.  While this might work in the short run, it is not a sustainable model for the long term.  The cornerstone of what I coach my clients is always to start with the end in mind, and have that end in mind when making your business decisions.  This includes having a written business plan (operational, financial and marketing/sales)…it doesn’t have to be elaborate (unless it’s required by investors/lenders), but it does need to be written down somewhere, vetted and shared with your team, and re-visited regularly.

  1. Talent Acquisition and Management

At one conference I attended, the common message I heard from all the women entrepreneurs who shared their success stories is that the key to their success was building good relationships and having a good team.  This is consistent with my research and with what big business CFO’s have shared with me personally.  You need to have the right people doing the right things with the right tools…and you need to have a system for evaluating their performance, rewarding them and retaining them.  You want a team that will challenge your ideas and strategies, to ensure that you are making the best choices for your business and your clients (and you’ll want to encourage them to do so).

  1. Risk Management

Risk management has been one of my main focus areas for over 10 years.  It is an area that is top of mind for big business CFO’s, but it is one of the most neglected areas in small and micro business.  Yet, risk is an area that can sink a small business in a heartbeat if not managed properly.  Do you know what your risks are?  They could be legal, operational, reputational, financial and credit, compliance, technology, privacy, economic or market risk.  What if something went wrong in providing a service to your client and they sued you?  What if you made a big order with a supplier and they didn’t deliver?  What if an employee was committing fraud?  Or someone was stealing your intellectual property? Or if you didn’t pay your taxes? Or if your technology failed, or someone hacked in and stole your data?  Some effective ways to manage these risks include first identifying your risks, then ensuring you have adequate and appropriate insurance, legal contracts, effective policies and procedures, and internal controls.  How does your business measure up to its risks?

  1. Governance

Along with risk management, comes governance.  Corporate governance is the system by which companies are directed and controlled. It provides the structure through which businesses set and pursue their objectives, while reflecting the context of the social, regulatory and market environments they play in.  For many small business owners, corporate governance and reporting is an afterthought…the reason being may be that many small business are not held accountable by any particular governing body, so governance and reporting takes a back seat to everything else in the business.  Why does this matter?  For one, good corporate governance strengthens a company’s reputation and risk management practices.

Not having good governance structure and practices could lead to things such as the following practices that could cause harm to others and ultimately cripple a business:

  • taking risks which have serious consequences, neglect of duty of care
  • dishonesty, withholding information, distortion of facts
  • misleading communications or advertising
  • avoiding blame or penalty or payment of compensation for wrong-doing
  • secrecy and lack of transparency and resistance to reasonable investigation
  • harming the environment or planet, people or animals
  • unnecessary waste or consumption
  • invasion of privacy or anything causing privacy to be compromised
  • conflict of interest, betrayal of trust or breaking confidentiality

As CFO of your business, the gate-keeper, you need to ensure you have good governance and reporting practices to reduce your risks.

  1. Operating Productivity

Often, cost control is a function of operational productivity.  This includes measuring how well you, your team and your assets are working for you.  What is your return on time and investments? You can look at revenues and costs as a function of time, or people (by function of sales, marketing, operations, technology, admin), or assets (particularly if you’re a capital intensive business).

  1. Profits and Cash Flow

No entrepreneur gets into business with a view of incurring losses…and it sucks when that happens.  Profits are often the driving force for creating financial value and obtaining financing.  But it’s not just revenue minus expenses…you have to also take into account depreciation and other costs indirect costs that you might not be thinking of on a regular basis, such as interest, taxes, and what you pay yourself (and YES – you should be paying yourself, just as you would for any other employee).

Even more important than profits, I think, is cash flow…you need to know what cash is coming in (receivables and collections) and going out (payables, payroll and taxes), and when, so that you can manage it effectively and ensure that you are still paying yourself, your employees  AND all the other bills.  That’s why it’s important to track, reconcile your accounts and review your cash flow at least on a monthly basis (or weekly is better) so you can make quick decisions to bring in more cash, especially if you’re facing a shortfall.  Doing so can also help identify problem areas in your business that need further investigation.

  1. Tax Planning and Optimization

As a small business owner, you have options as to how you structure your business, and what makes the most sense for you from a tax perspective…you don’t want to be paying too much tax, but also need to ensure you’re not under-reporting your income or over-deducting expenses.  Unexpected tax audit adjustments can be costly, and come with significant interest and penalties.  I’ve seen businesses go out of business because of unforeseen tax assessments.  This not only goes for income taxes, but for sales taxes and payroll taxes as well.

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How do you track and report all this?  Where do you start?  Start by working with your professional advisors… Ask your accountant questions so they can help you understand what your numbers are telling you.  Hire a business consultant – they’re trained to see and understand the big picture, analyze the situation and identify areas for improvement, as well as the solutions to implement for greater success.  If your concern is sales, hire a sales consultant or coach. Talk to your lawyer about hedging your legal risks, and to your business insurance agent to ensure you’re adequately covered.

Still not sure?  Send me an email…I’d be happy to discuss your situation to see how I can help directly or refer you to someone in my vast network of business experts (accountants, lawyers, marketing strategists, sales coaches, social media experts, web and graphic designers, content writers, technology solutions, insurance specialists, financial analysts and advisors, HR specialists, recruiters, and more!).  And check out upcoming workshops and programs than may assist you www.visionspire.ca/events

Contact Linda@visionspire.ca .

 

[author] [author_image timthumb=’on’][/author_image] [author_info]Linda Spencer is a CPA, CA, Canadian Tax Specialist and Money, Marketing & Soul business coach. Her mission is to eliminate stress and anxiety around money and taxes, by empowering heart-centered small business owners with the tools, knowledge, strategies and mindsets to put them in the driver seat of their financial success and wellness.[/author_info] [/author]