Why Do Small Businesses Need Integrated Financial Management Services to Experience Tax Savings?
“I’m paying too much in taxes.” …
“My business is turning a nice profit, but I need to borrow money to pay off my liabilities.” …
These are the kinds of problems clients often come to us for help solving. Over the years of working to decrease their tax burden and increase their cash flow, we have come to recognize a simple truth.
In between the so-called tax planning services offered by the average accountant and financial planner lies a grey area that risks compromising your wealth through larger than necessary tax bills and missed wealth-building opportunities.
That’s because the tax advice most accountants provide is limited to preparing tax returns for your business or professional practice. While the best a financial planner seems able to do is advise you to buy RRSPs to defer your personal tax burden.
The fact is, when your business and personal financial affairs are looked after by accountants in one firm and financial advisers in another, you usually end up paying more in taxes and wasteful financial service fees. At Leach Bradbury, we specialize in comprehensive and fully integrated accounting, tax planning, and financial management services for professionals and small business owners. By looking at your complete financial picture, we give you tax savings that put more money in your pocket—where it belongs.
Warning: Your Accountant Could Be Costing You Hundreds of Thousands in Income Tax
A couple staked their house on the success of their restaurants, securing an $800,000 line of credit based primarily on the equity value of their home so they could invest in the restaurants.
Their accountant was familiar with the saying that business owners pay themselves first, so he advised the couple to pay themselves $100,000 each per year.
In the early years of the business, the restaurants didn’t turn a profit and without profits there was no cash to pay their salaries. Still, with the accountant’s blessing, they declared the $100,000 salaries on their personal income tax returns.
Seven years passed. That annual $100,000 added up to $1,400,000 in taxable personal income between the two of them—even though they only managed to actually pay themselves $200,000 in cash. But by claiming all that income, they ended up paying approximately $283,000 in taxes and Canada Pension Plan contributions to the government.
On top of that, the restaurants still owed them $1,200,000 for their salaries.
Don’t pay tax twice
By following their accountant’s advice to pay themselves first, the couple fell victim to something known as double taxation, paying income tax twice on the same source of earned income.
You see, the couple had already used their after-tax income, the disposable income available to them after federal and provincial taxes had been deducted from their taxable income, to purchase their house.
They then borrowed money against the value of the house to invest in equipment, renovations, and operating capital for the four restaurants. But by declaring personal income from restaurants invested with their borrowed money, they ended up paying income tax again on the same money.
What they should have done was withdrawn the $200,000 ($100,000 each for the man and his wife) from the restaurants each year to repay the bank loan. They should never have declared the amount as personal taxable income.
Avoid common – and costly — wealth-robbing mistakes like these
This couple could have avoided losing hundreds of thousands of dollars—and hours of headaches and worry—if they had used an accountant who also had expertise in financial planning.
Accountants look only at the financial statements for your business while financial planners focus on your personal financial statements. But by keeping information about your personal and business finances in silos you risk losing money through double taxation. It can also cost you additional financial fees if you maintain separate corporate and personal accounts for insurance, credit and banking.
So look for a tax planner that can understand and integrate both aspects of your financial statements. As this couple’s story demonstrates, it can save you literally hundreds of thousands of dollars over the years.