Most Frequently Asked Questions...  
  Starting A New Business
I'm starting a business. How do 1 know if 1 have a good idea which can lead to a viable business?
This question is really two questions:
  1. Is this a good opportunity?
  2. Can I make it successful?
There are many good ideas which are not good opportunities. Good opportunities have the following characteristics:
  1. have value to the buyer and often satisfy a real need as opposed to a want,
  2. will usually last a long time (the duration of the market is referred to as the "window of opportunity"),
  3. are desired in the marketplace now,
  4. evolve from changing circumstances.
In evaluating your opportunity, you need to think about:
  1. the need for your product or service, the size of the market, and its growth rate,
  2. financial risk and reward such as how long until positive cash flow,
  3. what is the competitive advantage,
  4. do you have or can get the people needed to form the management team,
  5. what are the key success factors of the business, and
  6. what can kill the business (e.g. legal liability problems for home-build aircraft in the U.S.A. has pretty well driven all manufacturers out of the market)
The answer to whether you can make it successful is dependent on:
  1. the fit between the business and your personal goals (e.g. financial, family, work effort, intellectual stimulation),
  2. the fit between the business and your values (e.g. integrity, craft, pride, desire for money, desire for community recognition, hard work),
  3. whether you can harness the resources to make it a success,
  4. do you understand what will make the business a success - if not, how will you know how to tell whether you are on the right track,
  5. do you bring some of the critical skills to the business - if not, partners will not need you,
  6. are you will to take the risk that the business may fail (which may be due to circumstances beyond your control such as retroactive tariffs on imported products, severe competitor price cutting by a large, diversified competitor with deep pockets)
How do I tell if I am cut out to be a small business owner/entrepreneur?
An entrepreneur is one who seeks opportunities no matter what resources they control and figures out a way to make the opportunity become a successful business venture, however they define business success. A small business owner owns a small business but does not necessarily put together a unique concept/opportunity and is often more concerned with risk minimization. Small business owners would include many self-employed consultants who have a skill and market it to clients, or owners of many small retail stores which are similar to other retail concepts.
You can look at yourself and determine which category you fit into. Typical characteristics of an entrepreneur, according to Jeffry Timmons who wrote the book New Venture Creation,
  1. energy, health and emotional stability
  2. creativity and innovativeness
  3. intelligence
  4. capacity to inspire
  5. values
While many think entrepreneurs are born risk-takers, it is more true that they go after opportunities while considering how to minimize the risks involved. They are willing to live with some uncertainty as they develop and refine their business concept, and they are very externally focused to the market to continue to look for new opportunities. They never rest.
However, with the fast changing business environment, more small business owners are having to take risks, look for opportunities, and develop new concepts. They are having to become more entrepreneurial to survive. There are some business concepts, however, that are more suited to the small business owner, like franchises.
There is no right answer. It is most important that you understand yourself and your goals, values, attitudes, skills, strengths and weaknesses, and the opportunities and resources available to you, and decide at which end of the continuum you fall.
What sources of financing are available for start-up operations?
The sources of financing for start-up are generally:
  1. your personal lines of credit
  2. your personal financing capability
  3. friends and family
  4. outside investors
  5. Canadian banks in a limited way, typically government guaranteed to some degree, and
  6. Some government programs directly.
Many people believe that they can take a business plan to a Canadian bank and get debt financing for their idea before it has been proven to be a viable business venture. Canadian chartered banks are low risk lenders. Because they provide debt financing (except for some new subsidiaries which are starting to provide some equity financing) they do not participate in the upside potential of your idea but they are greatly affected by loan losses both personally on the account manager level and for the bank's opportunities to lend to other businesses.
For any loan to succeed, they need to review the 5 C's:
  1. Capacity to Repay - cash flow
  2. Collateral - security to back the loan
  3. Character - of the owners and key management team
  4. Capital - or what equity you are putting into the business
  5. Conditions - in the economy, industry, etc.
It is difficult to meet these conditions if you are only at the idea stage. That is why there are a few government guaranteed programs, such as the New Venture Loan, or Small Business Loans, which are administered through the banks but provide start-up financing to some degree. But, most likely, you will have to look to your own personal sources of financing for the first year and until you have statements for that year, so start building up your lines of credit now and your credit rating.
Friends and family (i.e. called love money) is a double-edged sword. They can have the funds and the belief in you and your concept, but you need to understand what borrowing or having them invest will or may do to your relationship. You need to be v" clear on how long the money is available because it will always take more money and longer to get a business off the ground than you originally intentioned.
Other outside investors are also a possibility but typically don't like to invest in start-ups. They prefer investing in a business expansion for their risk capital.
Should I be buying a franchise? What are the pros and cons?
Franchises can be great business opportunities especially where you have:
  1. no industry experience,
  2. little general business experience,
  3. some financial resources to invest,
  4. a desire to own and run your own business, and
  5. like to work within a system or way of doing business.
If you are the type to always question and change the way things are done, a franchise may not be for you. A franchisor wants all the franchisees to offer products or services in a consistent manner, with consistent pricing and quality, and following the operational procedures they have put in place. That consistency is what they are selling to the customers.
The pros and cons of any one franchise system depends also on the reputation and relationship between the franchisor and their franchisees. You also need to investigate the success of the franchise system you are considering.
With a good franchise system, the pros include the following:
  • training of franchises and staff both at beginning and ongoing,
  • operating procedures manual provided and updated
  • co-op advertising support as well as national or international name branding
  • real estate expertise and master leasing arrangements negotiated for franchisees
  • reasonable franchise fees or royalties for the value added by the franchisor
  • reasonable prices and policies for the purchase of products
  • in-depth market research done on new locations to ensure optimal traffic patterns
  • operations managers who visit regularly and help to improve operations constantly
  • prearranged financing packages with banks
  • regular franchises meetings sponsored by franchisor
  • continual feedback and support to owners, especially assistance during hard times
The cons are the opposite of the pros. You need to investigate any system thoroughly and talk to current (and, hopefully, past) franchisees. The franchisor should give you a complete list of these franchisees so you can choose who you contact.
What is critical in start-up to ensure success?
This is a difficult question to answer. There are, however, a number of elements which help to increase the chances of success as follows:
  1. Have a "vision", an idea which you have fished out in terms of its unique aspects, its competitive edge.
  2. Have a basic business plan in which you identify the markets, your customers, why they will buy and at what price. This plan can be point-form but you need to ask yourself the hard questions. You also need to include a projected cash flow - but keep in mind that the reality will always be different than your plan. Look at that rough plan once a quarter to see how reality has differed from your expectations and consider what changes you need to make.
  3. Do some marketing research yourself. There is nothing like hearing for yourself from real potential clients or customers why they would consider or not consider your product. The "No's" can be hard to hear, but understanding them and adjusting your mix early an can save your business.
  4. Don't spend too long planning - get out there as soon as possible and be flexible to what you hear in the marketplace.
  5. Get CUSTOMERS and deliver above their expectations!
  6. Watch your CASH - don't commit financial resources before you have to - negotiate terms where you can, stretch your payables, collect your receivable, don't take rented space before you have to, don't hire full-time if you can make do with part-time, etc.
  7. COLLECT your RECEIVABLES - Many entrepreneurs think that customers will pay on a timely basis after receiving your invoice. Many are also managing their cash flow and will only pay when contacted (repeatedly).
  8. Ensure you have enough of the knowledge of the industry and market to know when you are "winning" in the market.
  9. Ensure that you provide enough skills and strengths to the company that you will be critical to your partners if you have them
  10. Make sure you set up the basic legal framework correctly right from the beginning. Consider business structure, shareholder or partnership agreements
  11. Keep track of your results regularly - measure both your success and your problem areas.
  12. Hire good people, lead them with your vision, train them whenever you can, and give them constant feedback
  13. Constantly innovate (i.e. look for ways to improve everything)
  Always, always stay close to your customers!!!!! Each time your customer comes into contact with anyone in your business or comes into your business, it is a Moment of Truth, a chance for you to make a good or bad impression, better or worse than their expectations. Make each Moment of Truth positive and you will have repeat customers. Repeat customers is the way to a profitable, growing, successful business.
How do I price my product or service?
Pricing a product is complex. Too many business owners focus on their current costs and what they need to be profitable with that cost structure. The trouble is that costs change. Where on start-up you may be working out of your home, no employees and little overhead, when you move into facilities outside of home and hire staff, the cost structure changes. If you have marketed your service or product at a certain price, it may be difficult to change this later.
You also need to understand the market and the competition. One of our clients who runs a healthcare consulting business out of her home office had originally priced her service by comparing it to what clients would pay staff doing this job on an hourly basis, even though she knew that, by using her services, they did not have to make that commitment to full-time staff and that she was very good at what she did. She was working very hard, had landed many clients, and wanted to hire some other professionals and make more money while having a life. There was a lot of low-end competition but not a lot of people with her unique mix of experience and skills. She also knew that she was saving her clients money.
She suggested an approach that looked at the value of her services from a cost saving, profit making or other performance criteria. In certain situations, she could measure and tie her fee into that performance - but watch you don't add too much administration to your business. In general, though, she had to find the confidence to say that she and her staff are worth $X per hour or per day or per project. Sometimes, you need to find the customers who are willing to pay what you are worth, rather than taking on just any customers you can find.
In conclusion, you need to understand:
  • the market, its segments, its dynamics, its opportunity areas
  • your service or product offering
  • your competition and how your service or product compares
  • your customers and what they value?
  • how you can contribute to the key success factors of their businesses?
  • the mix of customers, pricing strategies, and service offerings which will create a business which will achieve your goals.
Then strike a price and see how the market responds. One client in the training business asked me whether I thought a course development fee in addition to the course fee for a set of pilots with a large financial institution was appropriate. These clients typically have policies on these matters, so why not ask? Just be willing to talk about the benefits to them. She did, and the client had no problem with the extra fee.
How do I find out what the competition is doing?
To find out what your competition is doing, you need to know who your competition is? For most businesses there are many different competitors offering solutions to the same problem, need or want. For example, in "multi-media", firm that might compete for the same customer for a tradeshow project could include Custom software designers, event management firms, sales presentation companies, and booth distributors. All might have strategic alliances to provide the parts they can't, and may try to sell managing the whole project.
Once you know who your competition is, some of the best ways to find out what they are doing is to:
  1. Ask the customers or prospects when you lose a sale. This is difficult for any owner excited about their own business, but hearing the reasons why you lost the sale is invaluable market research. They can help you understand their perceptions of your mix, your strengths and weaknesses, why the other firm got the business, who else was in the opportunity, why others did not get the business either, etc. Then you can go back an examine if you should or could have done anything differently. You can also review if this was an isolated customer situation (i.e. some decision-maker had a previous relationship with them) or whether you should look at your positioning and mix of services or products.
  2. Ask your customers when you win. Find out who else was being considered and what they liked about your offering best. Do this with care - you should not slam the other firm or encourage the customer to think again.
  3. look for information in the public domain. This includes lnternet sites, Industry Canada and other government databases of companies in certain industry sectors, annual reports and brochures published by the company, publications like Financial Post, databases like Dun & Bradstreet (which a surprising number of private firms release their financial information) and clippings or news releases either on the lnternet or at your library on what is happening with that company.
Some people call up or have someone inquire as to what the other firm is offering. You have to consider your business and personal ethics. If they ask who is calling, are you willing to misrepresent yourself? It is a small world and if the word gets out, your reputation damaged. Staff who are involved may lose respect for you.
There is a lot of information available from your contacts - don't be afraid to ask but I recommend that you always be honest about who you are and why you are asking. Wanting to know how to provide a better product or service in the future which fits the needs of the market is a straight-forward, honest, and honourable reason for asking.
Should I incorporate?
Incorporation makes sense in the following circumstances:
  1. There is a legal liability concern with your business. For example, due to the extensive health laws, almost all restaurants are owned by incorporated companies due to their limited liability. Limited liability means that the damaged party can only sue the company and not you personally. But don't assume that incorporation saves you from all liabilities. More and more provinces and the federal government are extending liability for various risks (such as environmental pollution or accidents, employee wages and severance, GST and other government withholdings) to officers and directors of the company. Also banks and other financing agencies will often ask for personal guarantees to secure any lending they do to the company - this will tie your personal net worth in as additional security on company debt.
  2. You will be negotiating and signing non-transferable agreements (such as franchise rights, distribution agreements) or setting up non-transferable intangible assets. While the tax laws in Canada make rolling most assets of a sole proprietorship or partnership into a corporation fairly easy, often the actual contracts are not transferable or assignable. You would have to re-negotiate them and this may lead the other party to changing terms and conditions.
  3. The business makes more than you need or want to live. Keeping excess income in small businesses in Canada can lead to tax deferral, and even a bit of tax avoidance if future tax rates are lower than current tax rates. There can also be increased opportunities to income split with your spouse or children, although recent tax cases may be limiting this opportunity.
There are other considerations in determining whether to incorporate:
  • Because losses from a sole proprietorship or partnership can be offset other sources of income on your personal tax return, unless the above conditions apply, I typically recommend using those forms of business structure and incorporating when you know the business is going to be a success or meets one of the above conditions.
  • In addition, since a corporation exists separate from its owners and exists forever until it is wound-up, it is more expensive to administer than a sole proprietorship or partnership with mandatory annual tax and accounting work and costs.
  • There are some other tax advantages to a corporation when you come to sell it if you can sell shares, but this can be difficult to persuade a purchaser to do.
Please seek professional advice on your individual situation before making this decision.
What are the different types of loans available from Canadian banks and when would I use each of them?
There are two main types of loans that are made from Canadian banks to businesses. They are:
  • Operating or Revolving Loans
  • Term Loans
  Operating loans are used to help provide working capital to the business, because in any business which has significant receivables and/or inventory, there is usually a need for financing until those assets can become cash. Since the business ongoing has those assets, it needs working capital on an ongoing basis.
Operating loans usually have a total authorized limit but the actual amount you can borrow at any one time is also limited by some margining on the security. For example, an operating line might have a $100,000 limit and be secured by a 75% margin on Accounts Receivable under 90 days. If your business currently has Accounts Receivable under 90 days of $90,000, you could borrow $67,500 maximum for that month. This limit usually is recalculated every month based on supplying the bank with an Accounts Receivable sub-ledger for the month.
These loans are reviewed every year by your account manager at which time, the terms and conditions (such as interest rates, personal guarantees, restrictions) are set for the next year.

Term loans are made for a certain term, typically 3-5 years for equipment, but can up to 15-20 years for property. They are typically used to finance equipment purchases, and property. The interest rate charged can be fixed (particularly with loans of 1-5 years) or floating. The security on these loans is the asset being financed, and may also include some additional, more general security.
Government guaranteed loans can fit into either of these two general categories. The main programs available currently are the New Venture Loans which are a maximum of $15,000, and Small Business Loans which have a maximum of $250,000. Both are administered by the chartered banks, but they are more willing to provide these loans to "high risk" small business because of the government guarantees.
Small Business Loans (SBL) are to finance hard asset purchases such as computers, equipment, leasehold improvements, and property and can be used at any time. SBL's are not to help with working capital, which is to be financed with normal operating lines and owner's equity injections.
In fact, this is where difficulty often arises for small businesses. Not only can you usually not get operating loans for the first year of your business, but when you do, you only get a percentage of the asset value (e.g. 75% of Accounts Receivable under 90 days). Since you also usually need to provide a personal guarantee, tying up your ability to use your personal net worth to source other financing, you need to consider where you will get the other percentage for working capital. The problem can get worse if you grow quickly. This is why cash flow forecasting is so critical - you can be profitable, but because of the time delay in collecting the cash, you can not meet payroll and have to go out of business.
So watch your working capital (defined as current assets less current liabilities) and forecast your cash flow regularly. Use the SBL as much as possible for capital assets and pay for them over time to free up your cash for running the business day to day.
What does a bank require to approve a loan for a small business?
Any banking proposal must answer the following questions:
  1. How much is needed?
  2. How long do you need it for?
  3. What are you doing with the money?
  4. How do you plan to repay it?
  5. What are alternative sources of repayment if something goes wrong?
  Banking proposals do not need to be huge business plan documents. If it is the first time you have approached a particular bank and account manager, you will need more information than for an annual review. The first time proposal should include:
  1. A brief description of the company, its structure, ownership, history
  2. A brief description of the industry, the company's positioning within it, and the competition
  3. The answers to the five questions
  4. The historical company results, either in a five year comparative format including the actual latest comparative year-end if the company has been running for five years, or if it is younger, the most you can give. Explain any extra-ordinary events which effected past results and would not factor in the future.
  5. Some ratio analysis of key performance statistics for the historical financial statements, with comments on performance such as working capital, current or quick ratio, debt to equity, return on sales (i.e. profitability), return on equity, sales growth, margin growth, profitability growth
  6. Comment on key initiatives over the next year or forecasting period which will affect results
  7. A forecast on a month by month basis of the income statement, cash flow, balance sheet, and perhaps the accounts receivable and accounts payable balances for the next year if this is for an operating line. This should be accompanied with a full explanation of all the assumptions used to build the model. If you are applying for an operating loan, please make sure your cash flow shows that you need the money you are asking for, that your worst cash flow position would be covered by what you are asking, and that the security margining justifies the line requested.
  8. A forecast for the five years on an annual basis if you are applying for a term loan of five years or more; if you are applying for less than five years, give an annual forecast for the full term of the loan.
  9. Resumes for you and all key owners or managers
  10. A net worth statement for you and other owners
If it is an annual review of your loans, a summary of the new financial and business information is required and an updated forecast.
What are other sources of financing available and when can you access these sources of capital?
Alternative sources of financing outside of the usual types of loans from Canadian chartered banks include debt (loans) and equity (investment) by:
  1. Government programs
  2. Venture capital (including Labour sponsored funds)
  3. Merchant bankers
  4. Angel financiers
  5. Equity by subsidiaries of the banks or other types of financing (such as project financing) by banks
  6. Alternative banking entities (such as Business Development Bank of Canada or BDC).
There are government programs directed at certain initiatives. For example, there are a number of programs to encourage businesses to hire employees. One such program (IRAP) pays part of your salary costs for employees. Of course, you need to find the funds to pay the other part.
  The main program to help with scientific research and development is through an aggressive tax credit system. Once you have calculated the credits available federally and provincially, you can now use those amounts as collateral for loans from the chartered banks. This can help with working capital while you wait for your refund. There are other programs for minorities, micro-businesses, certain industry sectors, etc. Information on these programs is available from lnternet searches of government sites, or by calling your nearest government office or professional. You need to understand their criteria and objectives, and watch out for the paperwork!
Venture capital, and merchant bankers have typically only been interested in deals over $1 million. There is significant time to their evaluation and management of an investee, and they want to make it work their while. Labour sponsored funds are a relatively new phenomenon in Canada (supported by generous tax credits) and will lend at less than $1 million. Many of them have a huge percentage of their funds still not invested and are being penalized by the government for this. They are motivated to invest, but have similar concerns as other venture capitalists on the time and risk involved.
Angel financiers are individuals (usually owning their own investment company) who have experience in your industry and so can, perhaps, better judge which concepts and businesses will be a success and which won't. They may be more willing than venture capitalists to invest because they have more confidence in the concept. Some of the original founders of Microsoft who have money to burn have played this role for other software developers.
In recognizing that standard types of loans do not fit all the needs out there, some of the Canadian chartered banks have set up specialized branches and facilities for certain types of businesses (such as knowledge-based industries where they may provide project financing which give a business working capital while it works on a project). The account managers in these branches specialize in understanding that industry or industries but are still somewhat limited by the bank's financial criteria for performance.
Some of the banks are setting up subsidiaries to make equity investments in certain sectors of small business. They say they will finance less than $1 million, but the jury is out.
The Business Development Bank of Canada (BDC and formerly FBDB) is an alternative source of financing to offer term loans, working capital, a micro-business program, venture loans, patient capital (long term financing) and venture capital. They have also formed alliances with the chartered banks to provide some specialized financing, such as export financing, and are the arm of the government for certain programs such as the Pan-Western Loan Fund for Tourism Firms, the Student Business Loans Program, and The Cultural Industries Development Fund.
Consider all the sources when searching for financing, but realize that the choices are limited when you are below $1 million, and yet not fitting into the normal banking criteria for standard loans.

Should I borrow money from friends and family?
Borrowing from friends and family (or love money) can be the only choice you have. If you have other choices, 1 usually recommend taking them because of the relationship complications of borrowing from friends or family. In my experience, while they often believe sooner in the concept and the entrepreneur's ability, they lose their trust when they can not get their money out when they expected (because it always takes longer and more money to get a business off the ground) or they don't even get a dividend or interest payment.
They may also need the money and be put under financial duress themselves by not getting it back when expected. You may also have unknowingly misled them by forecasting paying them back in a certain time frame.
If you are going to borrow from them, follow these guidelines:
  1. Ensure the money is "patient capital", (i.e. that it can be invested for the long-run if that is needed due to business circumstances, or in other words they do not need it back at a specific point in time)
  2. Ensure that not getting the money back at all will not affect the relationship or that you will be able to pay it back from other sources and be honest that, even though you are confident of your business venture, lots of things are out of your control, and it could fail - they need to realize it is risky
  3. Set down the terms and conditions on paper and sign, date and witness it.
  4. If you are not going to be able to meet those terms and conditions, sit down with the person as early as possible and discuss alternatives and set any new arrangements down on paper as well.
  5. Realize that they may feel they have a right to comment on your personal financial affairs and spending habits, or comment on your business operations and how you are approaching the business concept. Given that they have trusted you with money when no one else would, you should try to take all comments with a bit of a stiff upper lip.
Should I lease or buy a car, computers, office equipment?
There are several issues to consider in the lease or buy question, not the least of which is the initial cash outlay necessary to buy something like a car. If you have no available bank financing, a lease may be your only option.
In general, leases carry a higher interest rate than bank loans. There is also less flexibility in getting out of a lease because you don't own the asset and therefore can't sell it. You may also be subject to penalties for excessive mileage. These days, some banks are restructuring their car loans which give you the advantages of a lease (low down payment and monthly payments) but ownership of the vehicle.
From an accounting point of view, if you lease equipment, you usually expense the monthly payments. If you buy equipment, there are two deductions:
  1. the depreciation of the asset over its useful life and
  2. interest costs on any loan taken to acquire the asset. In either case, the expenses incurred in running the car are deductible (see question 2 above).
There are the following exceptions (you knew there'd be some, didn't you?):
  1. For tax purposes, there is a limit to the amount of leasing costs you can deduct on a luxury car (i.e. one that would exceed a $24,000 capital cost). So don't lease a Rolls Royee for business and expect to deduct the full cost.
  2. Where a lease is essentially a financing arrangement to purchase the equipment (i.e. you have a low buyout, a long lease or are required to buy the car at the end), you are deemed to have bought it regardless of what the paperwork says. In other words, there are two types of leases: an operating lease (a rental arrangement) and a capital lease as described in the previous sentence. If you have an operating lease, the lease payments are deducted. If you have a capital lease, you capitalize the asset and depreciate it as if you'd bought it.
What are my options when my business is experiencing difficulties?
Before you actually experience difficulty with your cash flow, there are warning signs that your business is in trouble:
  1. Lack of current financial information - decisions get made on wrong assumptions,
  2. Under-capitalization - this is a chronic problem with small business because it always takes more money than expected to get a business going and depleted the shareholders' own sources of financing, but it is critical that you pay attention to managing profitability
  3. Lack of management depth - statistics show that the finance function is often not adequately filled. Either the office manager or bookkeeper who do not have enough experience are delegated this function, or the person in the function is not considered one of the top decision makers in the firm and their recommendations listened to and taken seriously
  4. History of continuing losses
  5. Other structural problems such as high concentration of sales with a few customers, a high level of fixed costs where revenue fluctuates greatly, a product prone to drastic change.

  When you do know you are going to go over your operating line, communicate with your banker before it happens. They will usually cover the problem, but know when you will have a solution and communicate that. Do not write cheques you can not cover for that is a criminal offence. Return all phone calls - especially government collection offices for GST, etc. because they have the ability to freeze your bank account and, essentially, shut down your business.
When you don't see a way out of the problem, there are a number of options:
  1. Informal Proposals - at any time, you can go to your creditors and try to make a deal
  2. Proposals - make an offer to your creditors to compromise or rearrange their claims so you can re-establish solvency, get an extension of time, and compromise
  3. Receivership - where a trustee is appointed either privately or by court, to allow secured creditors to seize and sell assets covered by security (used by banks)
  4. Liquidations - by resolution or court order for the orderly winding up of a solvent company or for financial institutions which are insolvent
  5. Bankruptcy - by creditor or by your own actions, or if Proposal rejected or in default
Informal and formal proposals can be effective depending on the security the creditor holds. If they are likely to not get any or little compensation if you go under, they will be more likely to negotiate. Many rehabilitated companies have had to do this at one time or other, and yet are now excellent customers now. They may also have greater loyalty to those who helped them out. You may even have a chance to set up a special relationship.
Secured creditors, such as banks, typically choose one of the formal routes, because they want a trustee to be in the company, ensuring that they get their full recovery. Since they are typically secured on a greater than $2 security : $1 debt, they can usually do this.
Act early and proactively and you may just come out a winner!
What can I write off in my business?
In general, you can write off any expenditure that's made for the purpose of generating income that's related to your business. How you do it varies somewhat between non-incorporated and incorporated organizations, but the categories are basically the same.
Here are some issues that you may not have thought of:
  • Meals and Entertainment - Only 50% of the money spent in this category is deductible for tax purposes. However, you must have proof for 100% of it. For example, you might note on the back of a credit card slip the name of the prospective client you took out to dinner and the purpose of the meeting.
  • Furniture, Computer Hardware and Software - Whether purchased before or after the start of your business, you may deduct a certain portion of their cost if they are now used for the purpose of generating business income.
  • Office Supplies - Don't forget that pens, paper, envelopes, postage, etc. used in the course of business are a deductible expense.
  • Magazine & Subscriptions - If related to the nature of your business, these costs are also deductible. (i.e. Leisureways may not be deductible if you're a computer programmer, but might if your a travel agent.)
  • Salaries & Subcontract Fees - Any money that you pay someone else to help you generate your business income is tax deductible as are the company portion of employment taxes such as Employment Insurance and Canada Pension.
  • Bad Debts - When customers don't pay their bills, the amount owed to you can be written off. (Of course, if they pay you eventually, you must then include whatever that amount is in income.)
  • Bank Charges and Interest - These expenses are deductible if they can be traced directly to your business and not your personal affairs. One way to ensure this is to get a separate account for each business you run.
  • Travel - Again, if you're traveling for the purpose of earning income, then the expenses are, generally speaking, deductible. This doesn't include your spouse's airfare, etc. unless he or she is an integral part of the business and traveling for business purposes.

  How do I calculate the amount I can write off for car and home office expenses?
Car - This is one of the categories that varies between incorporated and non-incorporated businesses. In an non-incorporated businesses, you may deduct the expenses you incur in running your car to earn business income. To do this, you multiply the total expenses (i.e. license and registration fee, gas and oil, insurance, maintenance, interest on loan payments and depreciation or lease payments) by the percentage of business kilometers to total kilometers. To support your claim, you should keep all receipts and maintain a log. Note that kilometers driven to and from an office outside your home are not included in business kilometers. If, however, you run your business from your home, all business kilometers from there would count.
In an incorporated business, the rules are split between employee owned or leased vehicles and employer owned or leased vehicles. When the employee owns the car, the employer either pays:
  • no allowance
  • pays an allowance based on kilometers
  • pays a flat monthly allowance
If no allowance is paid, but the employer completes a T2200 Conditions of Employment form indicating that the employee needed their car for business, then the employee can deduct their expenses the same way as for self-employed business income.
If a flat monthly allowance is paid, then this becomes a taxable benefit, which is offset by the expenses written off by the same method identified in the previous paragraph.
If a kilometer allowance is paid, an allowance of up to $.35/km on the first 500Okm and $.29/km thereafter can be paid without incurring a taxable benefit to the employee and is fully deductible by the employer.
  If the company owns or leases the car, the employee will have a taxable benefit for the personal use of the company vehicle. If the car is used more than 50% for business, the taxable benefit for personal use is reduced. If the car is used more than 90% for business, there is an even further reduction. To claim these reduced rates, the employee must write a letter to his or her employer before December 31 st noting the business usage. The company would deduct the expenses for the vehicle subject to limitations for "luxury vehicles".
Home Office - The rules differ between deducting the cost of a home office from business or employment income. In order to deduct the costs of maintaining a work space in your home from business income, that space must be your principal place of business or used on a regular and continuous basis for meeting customers or clients and the space is used only for business purposes. The first condition is satisfied if you work only from home. Just as the business use of a car is a percentage of the total kilometers driven, the business use of a house is the percentage of the square footage or the percentage of the rooms that the home office occupies. The main categories used for calculating total expenses are heat, electricity, insurance, maintenance, mortgage interest and property tax. Employment income deduction are not dealt with here but are a lot more restrictive than the business write-off.
When do I have to register for GST, how is the calculation done, and how often do 1 have to report and pay this tax?
With few exceptions, any organization that accumulates more than $30,000 taxable income in four consecutive quarters must register for the GST within 30 days after the quarter they surpass it. An organization may include any individual or business who engages in commercial activity. The $30,000 applies to all taxable supplies. This term includes all goods and services that you charge 7% GST on as well as all goods and services that are currently zero-rated (i.e. GST at 0%). It does not include goods and services that are tax exempt. To find out whether your goods and services are 7% rated, zero rated or exempt, call your nearest GST or Excise Tax office or your accounting professional.
While registration requires you to collect GST on Sales, it also allows you to deduct GST paid on Purchases. For this reason, organizations not required to register may choose to do so. You may also choose to voluntarily register for marketing purposes (i.e. to appear greater than $30,000 annual revenue).
Installments/Payments are usually made on an annual or quarterly basis depending upon the level of taxable supplies. In your first year, Revenue Canada doesn't know how large your remittance will be so they allow to file annually, three months after your year-end. However, in the second year, if your remittance is beyond a threshold level, you will owe quarterly installments, based on that first year's remittance, and owe any difference when you file your annual return. In summary, depending on your first remittance, Revenue Canada may require you to pay monthly or quarterly installments and may require you to file monthly, quarterly or annual returns.
Payments are remitted to the Sunnyside Taxation Centre in P.E.I. and, once registered, they will provide you with a remittance forms personalized to your business which can be used to pay your installments at your local bank branch.
How much tax will I owe on my business income and when is it due? Is there an amount I should be saving on each dollar of revenue to prepare for my taxes due? When will my installments start?
Again, there is a difference in rates and timing between non-incorporated and incorporated businesses. For non-incorporated businesses, you are now required to have a December 31 st year end. Therefore, the 1 It period you pay tax on is the one from your start of business date to December 31 st of that year and is due by April 30th of the following year along with your personal return. Net business income (revenues less expenses) is taxed just like employment income. Both are components of taxable income. (See Revenue Canada's Guide T4002(E) Business and Professional Income for the additional schedules). As a
  general rule, if you've paid more than $1 000 in tax in the last few years and less than 75% of your net income was taxed at the source, you should pay installments. (There are some exceptions based on preceding taxation years.)
Installments are remitted quarterly on March 15, June 15, September 15 and December 15. The March and June installments are based on the second preceding year. September and December's are catch-up payments such that with the December 15th instalment you will have paid the equivalent of the total taxes payable of the first preceding year. Any difference between your actual tax payable for the current year and the amount paid in installments is due by April 30 of the following year and will affect your September and December installments of that next year.
Incorporated companies are separate legal entities from their owners and as such file their own tax returns. They also have a choice as to their year-end. Tax based on the first year of business is due three months after the corporate year-end. Thereafter, companies pay monthly installments based on their taxable income from the preceding year with an additional amount payable three months after the year-end. Their actual tax returns are due six months after their year end.
The income generated by an incorporated company does not show up in the owner's personal income unless he or she has been paid money from the company (e.g. salary, dividends).
What records do I keep and for how long?
Revenue Canada does not specify what type of records you must keep. Suffice it to say that any income or expense you claim should be supported by source documents (i.e. invoices, receipts, bank statements, car logs, etc.) It is a good idea to keep a separate bank account for each business you conduct and ensure that it is easily distinguished from your personal account. This particularly helps with tracing bank charges and interest expense which you may deduct from business income.
You should keep the financial records for a minimum of six years.
What is depreciation and how do I use it?
Depreciation is the means by which a capital asset is written off over its useful life, i.e. written off over a number of years instead of just one. Examples of such a purchase might be office equipment, computer hardware, cars, etc.. There are several methods of depreciation available.
Capital Cost Allowance (CCA) is tax equivalent for depreciation. It groups all depreciable capital property into classes and each class has a specified rate of depreciation which may or may not be representative of an asset's useful life. There may also be differences between the accounting and tax calculation of a gain or loss upon the disposal of an asset.
In an non-incorporated organization, the main purpose of preparing year-end statements is usually for tax filing. It is usually simplest to use the same method for accounting as for tax.
Incorporated companies do not have the same flexibility as non-incorporated businesses in choosing their method of depreciation for accounting purposes. This may result in a difference between depreciation for accounting and tax purposes. Such a difference may also cause the various capital assets shown on a company's financial statements to be different from the values used to calculate CCA on a company's tax return.
Resources and Staffing
Can I pay my family members from my business?
The short answer is "yes". The long answer is "it depends on what involvement they will
  have in the business and the structure of the business". Whether you are non-incorporated or incorporated, you can hire your spouse and/or children. You may deduct the salaries you pay them as long as the salaries are "reasonable for the work done". If you hire them as subcontractors, the same rules apply (see question 9 for the issue of employee vs. sub-contractor).
If you incorporate your business, you may also set them up as shareholders and pay them dividends. Note that dividends are paid with after-tax dollars from a corporation whereas salaries are deducted before tax.
Many corporations issue different classes of shares to each family member with the plan of paying different and substantial dividends to each in order to split income. However, there have been a recent court case which challenges this arrangement especially where the family member did not contribute much money for their shares.
Can I choose to staff my business only with sub-contractors and not have any employees?
The decision of whether your staff members are sub-contractors or employees is based on the facts of each relationship and not simply in choosing one or the other. The following tests, used together help, to determine whether a worker is an employee or a subcontractor:
  1. Is the worker told what is to be done, when, where and how?
  2. Is the worker provided with a workspace, supplies and tools?
  3. Is the worker economically dependent upon this particular company?
  4. Does the worker have a chance to profit financially from the work?
  5. Does the worker accept a risk of financial loss?
  6. Was the worker hired to fill a particular job or was the worker hired to produce a certain result?
A positive answer to question 1, 2 and 3 would imply an employer/employee relationship. The worker is essentially subject to the control to the employer. A positive answer to questions 4) and 5) means that the worker is assuming a financial risk, whether the result is profit or loss. This implies that the worker is independent. In question 6) the purpose for or manner in which the worker was hired may determine whether he or she is independent i.e. was the worker hired "as a technician" (employee) or was the worker hired "to computerize the manual drawings on the Jones project" (sub-contractor).
The facts for each worker need to be examined independently. No one test or answer throws you offside. Revenue Canada will look at the overall nature of the relationship.
What is the best way to handle payroll and all the taxes involved in having employees?
Employers are required to deduct income tax, El (employment insurance contribution (formerly, unemployment insurance) and CPP (Canada pension plan contribution) from their employees' pay. In addition, they are required to remit a matching portion of El (at 1.4 times the employee amount) and CPP, as well as employment related provincial payroll taxes such as the EHT (Employer Health Tax) in Ontario and WCB (Worker's Compensation). Tax, El and CPP are federal taxes. EHT and WCB are provincially regulated. Remittance is required monthly, quarterly or annually depending upon the size of your organization.
The easiest way, but not necessarily the cheapest, is to automate your payroll. Most of the companies, i.e. banks, that offer an automated payroll service will automatically calculate the deductions and remit them to the appropriate office on your behalf (for a small fee, of course). Payments to your employees can be by direct deposit or by cheques sent to you which you can distribute. These companies will also generate your T4s at year end. As an additional benefit, Revenue Canada no longer requires submission of a T4 Summary from employers that have an automated service because the service will submit one electronically.
  However, the downside is that these services cost money, usually a set minimum rate plus a per employee fee. Most computerized accounting software comes with a payroll option which will do the calculations for you but, you'll need regular updates for rate changes. Or you can do it manually. Each employer will have to weigh the costs in both money and time to decide the best option.
How much should I invest in training employees or subcontractors? Won't they just take the knowledge and go work elsewhere?
No one can predict when an employee is going to leave. You can't count an an employee's loyalty anymore than they can count on yours. However, if we are moving to a more knowledge based industry, constant training will be a necessary and worthwhile investment. The government is in agreement with this prediction and is providing financial support for education to this end.
Most employees and sub-contractors will consider regular training or upgrading of skills as a perk. It has been shown in recent studies, to cut down on staff turnover. The cost of losing key staff members is not only one of money and time, but also one of morale and productivity, both that of the leaving employee and his or her co-workers.
In a small organization, you may have the opportunity to personalize the training to each of your employees. There may be certain expectations within your industry or within a particular job field that should be upheld. You may also wish to provide training to sub-contractors if it will directly help your organization during the period of their contract.
In the end, what's best for the soul and what's best for the bottom line may be one and the same.
What administrative policies should be established? What are the government regulations and how much beyond that do I need to go? What should be written down as opposed to verbal?
This question has more to do with establishing a work environment for your company rather than legal requirements. As an employer you will need to, subject to law, establish hours of work, office hours, time vs. pay in lieu of overtime, etc.. But, you also need to establish a culture within which you will conduct your business.
Where are you flexible and where are you not? For example, if an employee has a sick child, what is your policy on absence? Can an arthritic employee have flexible hours? If you have only two people staffing your front desk, can they take lunch together? Your employees will likely treat you with the same respect you treat them. Without being taken advantage of, you want to empower your employees to own their jobs. Most of them want to know that they are a valued member of your organization. Feedback on their performance, and yours, perhaps through regular performance review may help in this regard.
The governments (municipal, provincial and federal) set minimum standards. In Ontario, the Ministry of Labour sets most of the working standards such as minimum wage, vacation pay, hours worked, overtime, etc.. Federally, Human Resources Development Canada (formerly the Minis" of Employment and Immigration) and Revenue Canada set regulations for things like the Canada Pension Plan and Employment Insurance. As far as the basic treatment of all peoples, Ontario's Human Rights Code and Canada's Charter of Rights and Freedoms would both apply. How much you exceed these standards will depend on what is standard to your industry and your personal preferences. What does your competition doing? What do you have to offer in order to get and keep good employees and keep them good?
How do I establish how much I pay my staff and how often I give raises? What kind of performance incentives are used and how could they be implemented?
Again, this is largely a matter of personal preference keeping in mind that you want to remain competitive and have maintain a group of people who will work hard to support your goals.
  Performance incentives are limited only to the imagination (and the law). Possibilities include bonuses based on individual or group performance, shared ownership of the business or profit sharing. Other may include more vacation time, training, fitness club memberships, topping up maternity leave payments, health care benefits (i.e. a dental plan, drug plan, long-term disability insurance), matching RRSP contributions, etc., etc., etc. Note that some of these may be taxable benefits.
What regulations do I need to be aware of?
Start with the Ministry of Labour or your provincial equivalent. There is a small booklet, which is updated regularly, that will give you minimum employment standards in Ontario. The can also provide you with information on EHT, WCB and access to publications that will detail safety standards particular to your industry. For example, restaurants or any organization dealing with food or beverage would subject to the regulations of Health and Welfare Canada. Many industries are now regulated by Environment Canada and WHMSS, especially where hazardous materials are involved. If you are not sure whether of not your company is subject to any of the above, please check with your local governmental office.
There are also laws increasing the personal liability for directors and offices of an incorporated company (e.g. for environmental problems). You may wish to consult an insurance agent and/or a lawyer specializing in your industry as to your liability.
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