Randall J. Ladell, MBA Chartered Accountant

Licensed Public Accountant 1210 Sheppard Avenue East, Suite 405 Toronto, Ontario, M2K 1E3 Email: randall@rjladell.ca Website: www.rjladell.ca

Business: (647) 436-8782 Mobile: (647) 280-4248

Fax: (647) 436-8742

Starting a Small Business in Ontario

This seminar is presented as a source of general information only and has been prepared based on information from various sources. Every effort has been made to ensure the accuracy of the information but this seminar is not intended as a substitute for competent professional advice tailored to the individual’s particular circumstance.

©2005 – Randall J. Ladell, Chartered Accountant

Do not buy shares is not a written in stone absolute. In many instances when you are acquiring an existing business it is the only choice. The advantage to buying the assets and goodwill of a business and incorporating a new company rather than buying the shares of the existing company is that you start with a clean slate. If you buy the shares then the company’s existence is continuous and the company is still liable for:

1. Unpaid taxes or any reassessments arising from a payroll, PST, GST or income tax audit;

2. Any warranty claims or customer returns;

3. Any undisclosed or unknown liabilities at the date of sale; etc.

You also assume the assets of the company at their current tax values. If on the other hand you acquire the assets directly in an arm’s length transaction then they are valued for tax purposes at their current market value (or the amount you paid).

The CRA rules regarding capital leases were changed in 2001. At present unless the bargain purchase option is $1.00 or title passes automatically at the end of the lease, the CRA believes a lease is a lease and only the actual rental payments are deductible. This results in an even spread of the tax deductions rather than a situation where the CCA plus interest claim is higher in the early years of the lease (and of course is less than the rental payments in later years as the interest component of the lease and the UCC of the asset decline).

The Average days to collect and Inventory turnover ratios are ones that I constantly stress for new companies. When you are just starting out and trying to grow, cash is always a scarce commodity and collecting receivables and maintaining inventories at the lowest possible levels can be the difference between success and failure.

The freezing of the loans that a shareholder has made to the company or restrictions on dividend payments from earnings are known to me under the general caption of Postponement of Claims. The lender has provided monies based in part based on your total investment in the company and wants to ensure that your investment stays in the company because it provides the financier with a greater assurance that ultimately their funds will be repaid.

Whether a license is required is a legal issue and except for this overview beyond the expertise of the writer. This is an issue that should be discussed with a lawyer or municipal, provincial or federal authorities.

You are not required to register for RST if you only sell non-taxable goods or services (fruit from a roadside stand) or are a manufacturer or wholesaler and do not sell any goods at the retail level (an annual warehouse sale counts as retail sales and there is no minimum sales amount. You must be registered).

Regardless of whether you are registered or not you are not required to pay RST on any purchases of goods for resale or used in any manufacturing process to produce goods for resale. You must provide your suppliers with an exemption certificate or else they are required to charge RST on your purchases (If you are an intermediate supplier, e.g., a wholesaler then you must get the certificate from your customers).

You are required to pay the RST when you are the final user of a good, i,.e, you must pay RST on office supplies, business equipment, etc. You can self-assess and pay the RST on these purchases yourself but it is usually easier to let your suppliers charge the RST directly on their invoices

GST is ultimately a consumption tax the same as RST, i.e., it is the final consumer who pays the tax. It is levied at each level in the supply chain to prevent leakage and to accelerate cash flows to the government. But for a business, the net cost of GST is NIL. The business claims all GST paid as an Input Tax Credit (ITC) that reduces the amount that must be paid for amounts collected from your customers. Some businesses selling exempt goods or services receive only refunds of GST paid as there GST collections are nil.

Quick overviews.. For more detailed information or questions regarding a specific issue, a business should contact a lawyer or the provincial authorities.

This is an area that is subject to very detailed rules and much litigation. An employee receives approximately 13% in statutory benefits (Vacation pay 4%, Statutory holiday pay 2%, and employers share of CPP 4.95% and EI 2.7%) for which a self employed contractor is not eligible.

In addition, an employee is governed by the various provincial and/or federal labour legislation governing termination, overtime, hours of work etc.

BUT, if under payroll audit the CRA decides that your self employed contractors are in fact employees, besides paying the employer’s share of deductions plus interest and penalties on deductions not taken, the employer may be liable for the deductions themselves, i.e., the employer will likely have to pay the CPP and EI amounts that should have been deducted from the employee’s wages.

Many new businesses consider their WSIB premiums to be just another tax but nothing could be further from the truth. It is a pure insurance pool providing protection for both employers and their workers and promoting safer workplaces. What any employer pays as a premium is wholly based on the claims experience for his or her industry.

If a business does not like its rate then the answer is not to protest to the WSIB but rather to work with its industry association to reduce accident and claims rates. In some provinces there are incentives or penalties respectively for employers with lower or higher than average claims rates.

I work very hard to convince all new businesses of the truth in the above. Costs are not just interest and penalties if you are audited, but also legal and accounting costs to object to any reassessment and disruption of your business as the CRA makes a detailed examination of your records.

At the end of the day it has been my experience that businesses and professionals without proper records pay more tax than they must because they have missed properly deductible claims and expenses.

The issues noted above can be very complex and are particular to the individual business being created. If a new business is being incorporated or an existing proprietorship or partnership is being transferred to a corporation these issues should be discussed with both a qualified lawyer and accountant.

Without going into any great detail, an incorporated active business eligible for the Small Business Deduction (SBD) is tax advantaged over the same business run as a proprietorship or partnership. An active business is just that, an operating business, e.g., retail outlet, manufacturer, wholesaler, service company, etc.

On the other hand, incorporating an investment company creates tax penalties, generally in the form of double taxation when profits are distributed as dividends to the owners. The tax deferral opportunities that may exist in the corporation for a company whose shareholders are already in the highest tax bracket are not generally enough to offset this additional cost. An investment company is one that is “passive”, earning income from holding property such as shares, bonds, rental properties, etc.