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A guide to start a new small business and a brief outline of relevant tax incentives.
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Starting a small business and understanding the relevant tax rules
Frances Cheng MBA, CFA, FRM, CFP, FCSI Investment Advisor and Financial Planner
BMO Nesbitt Burns
(905) 763 3764 Frances.cheng@nbpcd.com
Frances Cheng, MBA, CFP, CIM, FCSI
Over 10 years experience in corporate finance, institutional banking, investments and financial planning in Asia and in Canada.
Guest Speaker at different community forums
Guest Professor of Finance, Economics and Accounting at Kingston College.
Author of tax-planning articles. Assist affluent individuals manage their
wealth more effectively. Custom-made financial solutions to reach
an individual’s long-term objectives
My Services Uniquely available to you!
Full financial planning Tax Planning Analysis Estate Planning Analysis Investment Planning, Portfolio
Strategies, Trend Analysis, Fundamental Analysis
Insurance Planning Analysis Retirement Planning Analysis Education Planning Analysis
The Entrepreneur The Need for your products or service A self-evaluation of your
preparedness A basic understanding of your
business The development of a business plan $$$
Ask yourself : Why do you want to be in business? Are you confident you can succeed? Do you have any experience in the
choice of business, if not, how do you obtain it?
Are you a risk taker? Do you understand the implications of your decisions?
Should you maintain your current employment or will your business provide an adequate income by itself?
Is your family supportive and understanding?
Rewards, Risk and Pitfalls Management Planning The Business Plan Other Resources
New Business – Start from Scratch
Advantages Potential lower overhead
and lower start-up costs Greatest personal
freedom Ability to enter new
markets or introduce new products
Ability to change business practices or direction quickly
Disadvantages Greatest risk Requires
significant personal and business planning
Clientele must be developed
Buying an Existing Business
Advantages Limited risk Significant personal
freedom Established service or
product, clientele, method of operation, staff and name
Cash flow is being generated
Relationship established with suppliers and banks
Disadvantages Product/service may
be obsolete or market shrinking
No growth potential AR may be too high or
uncollectable Seller may have
hidden reasons for selling that have resulted in business deterioration over a period of years
Is Franchising For You? Check the franchisor’s credit
background Request and analyze the franchisor’s
most recent financial statements Obtain from the franchisor all the
public information available on its operations
Ask for a copy of the franchisor’s trademark application or registration
Is Franchising For You? Request a list of all franchisees with
their locations and telephone numbers
Complete the application or prescreening form
Obtain a full set of legal documents from the franchisor
Read the deposit agreement carefully and ensure it is refundable
Is Franchising For You? Visit the site and analyze the site,
available descriptive material, surrounding population, average annual income and age distribution.
Review the pro forma financial statements with an accountant
Obtain all information about franchising available from the bank
Is Franchising For You? Inform your spouse and family
completely about what you are doing Engage a franchise lawyer to review all
of the documents including trademark registration and the franchise agreement.
Decision will rest with you, as long as it makes sense
Seek professional help at all time www.cfa.ca (Canadian Franchise
Association)
Location Economic/business considerations Residential, social and cultural
opportunities of the community Zoning, building, transportation,
utilities, taxes, lease, approvals, Protection, neighbourhood,
restrictions, suppliers, your customers, your competition etc.
Funding Requirement : Initial costs include :
Land Building Fixtures Machinery Supplies Vehicles Pre-opening expenses Opening inventory
Funding Requirement : Daily operating costs include :
Rising inventories Payroll Rents Taxes Advertising AR
Sources of Funding Small business loan from
banks : Short term loans Long term mortgage loans Loans against inventory or AR Working capital
Sources of Funding Other sources of funding :
Insurance companies Trust companies Credit unions Commercial Credit and
Acceptance companies Venture capital loan companies Factoring companies
Business Term Loans Up to $250,000 Flexible repayment terms
(fixed/variable) Up to 5-year term on 15-year
amortization May qualify for government-
guaranteed loan
Options for Funding Public and private
placements of debt and equity
Loan underwriting and syndication
Securitizations Monetizations Trade finance
services
Multi-tiered financing
Acquisition financing
Term financing Project financing Leasing of capital
equipment Tax-efficient
structuring
Leasing Relatively high interest, totally tax-
deductible Also arranged for machinery,
vehicles and office equipment, to avoid heavy capital cost outlays
Reducing cost, defer GST & PST payments
Other alternatives ? Internal sources : inventory
control, cash management, credit management etc.
Friends are not usually the silent partners as originally perceived
Employees : Are they the right ones to ‘lock in’?
Bookkeeping Must keep adequate records
from the start MEOI publication : Record Keeping
Made Easy
Credit Control Maintain proper cash flow Risk can be minimized by :
Know your customer Make sure the terms are clearly understood Bill promptly Demonstrate that you expect prompt
payment Maintain dated AR Follow up on the payment if not received as
planned
Government Support COBSC 1-800-567-2345 www.cbsc.org/ontario
Venture Capital Companies providing VC take an
equity position, range from a minority to 40% range, I.e. board of directors and control over matters, dividends payout, major capex etc.
Provide advice and consultation, financial planning and control, underwriting, accounting and marketing.
VC prefers management with proven ability
Leasing Consult a qualified, reputable real
estate firm that specializes in commercial and industrial leasing
Leasing Retail Space Location & size If small space required, better in
an indoor mall, though at a higher rate per sq.ft., heavier traffic and greater exposure to impulse buyers
Good Space planning and analysis
Types of Leases Wholly net against percentage Wholly net : all operating costs
Heating, electricity, taxes etc. Metered directly or charged on a
proportionate share basis Against % : rate quoted as the greater
of either x dollars per s.q. or s.m. p.a. or a stated % of gross annual sales,usually 6-8% for most retailers
Industrial Space For light industrial use : no big
difference from that of most other business transactions
Rule of thumb : ratio of office to warehouse/mfg : 1 to 10
Total space requirement, physical space layout, ceiling height
Method of shipping-
Industrial Condominium Equity built-in, significant tax
advantages Not less than 500 s.m. I.e. your
space requirement is fairly constant
Owning your Premises Tax Benefits : deductions of
interest payments, financing plus CCA or dep’n.
Capital appreciation Equity build-up Cash flow : lease out surplus space
to tenants
Others: Company cars, trucks, fixtures and equipments Leasing to ease cash flow
problems Avoid significant capital outlay Cost of leasing deductible
CCA commonly used rates
Automobiles 30%
Computer hardware 30%
Computer software 100%
Furniture & fixtures 20%
Manufacturing and processing machinery
30%
Patents 25%
Leasehold improvements 5 yrs
Ratios Current Ratio
Current AssetsCurrent Liabilities 2 : 1
Quick Ratio
Cash+AR+quick assetsCurrent Liabilities 1 : 1
Operating Expenses Ratio Operating ExpNet Sales
Debt to Equity Ratio
Total debit (or Liab.)Networth 1.5 : 1
Ratios
R.O.E. Net IncomeEquity
Profit MarginNet ProfitsSales
Receivables days
Ratio of AR x 365 Sales
Inventory Turnover
Net Sales Inventory
Use of Professionals The Banker The Lawyer The Accountant The Computer system (from day 1) Business Research Aids
Business Reports : D&B Credit Bureaus/Equifax
The Registration, incorporations and Licences Sole Proprietorship Registration
MOCBS (416) 314 8880 www.cbs.gov.on.ca
Articles of Incorporation Corporate Services Section (416) 314
0096 NUANS Name research report
Co-operatives www.fsco/gov.on.ca Financial Services Commission of Ontario
The Registration, incorporations and Licences Partnerships and LP
Under Business Names Act Publications Ontario
What Form of Business Organization Is Suitable?
Sole Proprietorship Partnership Corporation
Sole Proprietorship Advantages
Low Start-up costs Greatest freedom
from regulation Owner in direct
control Minimal WC req’t Tax advantage All profits to owner
Disadvantages Unlimited
liability Lack of
continuity Difficult to raise
capital
Partnership Advantages
Ease of formation Low start-up costs Additional sources of
VC Broader mgt base Possible tax
advantage Limited outside
regulation
Disadvantages Unlimited liability Lack of continuity Divided authority Difficulty in raising
additional capital Hard to find
suitable partners
Corporations Advantages
Limited liability Specialized
management Ownership is
transferable Continuous existence Legal entity Possible tax
advantages Easier to raise capital
Disadvantages Closely regulated Most expensive
form to organize Charter
restrictions Extensive record
keeping necessary
Tax rules can be more complex
Licenses Municipal Licenses
Must conform to zoning and bylaws regulations
Fees, and application requirement contact the building of bylaw officer in the municipality
Resource-Based Tourist Establishment Licenses Under revised Regulation 1037 of
Tourism Act Ministry of Tourism and Recreation 1-800-561-3399
Liquor Licenses Alcohol and Gaming Commission of
Ontario www.agco.on.ca 1 800 522 2876
Import-Export COBSC 1 800 567 2345 Team Canada 1 888 811 1119 Toronto Region 1 800 461 2096
Delivery and Transport Licenses Motor Vehicle Transport Act
(Canada) Ministry of Enforcement Office Carrier Sanctions and Investigation
Office, Ministry of Transportation 1 800 387 7736 www.mto.gov.on.ca
Bonded Manufacturers and Bonded Warehouses The Excise Act Surety Bond : issued by an
insurance company,guaranteeing the performance of a contract.
Include : contract bonds, license and permit bonds, court and probate bonds
Insurance Bureau of Canada 1 800 387 2880
www.ibc.ca
Special Regulatory Licenses
MOCBS 1 800 268 1142
19 Regulatory Acts The Business Practices Act The Bailiffs Act The Consumer Protection Act The Consumer Protection Bureau
Act The Consumer Reporting Act The Collection Agencies Act
The Motor Vehicles Dealers Act The Motor Vehicle Repair Act The Paperback and Periodical
Distributions Act The Prepaid Services Act The Real Estate and Business
Brokers Act
The Prepaid Services Act The Real Estate and
Business Brokers Act The Travel Industry Act The Cemeteries Act The Funeral Directors
and Establishment Act The Condominium Act The Discriminatory
Business Practices Act The Debt Collectors Act The Theatres Act The Athletics Control Act
Food & Drug Act and Regulations Health Canada 416 973 1600 www.hc-sc.gc.ca
Canadian Food Inspection Agency Agriculture Canada
416 973 1438
Packaging and Labelling Industry Canada 416 954 1405 www.competition.ic.gc.ca
Product Safety Health Canada
Technical Standards Ontario Ministry of Consumer and
Business Services www.tssa.org 416 325 2000
Building Code Ministry of Municipal Affairs and
Housing 416 585 6666
Pollution Control Ontario Ministry of Environment
and Energy 416 325 4000 www.ene.gov.on.ca
Weights and Measures Under the Weights and Measures
Act Measurement Canada Office of
Industry Canada
Taxation
Provincial Tax Federal Tax
Ministry of Finance Tax Offices Toronto 416 222 3226 1 888 565 6433
Provincial Tax – Retail Sales Tax 8% : for most goods, labor cost on
installation, maintenance, prepared food products (>$4)
10% : on liquor, beer and wine if consume in restaurants (12% if purchased from retail outlets), admission for amusement (>$4)
5% : lodging, hotels, motels Tax Exempt : certain food products,
farm implements, and children’s clothing
Corporate Tax Under Ontario Corporations Tax
Act Income Tax : levied on taxable
income Capital Tax : levied on taxable
paid-up capital
Corporate Tax : Income Tax The general rate : 12.50% The effective rate : 6% on active
business income that qualifies for the federal small business deduction
Corporate Tax : Capital Tax The general capital tax rate : (Oct 1 2001) :
0.3% for corporations with taxable paid-up capital in excess of $2M but less than $2.4M
Flat rates of capital tax (I.e. $100, $200, $500) eliminated effective May 5 99.
Exempt : Family farm, fishing, credit unions (not F.I.), and certain mutual insurance corp.
Flat rate for mortgage investment corporation : $100
Corporate Tax : Capital Tax File Ontario Corporations Tax and
Annual Return (CT 23) within 6 months after its taxable year-end.
If total tax > $2,000, monthly tax installments. Otherwise, annual payment.
Gasoline Tax Direct tax collected by service
stations and remitted through their suppliers
No registration is required for gasoline.
Fuel Tax Direct tax collected by retailers and
remitted through their suppliers. Untaxed middle distillate fuel : coloured
red for non-taxable uses, e.g. heating, cooking or generating power in unlicensed equipment used for commercial, industrial or institutional purposes.
Use of coloured fuel in a licensed motor vehicle or in unlicensed recreation equipment is prohibited.
Fuel Tax Operators of diesel-powered
commercial motor vehicles traveling into or out of Ontario are required to obtain and place on their motor vehicles a Fuel Tax registration decal issued by the Motor Fuels and Tobacco Tax Branch.
Tobacco Tax Vendor’s permit issued under the
Retail Sales Tax Act Retailers must ensure their
wholesale supplies holds a wholesale dealer’s permit (penalties for purchasing from non-collectors).
Retailers will collect and remit 8% retail sales tax on all tobacco product sold.
Stocking or selling of cigarettes that do not bear an Ontario tax mark is prohibited (effective Nov 1 90)
Permits – Fuel and Tobacco Ministry of Finance Motor Fuels and Tobacco Tax
Branch 905 433 6389 Fuel Tax 905 433 6394 Tobacco Tax
Land Transfer Tax Exemption : May be available where
the transfer of land is from an individual to his family farm corporation or family business corporation
Retails Sales Tax may still be payable when chattels associated with the land are transferred.
Contact : Ministry of Finance 905 433 6361
Federal Taxes – GST Goods and Services Tax, base rate
7% Basic groceries, 0% Certain health care or financial
services GST exempt.
Annual sales > $30,000 is required to register under GST.
Input Tax Credits Businesses that are registered for
GST are able to claim a credit for GST paid or payable on business purchases.
To determine whether tax should be remitted or a refund claimed.
Excise Taxes Excise Tax applies before GST. May obtain information from local
district office “GST Guide for Small Business” “Simplified Accounting Methods for
Small Businesses” 1 800 959 5525
Federal Corporations Tax Monthly installments to CCRA. Due in 6 months after the
corporation’s year end.
Personal Tax Taxed on worldwide income Due Apr 30 of the following year Quarterly installments under some
circumstances Sole proprietorship and partnership
income is included on the individual tax return and taxed at normal rates.
Capital Gains Tax Only a portion of capital gains or
losses are included in income (currently 50%)
Losses can be offset previous gains, or carried forward to future years.
Exempt : personal principal residence
Source Deductions Business are to remit CPP, EI and
Income Tax on a regular basis. The frequency depends upon the pay period and the amount remitted.
Contact CCRA : Toronto 1 800 959 5525
Employment Health Tax (EHT) Under Employer Health Tax Act Based on employees who report for
work at a permanent establishment in Ontario and
Employees who do not report for work at a permanent establishment but who are paid from or through the employer’s permanent establishment in Ontario
Employment Health Tax (EHT) Since 1999 eligible employers are
exempt from tax on the first $400,000 of remuneration.
EHT for self-employed individuals has been eliminated
Contact : Ministry of Finance 1 800 565 6433
Labour Regulations
The Ontario Ministry of Labourwww.gov.on.ca
Employment Standards The Employment Standards Act “A Guide to the Employment
Standards Act” Who is covered by the Act and its
general application Hours of work, min. wage, home workers, public
holidays, overtime pay, vacation pay, equal pay for equal work, benefit plans, pregnancy leave and parental leave, termination of employment, severance pay, payments on termination, agricultural workers, domestics, lie detectors, retail business establishments, general administration etc.
Minimum Wage
General hourly rate $6.85
Hourly rate for persons employed to serve liquor in licensed premises
$5.95
Student, hourly rate, < age 18 who work 28 hours per week or less during the school term and more or less than 28 hours per week during school holidays
$6.40
Vacation Pay Entitled to 2 weeks vacation with pay,
if after one year of service, must be given at least 4% of total wages for the year.
If terminate before 1-year period, must pay 4% of total wages, within 1 week of termination.
Vacation pay benefits apply to full-time, part-time and student employees.
Equal Pay No differentiation pay between male
and female employees, for same kind of work except A seniority system A merit system A system that measures earnings
by quantity or quality of production or
A differential based on any factor other than sex
Source Deductions Required to remit CPP, EI and
Income Tax on regular basis. Same as Provincial source
deductions
Workplace Safety and Insurance Board Must register with Workplace Safety
and Insurance Board (WSIB), within 10 days of hiring your first full or part-time workers, include family members.
Sole proprietors, partners and executive officers are not automatically covered under WSIB, but you can apply for optional insurance.
WSIB Gain access to a province-wide network
of health and safety training and resources to help you and your workers avoid injuries and illnesses.
Protects your business from lawsuits by providing benefits for your workers.
Benefits include wage loss and disability benefits, health care costs in case of injuries and illnesses.
WSIB Help you manage the claims to
minimize lost productivity and contain costs.
Include a registered nurse to ensure your workers receive quality health care.
WSIB will determinate your rate group (share the premium within the group)
WSIB You need to provide :
An estimate of your yearly payroll Products you produce
WSIB : 1 800 387 0750 Or register through Ontario
Business Connects
Occupational Health and Safety Act Recently amended B 208 to
include training, education, research and consultation
Sources of Information Small Business Services :
www.ontario-canada.com www. enterprisetoronto.com
THANK YOU
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