Willkommen to the first article on our series on terrible accountants and what you need to watch out for before they waste your money and time.
There is 1 of 3 ways to pay money out of an operating company:
- Repayment of shareholder loan (not an option when they were already repaid)
- Dividends based on shareholdings
- Management remuneration (based on fair market value of services rendered)
The shareholders of an operating company in Calgary wanted to pay themselves from their operating company in Edmonton (Op Co) and they paid themselves proportional to their shareholdings. The 50% shareholder in Calgary took 50% of the payout while the 3 shareholders in Edmonton took 16.67% each. They have done this consistently over the last 2 years.
The Chartered Professional Accountant (CPA) for the Calgary shareholder called yesterday and insisted that I amend 8 corporate tax returns and 14 GST returns to change the dividends to management fees.
I will have no part in such nonsense as the deductibility of management fees is often reviewed by the Canada Revenue Agency.
- Management fees must be invoiced detailing the services rendered at a fair market rate. The 50% payout his customer received is 3X the fair market rate of the actual management fees issued to the Op Co by our Edmonton shareholder. How could this be possible, when the Calgary shareholder is in Calgary running a different Op Co?
- You can not simply invoice the Op Co more than a year later for a round $150,000 including GST with no periodic invoices consistent with the payments received. The invoice should be the rate x the hours and subject to GST. There should be a service contract between the Op Co and the shareholders and CRA will look for specific proof of how your management fees were determined. This means detailed descriptions of the work performed for the Op Co.
- If the Calgary Chartered Professional Accountant (CPA) got his way, anti-avoidance rules will kick in and the $150,000 management fees will be denied along with more than $50,000 in unnecessary taxes + penalties and interest on the avoided tax. Arm’s-length management fees that do not meet the requirements of the sections of the Income tax Act can lead to double taxation for which no relief is available.
- All regrets in life involve wasted time. This is the only thing you can never get back so never waste a second giving people second chances. Poor choices reveal poor character.
Below is a link to an article written by me detailing the reasons to use a holding company. This is how we can legitimately save taxes without breaking any laws and end up losing more than you ever bargained for.
Our goal at SwissBooks is to secure our customer’s future and the future of their loved ones. Our business offers a comprehensive services to customers. We will never sacrifice the long-term well-being of our customers for any ill gotten short-term gains. We will work with you to minimize your tax obligation, preserve and protect assets for future generations. Accounting is beautiful a series of debits and credits that must balance. There is no such thing as bad accounting- only bad accountants.
Like all people with no value, bad CPAs should be avoided at all costs. Join my personal vendetta against all the bad CPAs in Canada that hide behind their designations or hide behind their high fees. Their customers automatically associate authority based on the high fees they charge. Bad CPAs: please start behaving or I will start lighting you up on this blog.
Upcoming topics for bad accountants:
- Inflating expenses to “minimize” your taxes: fake accomplishment, will bite you in the end. I know you can not compete with me, but putting your customers at risk by reporting bogus numbers should put you in prison. ($12,000 dollars of office expenses for a little shop that provides a beauty service? How much pens and papers can you buy for $12,000?)
- Paying employees as contractors: learn the difference
- Encouraging mindless spending to increase tax-write offs: fake accomplishment. Congratulations! Your customer pays no tax; they will also be in financial ruin. Only acquire corporate vehicles or leases if they are required for conducting business. Ferrying kids around to school? Personal. Get familiar with the metrics, keep business – business.
- “Investing” under $500,000 in individual stocks: inefficient waste of time. If you could beat my index fund your time is worth more working on Wall-Street.
- Franchises: not worth pursuing unless you are the franchisor.
We can’t be responsible for other accountants irresponsibility. Our responsibility comes from 10 years of delivery quality, completing files on time, servicing memorably and saving our customers far more money in taxes than any small price difference.