MRSB Chartered Accountant Colin Dawson goes over the basics for business owners this tax season
Now that the holidays are behind us, it is once again that magical time of year during which every employer must prepare statements of remuneration to his or her employees and statements of investment income to investors in order to properly disclose earnings for tax purposes to the Canada Revenue Agency (CRA). Sound like fun?
Not really, we know. So to assist those who might not have had to prepare these statements before, we have put together this guide, which should answer some of your questions about this oh-so exciting process.
Statement of Remuneration Paid (T4)
What is a T4?
CRA requires you to complete a T4 if an employee has received any of the following:
- Salary, wages (including pay in lieu of termination notice), tips or gratuities, bonuses, vacation pay, employment commisions, gross insurable earnings of self-employed fishers and all other remuneration you paid to employees during the year (visit the CRA website and search, "Box 14 Employment income" for a detailed list);
- Taxable benefits or allowances;
- Retiring allowances;
- Deductions you witheld during the year; and
- Pension adjustment (PA) amounts for employees who accrued a benefit for the year under your registered pension plan (RPP) or deferred profit sharing plan (DPSP)
An example of this form can be found at http://www.cra-arc.gc.ca/E/pbg/tf/t4/t4flat-13b.pdf
It is also important to note that the above link will provide a drop-down list of box codes that you can use to populate the T4 slip for any special situations. In addition, you can visit the CRA website (www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/menu-eng.html) in order to obtain information on the proper amount of CPP, EI and federal provincial income tax to deduct from each employee's pay to comply with the payroll deductions utilized by CRA.
When do you have to complete a T4?
You must complete T4 slips for individuals who received remuneration through the calendar year if you had to deduct Canada Pension Plan, Employment Insurance or income tax from the employee's earnings. In addition, the earnings of the employee must be greater than $500. The only exception to these two criteria exists when you provide taxable group term life insurance benefits to an employee. You always have to prepare a T4 slip for those employees even if the total of all earnings in a calendar year is $500 or less.
When do you issue a T4 to an employee?
T4 slips must be completed and distributed to all employees on or before February 28th of the year that follows the one in which they earned their remuneration. For example, a T4 for the 2013 calendar year must be completed and given to the employee no later than February 28th, 2014.
You may provide your employees with one of the following:
- Two copies of their T4, sent by mail to their last known address;
- Two copies of their T4, delivered in person; or
- One copy of their T4 distributed electronically (for example, by email) if you have received the employee's consent in writing or electronic format
If you do not provide this information, you can be subject to penalties. The penalty for failing to provide T4 slips to your employees by the above noted date is $25 per day for each missed employee with a minimum penalty of $100 and a maximum of $2,500. This makes it quite clear that non-compliance when filing T4s in a timely manner can be very expensive for any employer.
Issuing a T4 Information Return
Once you have completed your T4s, you will have to provide a summary of those information slips to CRA so that they can assess the earnings of your employees and determine if you have properly remitted all deductions and taxes required on their behalf.
Once you have been issued a payroll number (your business number with RT0001 following after it), you will be sent a T4 package which will have an example of this form in it. This form as well as the T4 information slips themselves can be printed from generic accounting software (Sage and QuickBooks). You must file information returns by Internet if you file more than 50 information returns (slips) for a calendar year.
Statement of Investment Income (T5)
What is a T5?
A statement of investment income (T5) information slip is required if you make a payment to a Canadian citizen who served as a nominee or agent for you.
These payments include:
- Eligible dividends and dividends other than eligible dividends (including most deemed dividends);
- Interest from the following:
- a fully registered bond or debenture
- money loaned to or on deposit with, or property of any kind placed with, a corporation, association, organization, or institution
- an account with an investment dealer or broker
- an insurance policy or annuity contract (when the interest is paid by an insurer) or
- an amount owing as compensation for expropriated property
- Certain amounts distributed from an eligible funeral arrangement;
- Amounts that have to be included in a policyholder's income under section 12.2 of the Income Tax Act;
- Royalties from the use of a work, an invention, or a right to take natural resources; or
- Blended payments of income and capital made by a corporation, association, organization, or institution
When do you have to issue a T5?
You do not have to prepare a T5 slip to report the following:
- Amounts paid to one recipient when the total amount for the year is less than $50;
- The interest part of a blended payment made by an individual;
- Interest one individual pays to another, such as interest paid on a private mortgage (this does not include investment dealers or brokers making payments for client accounts);
- Interest paid on loans from banks, financial houses, or other institutions whose usual business includes lending money;
- Capital dividends;
- Amounts paid or credited to non-residents of Canada, as described in Payments to Non-Residents of Canada;
- Interest on an investment contract accrued or payable during the year to a corporation, partnership, unit trust, or any trust of which a corporation or partnership is a beneficiary;
- An amount distributed from an eligible funeral arrangement, if the amount is a return of contributions only; or
- Interest paid to farmers under the AgriStability and AgriInvest programs, Fund 2 (these amounts are reported on an AGR-1 slip)
How do you issue a T5?
You can send electronic copies of an individual’s T5 slips, by Feb. 28th of the year after the calendar year in which the investment income was earned. Note that if you are going to send an electronic copy, you must have consent from the recipient to do so in writing or email before electronically distributing them.
If you are filing on paper, you will need to send CRA each T5 information slip, along with the T5 summary before the above mentioned deadline. In addition, you will have to send two copies of the T5 slip to the recipient by the same above noted deadline.
For your own records, you do not have to keep a copy of the T5 information slips that you issued, however, it is highly recommended that you do so. At the very least, you must keep the information used to prepare the slips in an accessible and readable format in case they are requested by CRA to support any T5 information slips previously filed.
So there you have it, everything you need to know about preparing T4 and T5 slips for your employees. Of course, don't hesitate to contact our Tax Services team if you have questions or need further guidance.
Partner Lloyd Compton explains how our Valuation team can help you better prepare for the future of your business
You may already know that MRSB Group has a fully integrated Valuation & Litigation Support division, and that we are well equipped to provide an in-depth valuation of your business. But while valuation is all about determining what your company is really worth for the purposes of sale or estate/succession planning, there is another reason for valuation that has the potential to actually increase business value and the wealth of its shareholders. I'd like to tell you a bit about this offering and how it might benefit you.
As demographics change in Canada (and elsewhere), there will predictably be an increasing number of businesses for sale. This inevitably means that potential buyers will have more choice in the market, which leads to competitive pricing on the part of sellers. Instead of accepting the possibility that your business may eventually be sold for less than its potential value, there are actions you can take in the here and now.
MRSB's valuation advisors have developed a process to identify your company's key value drivers and will prepare an action plan that will enhance these drivers and result in less risk to you, the owner, and therefore higher value when it comes time to sell. In a nutshell, it's possible to increase the value of your business in the long-term without increasing revenues.
Here are just a few of the key value drivers for a business:
- A loyal and diverse customer base with documented history of sales
- An engaged management team, secured with contracts and incentives
- Protection from foreign currency exposure
- A formalized business plan
- Strong internal controls
- Marketing ability and a sales team
Without going into too much detail, here's a quick rundown of the steps we will take to identify your value drivers and leverage them into the future. First, we prepare an initial, complete valuation of your business. Next, we identify the aspects of your valuation that could be positively affected with certain strategic actions by the owner. Then we prepare a step-by-step action plan to help you enhance the value drivers. Lastly, our team will follow up and support you through the implementation of your action plan.
Assume your company has after tax earnings of $200,000 per year, and a valuation exercise determines that an appropriate capitalization rate for the business is 20%. This means your business is likely worth approximately $1 million ($200k / .20).
The capitalization rate is based on the risk of not achieving this earning stream into the future. So if you could reduce the risk and your capitalization rate by just 2% than the business would be worth over $1.1 million ($200,000 / .18). If you spend $10,000 to effect the necessary changes, you have increased the value of your business by 10% and achieved a 10x return on investment.
Visit our Valuation & Litigation Support team page to get in touch with me or another MRSB advisor who can help you move your business toward greater value.
Don Currie, Senior Consultant with MRSB Consulting Services, provides his perspective on what you may want to consider when hiring a consultant or consulting firm to move your business or organization forward
Being a consultant is rewarding work, and in my 25 years in the industry I've worked with more clients than I dare to try counting. Through the years I've realized that there are a few areas which, if better understood, can make the client-consultant engagement more rewarding for everyone involved. Below are some broad questions you may ask as someone considering the services of a consultant, and my two cents on each. Enjoy!
Should you consider hiring a consultant?
This is the first question you should ask - and think about quite a bit - before inviting a consultant onto your team. Some typical scenarios where your organization may benefit from hiring a consultant include one or more of the following:
- Your organization has a need for expertise in a specific area (e.g. marketing, operations, financial analysis or financing) and the need is time sensitive or considered to be relatively short-term (usually less than a year) with a specific start and end date.
- Your organization has made unsuccessful attempts at meeting its own needs in the past, or the results of previous attempts were not satisfactory.
- There is internal disagreement on the best way to meet a particular need. Engaging a consultant with previous experience in the area or one with strong facilitation skills can help in bringing about consensus.
- An objective perspective is required (e.g. to remove emotional or cultural barriers or strong biases within your organization).
- The work or task at hand is something that no one else either wants to do, knows how to do, has time to do, or a combination of these factors.
- A funding or financing organization is requesting that a consultant be brought in to provide further information or justification for taking specific action, or to support a funding/financing request for a project.
You think you might need a consultant. What do you do next?
Most professional consultants will have an initial meeting with the client to discuss your opportunities, goals and challenges at no fee or commitment. Your specific opportunities or challenges might not be that well defined - this is ok! A consultant can assist you in assessing the situation. From this initial discussion the consultant will work with you to develop a terms of reference for the engagement that addresses your situation and specific needs.
The terms of reference you receive should indicate deliverables such as draft and final reports, when and to whom any presentations are to be made (when applicable), primary and or secondary research methodologies that are to be used, timelines to be adhered to and budget.
You’ve engaged a consultant. How can you make sure you benefit from the engagement as effectively and efficiently as possible?
The benefit you receive by engaging with a consultant will increase with his or her understanding of your organization. Follow a few basic techniques to foster this understanding:
- Help the consultant to understand your product(s) or service(s), your market(s) and key stakeholders. One effective way of doing this is by providing them with existing, relevant documentation:
- A copy of your most recent business plan
- Strategic plans
- Policies and procedures manuals
- Technical documentation
- Financial statements
- Organizational chart
- Pricing policy
- Distribution system
- How your organization currently uses media and promotional materials
2. Give the consultant a sense of the overall nature and culture of your organization (be honest!):
- Are employees considered to be independent or do they typically work in teams?
- How are decisions made within the organization and by whom?
- Are there known barriers or sensitivities?
- How do staff generally react to change (i.e. are they typically supportive or resistant)?
3. Give the consultant a sense of the priorities within the organization today. Perhaps you want to launch a new product or service, increase sales or market share, be more efficient in particular areas or be more innovative within your sector.
4. Let the consultant know your preferred method (email, telephone, in-person) and frequency of communication.
Lastly, remember that open communication and a clear understanding of what you are trying to accomplish will go a long way toward meeting your specific needs and ultimately improving your organization’s overall performance. Hiring a consultant is an exciting and rewarding experience, so take pride in the fact that you've reached a point where this is a possiblilty for your organization.