This is more problematic since a corporation can continue after the death of the shareholder/owner – but maybe not for long.  Incorporation is usually done for two reasons:  lower tax burdens on business income and a perceived (albeit incorrect) perception that all liabilities of the corporation are that of the corporation only.

It is imperative that a succession plan and an estate plan be in place to keep the corporation a going concern and solvent. The death of a small business shareholder triggers certain events:

  • The equity in the business is now the property of the deceased shareholder’s estate.
  • If there are bank loans in place pre-death, the guarantees shift post-death. The estate of the deceased shareholder becomes the de facto guarantor of the loans of the business.
  • The appointment of an estate representative of the deceased shareholder’s affairs is very important because he/she may have to oversee the day-to-day business affairs until the business is sold or closed.
  • Any salary paid to the deceased shareholder (as President or CEO) pre-death doesn’t have to continue post-death. However, if the family income of the deceased was close to 100% of the income of the household, this becomes problematic.
  • In cases like the above, any payments post-death to a spouse (without any reasonable (legal) right to receive this payment) is a capital drain on the business and may be questioned.
  • If the deceased shareholder was an Officer of the business and had signing authority at the bank for cheques, the estate representative needs to meet the bank officials armed with both a death certificate and a copy of the will of the deceased. The will should corroborate and name the estate representative as the person who will replace the deceased as signing authority.
  • Hopefully there is a good management team in place to keep the business operational (as a going concern) until a decision on its future can be finalized.
  • The estate representative should meet (post haste) with the company management team to introduce himself/herself and get a very concise explanation of the activities of the business and pressing issues.

More to come on this important topic.

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As gruesome as the topic seems, it is a contingency for which a succession/estate plan must be made.  The death of a proprietor means that the proprietorship is over. The T2125 return must be prepared up to the date of death and this is filed in accordance with the rules for filing a deceased person’s return:

  • 6 months after the date of death or April 30th (of the following year) whichever is sooner.

This return is called a “terminal return” and a copy of the last will and testament of the testator (the deceased) must accompany the T1 return along with a copy of the death certificate (provided by the funeral home).

It is important that an experienced estate representative be appointed as the business may be closed as at the date of death, there may be contracts to complete, trade receivables to collect and payables and statutory filings to make.

The assets and liabilities of the proprietor would become estate liabilities and estate assets and must be properly accounted for.

 

Death can be sudden, or expected. Death fills us with grief at the loss of a friend or loved one. It can be very stressful for those of us who are charged with the highest of fiduciary duties – being the executor/executrix of an estate.

Your duties are:

  • Bury the dead! Make the arrangements with the undertaker as per the wishes of the deceased.
  • If the will is to be probated, prepare a list of assets and liabilities as of the date of death. This is given to a lawyer who will prepare this for presentation to the probate court. A fee is required.
  • Send copies of the death certificate to employers, pension providers, investment firms and creditors attesting to the death of the person and that you are appointed as estate representative.
  • Check for life insurance policies. Term life or whole life policies should be given copies of the death certificate. The funds (life insurance proceeds) are non taxable proceeds and are the property of the estate for which you are the fiduciary.
  • Make certain that the will you have is the latest will. (I assume that is another reason for having the estate probated as the will must be submitted with the estate holdings).
  • Arrange to dispose of personal assets in an orderly fashion.
  • The funeral director’s fee may be paid before the estate is settled. Check with the estate lawyer however.
  • Take a copy of the will and death certificate to the deceased individual’s bank. The account should be closed and any funds transferred to an estate account. Cheques should be printed in the name of: “The Estate of________”
  • A T1 return (terminal return) needs to be prepared up to the date of death.
  • Any income received post-death form part of the estate proceeds.
  • A T3 trust return for the period post-death to date of settlement of the estate must be prepared.
  • The income taxes due by both the individual and the estate needs to be assessed by the CRA before any beneficiaries can be paid and a TX19 Clearance Certificate issued.

This is a big job. Make sure you understand what you are getting into before you accept the appointment.

 

 

 

CRA appeals

Posted: October 31, 2013 in Taxes
Tags: ,

I’ve done a few in my day. The CRA disallows a key deduction and this results in your tax bill going through the roof. What to do? There is the T400A appeal. This is a formal process that starts with a clear articulation of your reasons why the refusal should be reversed.

The important point is that the appeal must be accompanied by supporting documentation. The appeal must be sent to your local CRA appeals office. Usually the appeal determination could take from 3-6 months.

I’ve done a few for tuition deductions as well as disability appeals. They take a long time and the T400A appeal must be crafted carefully.

This seems like a very strange post on a small business site.  It isn’t! ‘Death’ is an unplanned exit strategy for a small business owner – gruesome as it might sound. The death of a proprietor or shareholder should be part of contingency planning.

The death of a proprietor signals the legal cessation of the proprietorship. The T2125 form has an end date on the date of death of the proprietor. The assets and liabilities are those of the deceased taxpayer anyway so disposing of those can be performed as part of the winding up of the estate of the deceased proprietor.

The death of a small business shareholder presents a few unique problems. The common shares of the deceased shareholder need to have a valuation placed on them. Any shareholder loans payable to the shareholder now are payable to “The estate of the (deceased) shareholder.” The corporation is a separate legal entity and can survive the death of a shareholder – but may not.  Is a succession plan in place? If 100% of a shareholder’s livelihood derives from a salary and the shareholder dies, there is no carry-on of a shareholder to an estate.

It could take 1-2 years to successfully windup a small business corporation and legally surrender the articles of incorporation. The assets must be disposed or and used to pay liabilities. If there is any cash left, the estate could declare and pay a liquidating dividend to the estate of the deceased shareholder. In reality, the cash collected from outstanding trade receivables might be insufficient to cover current liabilities, including CRA remittances. In that case, the estate representative (executor) might have to inject more money into the business to pay all bills.

I have seen many small businesses wind-up with large amounts owed to shareholders – in the form of a shareholder loan and issued common stock. There is some tax relief available in the form of an Allowable Business Investment Loss (ABIL).  This is a “too late” strategy for the estate.

It is imperative that the shareholder(s) of a small business have a succession plan in place. An executor should be appointed who understands business in general and who may be responsible for winding up the business.

As strange as it may seem, not many do. Financial statements are “ex post”. They reflect what has happened. They are (or should be) the basis for management action – going forward.

They should be compared to a benchmark (either a budget/forecast or prior year financials). You should be looking for:

  • Revenue changes (increase/decrease)
  • Gross profit margin changes
  • Extraordinary (one-time) items.
  • Trade receivable aging
  • Trade payable aging.
  • Debts to the CRA

The issue of whether or not the business makes any money should be supportable by client revenue actuals vs projections and the gross profit margin on this revenue.

There are businesses that don’t bother to generate or analyze financial statements. The bank balance is what they focus on.

Do you have financial statements prepared for your review on a monthly basis?

I am offering my “Starting Your Own Business 101” course listed on the frontal page of my blog — for FREE… NO CHARGE.  Read over the course outline. I will send you the material and you can read the material and develop your business plan.

I will mentor you through your business planning phase. I can review your business plan and help you populate your financial forecasts.

Take advantage of this offer.

 

 

They are not the same but at times are used inter-changeably by business owners. Marketing is an activity that involves:

  • Researching a sector for a niche client
  • Finding the customer demographic -age, locale, income level, education level etc.
  • Finding why (the above) demographic buys and what are their buying habits
  • Determining where a potential customer is – geographically and their disposable income levels

There are more of course but those are a few important ones.

Selling involves closing the deal after you have determined what market you operate in. Selling can include: media advertising, direct sales, etc.

The key point to remember is: you can “sell” but don’t expect to have any success unless you know your market.

The other important point to note is that the market can shift. A “20 something” young urban adult will have different wants and needs in their 30s than they do in their 20s. Make sure that you analyze your market on a regular basis so you can target your selling activities.

 

I guess the simple answer is: “Are you keen on buying or do you just want to know?” It is ironic that the net worth of self employed Canadians is largely un-calculated. The value of a proprietorship is essentially it’s goodwill. This means the net present value of its customer list. The value of shareholder equity can be calculated but some assumptions need to be made.

For a CCPC (Canadian Controlled Private Corporation) the shareholder equity section of the balance sheet is reported at book value only. One way to compute your net worth is to look at the “Cash Generated By Operating Activities” section of the Cash Flow Statement. You should go back 3-5 years. Your accountant can prepare this statement if it isn’t readily available. Now what?

The cash generated by operating activities is otherwise called your cash profit.  Then perform the following additions/subtractions to the cash profit:

  • Add back amortization (a non cash accrual)
  • Add back any accruals for income taxes (non cash accrual)
  • Deduct management (ownership) salaries and benefits.
  • Deduct family salaries and benefits (if you have family members in the business)
  • Deduct any other perqs that your business may cover for you.

The resulting (adjusted) cash flow from operations is (or should be) a larger number.

Do the same exercise back 3-5 years if you can.  Then average the adjusted cash profit.

This cash profit (average) is capitalized by 3x the average cash profit.

This is a fair valuation of your business equity.

It may be a surprisingly large figure. It should give you pause for reflection. Two queries should come to mind:

  1. How do I begin to monetize some of my net worth right now? Can I draw a dividend in lieu of a partial salary?
  2. How do I protect the equity in my business or pass it on to family members?

Good questions indeed.

 

Many small business entrepreneurs who I’ve met feel it is better to start out as a corporation rather than being a self employed proprietor. Their thinking is that they escape personal liability operating under a corporate veil. Let’s look at some factors to be considered before incorporating.

A corporation is a separate legal entity from the owner (ie the shareholder). If the corporation is a Canadian Controlled Private Corporation (CCPC) there is a very lucrative small business deduction of 17% from the 38% corporate tax rate. There are other small business deductions depending on the business sector. Provincial corporation taxing authorities offer small business deductions as well.  In an ideal world, an individual who is in the 45% marginal tax bracket, could take dividends in lieu of T4 salary income and be better off on an after-tax basis.

A corporation offers limited liability protection against trade creditors. The liability of the shareholder is limited to the extent of the amounts owed plus any damages that might be awarded in a civil litigation case. A prudent shareholder/owner would want insurance protection as well so this could be covered off in a strict downside situation.

The Canada Revenue Agency (CRA) can hold the shareholder/director personally liable for unpaid corporate remittances for: employee payroll remittances, harmonized sales tax (HST) remittances and corporation tax remittances. If a company has bank lending facilities (ie line of credit and term loans) the bank will require personal guarantees in the case of default.

The incorporation process can be costly but worth the effort if the business performs as planned.  The share structure must be carefully planned so a lawyer should be retained. Should you incorporate federally or provincially?

The year end of the corporation requires a T2 tax return and this should be prepared by a professional accountant. Depending on the type of financial statement required the exercise could cost the company between $1,000 to $5,000.

Plan before you incorporate.