Tax Tip Thursday

Implications of Bookkeeping on Your Shareholder Account

Back to bookkeeping again.

I would like to talk about bookkeeping specifically for transactions that involve the owner of the business. This is generally more applicable to corporations, but much of it holds true for sole proprietorships as well.

 The important message in this week’s show is make sure the bookkeeping is done correctly for any of those transactions and make sure you understand the outcome and the implications to you personally!

 Common Problems

Here are some of the common problems that occur and are generally ongoing:

  1. Owner’s use the business bank account as a personal bank account.  This is a big problem and we do not let our clients do this for several reasons:
    1. This adds extra work and complexity to the bookkeeping process.
    2. It is costing you more in bookkeeping for sure.  Your bookkeeper has to account for and sort through both all of your business transactions and also all your personal transactions. All of that extra work takes more time and therefore more fees to you.
    3. CRA takes a dim view of people who do not differentiate between their business and personal expenses. 
    4. If you are reviewed or audited, there will be a significantly higher level of scrutiny by the CRA for each and every expense item.  If your bookkeeper is handling this, again, a lot more time and therefore higher fees.
  2. For businesses that are registered for HST, we often find that HST is still applied to the personal transactions as if they were business transactions.  This can be very problematic and costly if CRA gets involved.
    1. If you are caught in an HST audit, they will deny all the ITC’s (HST on expenses) that you claimed against the personal expenses.
    2. You will have to pay that all back plus penalties and interest.
    3. The HST department will pass the information along to the tax department and if you claimed personal expenses on your taxes, they will also be denied and you will have to pay back the tax on those expenses plus penalties and interest
  3. If the bookkeeping is done properly, it will result in a Debit balance to the Shareholder account.
    1. A Debit balance in the shareholder account means that the shareholder owes the corporation that money.
    2. The shareholder can only owe the corporation money over 1 year end and not 2.  The shareholder must take any debit balance into income personally.
    3. This can cause unplanned tax bills and paying higher taxes than would have been required.

We teach our clients to NOT use the business bank account as a personal bank account.  Instead, we teach clients to pay themselves from the business to their personal bank account and then spend their own money on all their personal expenses.

This solves a few problems:

  1. Now we do not have to do bookkeeping for all the personal expenses
  2. There is no chance of including HST in the transactions that are of a personal nature.
  3. If our client is audited, there are only business transactions running through the business
  4. It is much easier for the owner to know how much they are taking out of the corporation and managing their own personal budget.
  5. We are able to offer fixed price bookkeeping packages to our clients based on the volume of just their business transactions; therefore costing the client less money!

Don’t Hide Information

I have seen horror stories with these situations.  I have a new client and they have a huge problem.  Unfortunately, neither the bookkeeper or the accountant told my client that they were running up a significant debit balance in the shareholder account.  Literally hundreds of thousands of dollars.  The client is faced with a situation now where they have to deal with taking that money into income personally.  The situation was totally avoidable.

Make sure your shareholder transactions are accounted for properly and that you understand the implications of the balances.

We are offering a free review of your books.  We can catch these problems for you! Book your appointment today.

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.