Why being incorporated is different...

The number one way clients who have incorporated companies (Ltd., Limited, Inc., Incorporated) get themselves into trouble is thinking that the company is “theirs”.

When you incorporate a company you are actually creating something that is it’s own entity.   When you hold the shares of that company you do have the authorization to make the decisions but the assets (including the cash value items like the bank account) do not belong to the shareholders – they belong to the company.

Any company that has been incorporated with have a liability account on the Balance Sheet called a Shareholders Loans account or Due to Shareholder or some other such name variation.  This account is used to account for funds that the shareholder (s) have loaned the company.  This account is also used to keep track of money the company has “loaned” the shareholder.  At the end of the fiscal year (the company year end) this account can NOT be in a negative balance – meaning that the shareholder (s) can NOT owe the company money.  The two main ways that shareholders can take funds from the company are either through payroll or via dividends.

So where do people go wrong?  They think to themselves – this is my company.  I started it and if there’s money in the bank account its mine to do with as I please.  WRONG.  The money belongs to the company.  If you use the company debit card to buy your groceries at the store, then you should be depositing that money back into the company and making a note for your bookkeeper that the withdrawal was personal and the deposit is reimbursement for it.  If you happen to have put a large amount of money into the company to get it going, keep it a float, etc. then you can pay yourself back some of that money in this way.  But be very careful.  You should be getting financial statements on a regular basis and you should be watching that Shareholder’s Loans account religiously to make sure you don’t get yourself into a situation where you’re owing the company money.

The easiest way I try to help it make sense for people is to consider the company a guy named Bob.  That’s Bob’s debit card, Bob’s credit card and Bob’s cheque book.  If you use Bob’s debit card to pay for your massage, groceries or what have you, you’d better pay Bob back or he’ll an ex-friend who might be calling the police to report a theft.

So if you have started or taken over an incorporated company, be a good friend to “Bob”.  Don’t use his credit card, debit card or cheque book to pay your own personal expenses.  And, if you happen to do so – make sure to pay Bob back in a timely fashion and make clear notes for your bookkeeper.

Info for Employees

We don’t complete personal tax returns here at BOIB but we do provide payroll services.

If you are an employee or will be an employee – this post is for you!

When you hire on as an employee, your employee should be requesting that you fill out and provide them with original copies of your TD1 forms. These forms are used by whomever is doing the payroll to determine what deductions to take from your paycheques for EI, CPP & Income Tax purposes. Employers are required by law to deduct and remit to the government these deductions on a regular basis.

If you do not fill these forms out correctly, the person or company providing payroll services may not deduct enough income tax or may deduct too much. Many different things can affect how much tax you should be paying – one of the most common is holding down more than one part-time job.

Each year the Federal & Provincial goverments release tax exemption amounts – this the amount a person can earn before they are required to pay income tax (this is only about income tax – not EI or CPP). In 2015, the Federal amount is $11327 and the BC amount is $9938. You can only claim this deduction once per calendar year. Therefore, when filling out TD1 forms for the first job, you should fill these amounts in on the forms (there are separate forms which look almost exactly the same but one is Federal & the other Provincial). HOWEVER, if you have a 2nd, 3rd, or 4th job, you should NOT be claiming these deductions again. You should be filling in 0’s for the exemption amount and depending on your earnings you can also opt to fill in the box on page 2 of the Federal form to have extra tax deducted.

Remember that it’s the responsibility of the employee to make sure these forms are filled out correctly. Payroll providers do not know your personal circumstances. We don’t know if you’re married, single, divorced, have one child or six, live with your parents, work 12 jobs, etc. We depend on the information you provide to us to determine the proper deductions. And don’t forget that raises throughout the year or changes in your personal circumstances (think marriage, collecting EI, having a baby, etc) can change your tax situation, as well.

Here is a link to the CRA website where you will find downloadable copies of TD1 forms. They even offer worksheets to help you determine the proper amounts to fill in for your situation.

http://www.cra-arc.gc.ca/formspubs/frms/td1-eng.html

And for heaven’s sake – look at your paystubs! Too many people simply ignore their paystubs each pay period. You should be keeping track of your hours worked and double checking that an error hasn’t occurred in calculating your pay. Mistakes do happen – such is life – and the responsibility is yours to make sure any issues with your pay are caught quickly so it can be rectified.