Year: 2024

Do We Need an Audit? An Overview of Not-for-Profit Organizations and Their Financial Statement Requirements

Posted on by Edixon

UPDATE: The end of the three-year transition period is coming in October 2024, after which all Ontario not-for-profit corporations are expected to conform with the Ontario Not-for-Profit Corporations Act (ONCA) as discussed below. Another area this applies is with regards to the location of board meetings. Electronic meetings are allowed (unless by-laws or articles do not allow), however meetings cannot be held over e-mail. The technology used must allow everyone attending the meeting to reasonably participate and communicate with each other.

If your organization was incorporated prior to October 19, 2021, the by-laws or articles may not be in compliance with ONCA. Governing documents need to conform with ONCA by October 2024, after which they are deemed amended to comply.

Please contact your DJB advisor if you require any further information or explanation.

There have been a number of changes in recent years to modernize the laws governing corporations without share capital. These corporations were previously governed by the Corporations Acts in the various jurisdictions, but the laws and regulations created for business and for-profit enterprises were not effective at times for the not-for-profit sector. In 2011, the new Canada Not-for-Profit Corporations Act (CNCA) came into force to govern the not-for-profit corporations incorporated federally. Ontario created a similar Act, the Ontario Not-for-Profit Corporations Act (ONCA) that received Royal Assent in 2010 and was finally brought into force on October 19, 2021. There is a three-year transition period during which all existing not-for-profit corporations registered in Ontario have to make any necessary changes to their incorporation and other documents to bring them into conformity with ONCA.

There are a number of various legal changes addressed in the new legislation, but we wanted to focus on the section on Financial Statements and Review. A corporation must prepare financial statements each year which comply with the requirements of the Not-for-Profit Act. The financial statements must be prepared in accordance with the Canadian Generally Accepted Accounting Principles (GAAP) as set out in the CPA Canada Handbook.

There are new guidelines introduced in both the CNCA and the ONCA on the level of public accounting assurance required. We have summarized these below in a chart and included some important definitions.

The ONCA classifies not-for-profit corporations into two categories – public benefit corporations and non-public benefit corporations. A corporation is considered to be a public benefit corporation when it is a charitable corporation or when it has received more than $10,000 in revenue from public sources in a single financial year. Public sources include gifts or donations from people who are not members, directors, officers or employees, grants from all levels of government and funds from another corporation that has also received income from public sources. A non-public benefit corporation is a corporation that has received no public funds or less than $10,000 in public funds in each of its previous three fiscal years. The CNCA has the same requirements and classifies these as soliciting and non-soliciting corporations.

The differentiation is important as the government wants to ensure that organizations receiving public funds are sufficiently transparent and accountable for that income.

Private foundations may be considered a non-public benefit corporation, depending on their revenue sources.

As a reminder, all corporations governed by the ONCA and CNCA must send a summary of their annual financial statements or a copy of a document reproducing the required financial information (such as an annual report) to the members not less than 21 days or a prescribed number of days, before the day on which the annual meeting of members is held, or the day on which a resolution in writing is signed by the members to all members who request a copy.

A soliciting corporation incorporated federally must provide its annual financial statements to Corporations Canada not less than 21 days before the annual general meeting of members or without delay in the event that the corporation’s members have signed a resolution approving the statements, instead of holding a meeting. The date must also not be later than six months after the corporation’s preceding financial year.

Incorporated Federally
Type of Corporation Gross Annual Revenue per Financial Year Appointment of Public Accountant by Members Financial Review Required
Soliciting $50,000 and less Must appoint a public accountant by ordinary resolution unless members waive appointment by annual unanimous resolution Public accountant must conduct a review engagement; but members can pass an ordinary resolution to require an audit instead. If no public Accountant is appointed, then only a compilation is necessary.
Soliciting $50,001 to $250,000 Must appoint a public accountant by ordinary resolution at each annual meeting Public accountant must conduct an audit; but members can pass a special resolution to require a review engagement instead.
Soliciting more than $250,000 Must appoint a public accountant by ordinary resolution at each annual meeting Public accountant must conduct an audit.
Non-Soliciting $1,000,000 and less Must appoint a public accountant by ordinary resolution unless members waive appointment by annual unanimous resolution Public accountant must conduct a review engagement; but members can pass an ordinary resolution to require an audit instead. If no public Accountant is appointed, then only a compilation is necessary.
Non-Soliciting more than $1,000,000 Must appoint a public accountant by ordinary resolution at each annual meeting Public accountant must conduct an audit.

These rules were effective as of October 2011 when the CNCA came into force.

Incorporated in Ontario
Type of Corporation Gross Annual Revenue per Financial Year Appointment of Public Accountant by Members Financial Review Required
Public benefit corporation $100,000 and less Must appoint a public accountant by ordinary resolution unless members waive appointment by an extraordinary resolution (at least 80% approval) Public accountant must conduct a review or audit engagement. If no public accountant is appointed, then only a compilation is necessary.
Public benefit corporation $100,001 to $500,000 Must appoint a public accountant by ordinary resolution at each annual meeting Public accountant must conduct an audit; but members can pass an extraordinary resolution to require a review engagement instead.
Public benefit corporation more than $500,000 Must appoint a public accountant by ordinary resolution at each annual meeting Public accountant must conduct an audit.
Non-Public Benefit $500,000 and less Must appoint a public accountant by ordinary resolution unless members waive appointment by annual unanimous resolution Public accountant must conduct an audit or review engagement. If no public accountant is appointed, then only a compilation is necessary.
Non-Public Benefit more than $500,000 Must appoint a public accountant by ordinary resolution at each annual meeting Public accountant must conduct an audit; but members can pass an extraordinary resolution to require a review engagement instead.

These rules were effective as of October 19, 2021, when the ONCA came into force.

These rules allow members in Ontario corporations with $100,000 and less in annual revenue to pass an extraordinary resolution (80% approval) to waive both the audit and review engagement requirements.

Before a Board of Directors decides to take advantage of these new rules allowing the organization to be exempt from an audit (presumably to reduce annual professional fees), it is important to remember that an independent, external review of management’s financial reporting is an effective tool to fulfill a Board member’s governance responsibilities. We would also caution against moving away from an audit if you anticipate your organization’s revenues to exceed the minimum thresholds that require an audit in the near future. The costs of transitioning to and from an audit in a short period of time generally exceed the cost savings from moving away from an audit.

If you require any further information or explanation with regard to recent changes for your organization’s external financial reporting requirements, please contact your DJB advisor.

Choosing the Right Software

Posted on by Edixon

One of the most important things in any business is making sure you have enough money to pay your bills; this is why it is imperative to choose the correct software for your bookkeeping.  Take your time choosing the right software because it can be costly having to repeat this process.  You need a system that will track all your day-to-day transactions, such as invoicing, recording payments, tracking expenses, HST, payroll, and reconciling transactions.  The more accurate the information is, the better the reports will be and the more insight you will have into your business performance.

Choosing the best accounting software for your individual business is challenging. Each program includes a different set of features. Depending on those features and the number of users, will determine the price point.  Some of the questions you have to ask is:

  • Would you like your program to be cloud based so you can access it from anywhere on multiple devices?
  • What kind of features are you looking for?
  • What kind of reporting are you looking for?
  • Do you need to track inventory, payroll, HST?
  • Do you invoice and pay bills out of the system?
  • How many users will be using the system?
  • What is the price point you would like to stay within? 

Creating a list of needs and wants will help you determine which software is best for you.  Reach out to other business owners and ask them what they use and what they like and dislike about the system.  Check to see if the system has a free version; see if it can do all the things you want it to do.  Talk to your accountant or bookkeeper, they will have suggestions as well.  Don’t be afraid to ask the questions.

Once you have made the decision on the software, make sure that the setup is correct.  An incorrectly set-up system can be just as costly as choosing the incorrect system.

 

Real Estate: CRA Audit Activity

Posted on by dflanagan

CRA uses a combination of risk assessment tools, analytics, leads, and third-party data to detect noncompliance in the real estate sector. They have identified ten areas where they perceive that there is a significant risk of non-compliance, as follows:

  • reported income does not support lifestyle (e.g. acquiring expensive assets like real estate without an obvious income source to support it);
  • property flipping (buying and reselling homes within a short period with the intention of selling them for a profit; CRA has identified three main categories of flippers: professional contractors, or renovators speculators, or middle investors, and individual renovators);
  • unreported capital gains on the sale of property;
  • unreported capital gains on property sold by non-residents and insufficient withholdings, if required, when purchasing property from non-residents;
  • unreported worldwide income by Canadian residents;
  • unreported GST/HST on the sale of a new or substantially renovated home;
  • improperly claimed GST/HST rebates (e.g. when a taxpayer applies for a new housing or rental rebate but actually intended to flip the property for a profit);
  • not classifying oneself as a land developer; • not properly reporting/claiming the principal residence exemption on an individual’s personal tax return; and
  • an individual’s status as a realtor (as a realtor’s main revenue stream is from the sale of real estate, CRA has identified them as a higher-risk population).

Based on a historical review of CRA’s webpage, it appears that the following three points were added in 2024: land developer, principal residence exemption, and status as a realtor.

In 2015, CRA increased its focus on real estate non-compliance in major centres, such as the greater Toronto area and British Columbia’s Lower Mainland (the greater Vancouver area). From 2015 to the Spring of 2023, CRA reported that the cumulative total of additional taxes and penalties assessed was $2.7 billion, derived from approximately 75,000 audits. While British Columbia only has about a third of the population of Ontario, CRA identified roughly the same amount of tax non-compliance over the past eight years ($1.4 billion in BC and $1.3 billion in ON). Non-compliance in British Columbia is largely related to income tax, while in Ontario, it is largely related to unpaid GST and HST on new homes or inappropriately claimed rebates on those taxes. More recently, during the 2022 to 2023 fiscal year, CRA identified $426 million in additional tax and penalties in the real estate sector in Ontario and British Columbia.

Ensure that all real estate earnings and dispositions are properly reported and supporting documents retained. Be prepared for extra CRA scrutiny and review.

 

Online Reviews: Employees Must Disclose their Connection to the Business

Posted on by dflanagan

Under the Competition Act, employees posting reviews online about their employer or the competition must disclose their connection to the business, even if the individual provides their honest opinion. This requirement applies to all types of reviews, including testimonials. A January 18, 2024, Competition Bureau Canada News Release (Online reviews posted by employees: businesses could be liable) recommended that businesses establish policies and provide employee training to reduce the risk of liability. The release also recommended that if an employee cannot make the connection clearly visible in a review, they should avoid posting it. This may occur when an employee intends to provide a star rating for a product or service but cannot disclose their connection with the provider.

Ensure employees are aware of this requirement under the Competition Act and properly disclose relevant connections when posting online reviews.

Unnamed Persons Requirement: Another CRA Compliance Tool

Posted on by ssiconolfi

In 2023, CRA issued Shopify an unnamed persons requirement (UPR) that required Shopify to provide information on more than 121,000 Canadian vendors for the past six years. CRA uses this information to verify whether the unnamed persons for whom it received information have fulfilled their income tax and GST/HST obligations.

CRA has recently been using UPRs to detect non-compliance in several other industries, such as construction, crypto-assets, and real estate. They can request various types of information in a UPR, including client information (e.g. names, addresses, phone numbers, date of birth) and books and records (e.g. sales and purchase records and legal and public records). CRA reiterated that a UPR differs from an audit as information requested from a business in an audit generally only pertains to the specific entity. However, for a UPR, the requested information typically pertains to an identified group of the business’ clients.

Taxpayers who have not complied with their tax obligations may qualify for penalty relief through the voluntary disclosure program. However, the program does not apply if CRA has commenced an enforcement action, such as a UPR, or received information about potential tax non-compliance.

Ensure you properly report all of your income. Once CRA commences an enforcement action, including receiving information about noncompliance, the voluntary disclosure program is no longer an option.

How Does GST/HST Apply to Airbnb/Short-term Rentals?

Posted on by Edixon

The popularity of Airbnb, short-term rental pools for cottages and vacation properties continues to grow.  One aspect of venturing into the short-term rental game is how GST/HST applies.  The volume of rental income and the length of the rentals is the determining factor on whether you will need to charge GST/HST.

Essentially, long term-rentals are exempt from GST/HST, while short-term rentals are subject to the tax.

What is considered a short-term rental?

A short-term rental is generally one where the period of occupancy is less than one month and the consideration for the supply is more than $20 a day.

Am I considered a small supplier?

If you are supplying short-term rentals, you will need to determine if you are considered a small supplier for GST/HST purposes.  A small supplier is one whose worldwide annual GST/HST taxable supplies, (including zero-rated supplies and including the sales of any associated parties) are less than $30,000, or less than $50,000 for public service bodies (colleges, non-profit organizations, charities, hospitals).

One of the most common oversights we see is forgetting to include any other associated business revenue into the small supplier test.

Should I voluntarily register for GST/HST?

If you are under the $30,000 of taxable supplies for your associated group, you can elect to voluntarily register for GST/HST.  The benefits of this would be to enable the claim of any GST/HST paid on expenses related to your short-term rental income.  It may also permit you to recover some or all of the GST/HST you may have paid on the unit.

But be aware – if you choose to register, you will be required to collect and remit the GST/HST on your short-term rental income.

There are many factors to consider when venturing into this market; especially if you will be using a portion of your principal residence.

Determining the Economic Benefits of Customer-related Intangible Assets

Posted on by ssiconolfi

This is the second article in a series on intangible assets and the various valuation methodologies and considerations. First article: Unlocking the Value: Understanding Intangible Assets in Business Valuation

Customer-related intangible assets present insight on customers and their buying patterns. This can be analyzed to execute the development of new products or services, align a company’s strategic initiatives, or expand to new markets and geographic locations. Examples of customer-related intangible assets include customer lists, customer relationships, and customer contracts.

Organic growth vs. Inorganic growth

A business can grow through two categories: organic growth and inorganic growth. Organic growth is natural growth from existing operations, such as selling more products, reducing costs, or improving efficiency.

In contrast, inorganic growth is rapid growth of a business through acquisition or expansion resulting in an immediate increase in market share. Through a business acquisition, a competitor’s customer-related intangible assets can also be obtained to gain a competitive advantage. Accordingly, customer-related intangible assets are a commonly identified intangible asset in a business acquisition.

In this article, we address some of the nuances in valuing a customer-related intangible because of a business acquisition.

Customer lists vs. Customer relationships

A customer list contains customer information, such as personal, behavioural, or demographic data and can even potentially be re-sold. A purchaser can use this information to determine a target demographic when marketing new products and services or expanding existing product offerings.

A customer relationship is based on a history of sales transactions. The value of a customer relationship depends on how often purchases are made, the friction or costs to find and replace customers, and how dependent those customers are on the business. The benefits of a strong customer relationship include customer retention, loyalty, referrals, and satisfaction. A contract does not need to exist for a customer relationship to have value, as long as there is an expectation of the relationship to continue.

Customer contracts

Customer contracts not only provide an estimate of future profits, they can also provide economic reassurance to the purchaser during a business acquisition. A contract can exist in various forms such as verbal, written, express, or implied. An intangible asset can exist as long as the contract is legally enforceable. The specific contract terms are reviewed when determining the value of a customer contract.

In addition, customer’s purchasing patterns, length of the relationship, and potential of renewal also need to be reviewed to meet specific financial reporting and accounting standard requirements when valuing intangible assets in relation to the definition of fair value.

Customer attrition rate

Customer attrition is the expected future loss of customers or decline in future customer purchases and is based on historical revenue or customer count to provide an indication of future expectations. The selection of the customer attrition rate is based on historical data, future forecasts, and the following factors:

Customer segmentation: Separating customers based on their as personal, behavioural, or demographic data will improve accuracy of the customer attrition rate.

Loss occurring at a variable or constant rate: The rate of customer loss can occur early in the relationship, later in the relationship, or be constant regardless of the age of the relationship. The telecommunication industry has a high rate of customer loss early in the relationship because of competition and relative ease for customers to switch providers.

When a customer is considered “lost” can vary depending on the product or service offered. For a music or video streaming service, a customer may be considered lost after cancellation as the relationship can end very easily. However, for a home appliance or home furnishings store, a customer may not be considered lost until five years have passed with no sales due to the periodic and large nature of purchases from those stores.

If you have any questions or require assistance regarding business combinations and valuing customer-related intangible assets, please contact a member of our Financial Services Advisory Team (FSAT) team.

 

 

Director Liability: De Facto Director

Posted on by ssiconolfi

Directors can be personally liable for payroll source deductions (CPP, EI, and income tax withholdings) and GST/HST unless they are duly diligent in preventing the corporation from failing to remit these amounts on a timely basis. Individuals can be personally liable as directors for up to two years after their resignation.

A July 19, 2023, French Court of Quebec case reviewed whether the taxpayer had resigned as a director of a corporation, thereby protecting the individual from personal liability of the corporation’s failure to remit $22,418 in QST and $38,479 of source deductions. The taxpayer argued that she resigned in writing on the day the corporation declared bankruptcy. Revenu Québec (RQ) argued that even if the taxpayer had resigned, she continued acting as a dire

Taxpayer loses

The Court found that even after the taxpayer allegedly resigned, she continued to carry on the duties of a director. For example, she signed an income tax return for the corporation, authorized the corporation’s accountant to discuss matters with RQ, had conversations with RQ regarding collection activities but did not disclose that she was allegedly no longer a director, and sent two $500 cheques to RQ in an attempt to settle the corporation’s tax debts.

The Court also reiterated previous jurisprudence that found that a director who has resigned must inform the Minister of their resignation during exchanges of correspondence relating to the company’s tax debt and those relating to the liability of directors. While the Court’s comment was specific to the Quebec Companies Act, the Court stated that it did not believe the rules were different for corporations under other provinces or the federal act.

The Court also stated that just because a corporation is bankrupt, the director does not lose their status as a director.

Ensure that allowances paid to employees meet the strict conditions for being tax-free to avoid a surprise tax bill for the recipient.

What Every Charity Needs to Know about the Calculation of the Disbursement Quota

Posted on by dflanagan

In January 2023, Canada Revenue Agency increased the required disbursement quota for charities from 3.5% to 5.0% on the portion of property over $1 million.  Many charities however, do not know how the value of this property for the determination of the quota is calculated or how they meet the disbursement target.

As part of the annual Registered Charity Information Return, there is a question on the amount of property that the organization owns that is not used directly for charitable activities or administration.  This could include excess cash or investments on hand or other capital property such as a building that is not used by the charity.

If this amount is more than $100,000 for charitable organizations (or $25,000 for public or private foundations) then you must calculate and enter the amount. Rather than take the amount at a specific date, it is instead determined based on the average over the prior 24 months.

Once this average value of property not used in charitable activities is computed, the next step is calculating the disbursement quota.  It is determined at 3.5% of the value less than $1 million and 5% for any amount exceeding $1 million.  For example, an average value of $1.5 million will result in a disbursement quota of $60,000.

To meet the disbursement quota, the organization must have total expenditures on charitable activities and gifts to qualified donees in the year more than the quota or be offside and have a shortfall.

If however, a shortfall exists the charity can draw on disbursement excesses from the previous five years to help meet the shortfall or if no excesses are available they have one year grace to create an excess the following year to cover the prior year shortfall.

Expense Claims that Pass the Audit Test

Posted on by Edixon

Often taxpayers are audited by the Canada Revenue Agency (CRA) and end up being surprised when some or all of their expenses are disallowed.  Many times this could have been avoided with proper documentation.  In this article, we will look at some common issues the CRA has with respect to claiming of expenses and the related documentation.

In general, expenses are deductible if they are incurred for the purpose of earning income from business or property, and are reasonable in the circumstances.  Too often taxpayers attempt to deduct personal expenses from their business income.

Bank statements and credit card statements are not sufficient evidence for a CRA auditor.  You need to keep invoices that detail what was purchased.

Meals and entertainment

Receipts are the major supporting documents because they provide information such as the date/time, location, and the amount paid.  Since there can be a definite personal aspect to these expenditures, the CRA also expects an explanation on how those meals and entertainment expenses relate to your business income. Therefore, you should document the following information on each receipt:

  • Who attended the event
  • Their relationship to your business
  • What client matter or income it relates to

If you do not have adequate supporting documents, the CRA could disallow the expense.

Automobile expenses

When you have self-employed income, the CRA allows you to take a deduction for costs associated with your vehicle.  The deduction is based on the number of kilometres you travel in your vehicle for business-related activities.

To calculate your deduction properly, you will need to keep track of your trips throughout the year, and also hang on to any receipts for vehicle-related purchases, in the event of a CRA review. To claim this deduction, the CRA requires you to keep a full logbook that journals your travel activities.  Your logbook should list the odometer reading on the first day of the tax year (or the odometer reading on the first day you decided to start using your vehicle for business), and the odometer reading for the last day of the tax year. Then for each trip, note the date, the kilometers travelled, the address or destination of your travel and the business purpose for the trip.  From your logbook, at the end of the year, you will be able to determine the total kilometers travelled and the number of kilometers travelled for business purposes, and thus the total percentage use for business use.  To determine your tax deduction, you apply this percentage to your total vehicle costs including:

  • Fuel
  • License and registration fees
  • Insurance
  • Lease expenses (CRA maximum lease cost may apply)
  • Maintenance and repairs.
  • The CRA prescribed capital cost allowance (depreciation)
  • Interest costs
Home office expenses

Self-employed individuals often carry out at least a portion of their business activities at home. In order to claim home office expenses, you must meet one of the following requirements:

  • Your home office must be the principal place of your business
  • You use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your clients, customers, or patients

If you are an employee, your employer must complete form T2200 indicating that you are required to use part of your home as an office to carry out your duties.

To determine how much you can deduct for your home office expenses, calculate the size of your office as a percentage of your home’s total size.

The rules for claiming home office expenses depend heavily on your type of employment:  Both self-employed individuals and eligible employees may both claim expenses for heat, electricity, water, maintenance, and rent (if applicable). Commission employees and the self-employed may also claim property taxes and insurance. Only self-employed taxpayers may claim mortgage interest as a home office expense.

If you have maintenance costs that are related exclusively to your home office, you can deduct the entire portion of those expenses.  Make sure that you keep all of your invoices to support your claim.

In some cases, you may not be able to claim the entire amount of your home office expenses in a single tax year.  Both employees and self-employed individuals cannot create a loss from claiming home office expenses. The excess expenses can be carried forward and in most cases can be applied to future years.

Oral audit evidence

If you do not have all of your documentation in place when the auditor calls, they may accept your oral testimony as support for the tax deductions that you’ve claimed.  However, in most cases you will lose at least a portion of your expense claim.  The better way and to reduce your stress, is to develop a habit of making sure that you have the right documentation in place from the start.

If you have any questions, or need assistance with claiming expenses, please contact one of our DJB tax professionals.