View this email in your browser

May 2024 Edition

▶️ Cash Flow Struggles … and What to Do About It

As part of our Fractional CFO work with clients, we dig deep into the numbers to uncover the true health of a business. What we find is often not pretty, especially nowadays. With high interest rates and inflation, many businesses are struggling with their cash flow.

From recent discussions with clients, here are some suggestions:

1. Cut Back on Discretionary Expenses: This might seem obvious, but take a regular look at your Profit & Loss statement. You'll often find expenses you didn't realize you were paying for or spending so much on. Also, ask yourself if cutting an expense for a few months would hurt your business.

2. Extend Payment Terms on Bills: Slow down paying your bills and ask your vendors for more time if needed. Alternatively, see if they offer discounts for early payments.

3. Speed Up Collections: Set clear due dates on your invoices and charge interest on late payments. Use automated reminders and follow up on overdue invoices. If the amount is large, have someone call the customers. It might be tough, but it gets money into your bank.

4. Automate Collections: For service-based businesses, get payment information upfront. Charge your customers' accounts as soon as the work is done. This way, you avoid having unpaid invoices.

5. Sell Unused Assets: If your business has assets that aren't being used, consider selling them to get some quick cash. Extreme times call for extreme measures!

6. Renegotiate Debt Terms: Review your debts, including terms and interest rates. You might find some better deals. Talk to a few bankers about consolidating your debt under better terms.

7. Ramp Up Sales: Increase your marketing and sales efforts. Pay attention to leads, conversion rates, and set concrete sales goals. Without specific goals, you're just ‘hoping’ for more revenue.

8. Downsize Team: This is often the last resort. If your revenue has dropped significantly, you may need to adjust your salaries expense accordingly. Letting people go is tough, but sometimes necessary for the business to survive.

There are many more actions you can take, but these should help you get started.

▶️ How is Life Insurance Taxed inside a Corporation?

When a corporation owns a life insurance policy, the tax rules can be a bit tricky. Generally, the premiums paid for life insurance policies, where the corporation is the beneficiary, are not tax-deductible. This is because the death benefit from the policy is usually received tax-free.

So, if the corporation owns the policy and is also the beneficiary, the payout when the insured person dies is typically not subject to income tax. Life insurance proceeds would be received tax-free by the corporation, and the amount of those proceeds, less  the “cost base” of the insurance policy, would credited to the corporation’s “Capital Dividend Account” (CDA). A tax-free capital dividend could then be declared, which would be tax-free to the estate of the shareholder.

However, there are some situations where taxes come into play. For example, if the policy has a cash value and the corporation decides to cash it in, any amount received over what was paid in premiums could be taxable. Also, if the policy is transferred from the corporation to a shareholder or employee, this could be seen as a taxable benefit, which might affect both the company and the person receiving the policy.

Using life insurance in a corporation can be a great strategy, but it's important to plan carefully to get the most tax benefits and avoid any surprises. It's always a good idea to talk to our team and your insurance provider to get a consultation on making sure everything is set up right and fits with the your financial goals.

▶️ Benefits of a Health Spending Account in your Corporation

A Health Spending Account (HSA) can be beneficial for shareholders when setup in your corporation. Instead of taking out money as after-tax compensation to pay for medical expenses and then claiming those on your personal tax return, you can have these expenses covered directly by the company's HSA. This can save you a significant amount of money and simplify the process.

When you use an HSA, the corporation pays for your medical expenses directly, which means you don't have to deal with the hassle of paying out of pocket first and then waiting for a tax credit. The money used for medical expenses through an HSA is also tax-free, so you avoid paying income tax on that portion of your compensation. This can lead to substantial tax savings compared to taking the same amount as salary or dividends.

It's important to note that the medical expenses covered by the HSA must meet the criteria set by the Canada Revenue Agency (CRA) for the medical expense tax credit. This includes a wide range of expenses, from prescription medications and dental care to vision care and even some alternative treatments. By ensuring your expenses fit within these guidelines, you can maximize the benefits of your HSA.

There isn't a strict dollar limit on how much can be claimed through an HSA, but the contributions must be "reasonable" and in line with what would be offered to an arm's length employee. The CRA expects the benefit levels to be justifiable and not excessive​. This ensures that the HSA is used for its intended purpose and complies with tax regulations. This court case lays out some good guidelines as to how the Tax Court of Canada assesses reasonability.

Overall, using a Health Spending Account can be a smart financial move for shareholders. It offers a tax-efficient way to handle medical costs, reduces the burden of out-of-pocket expenses, and ensures you comply with CRA regulations. If you haven't already, consider setting up an HSA in your corporation to take advantage of these benefits.

If you would like to discuss this further, and perhaps get a referral to an HSA professional, feel free to setup a tax consultation with our team.

🤓 QUOTE OF THE MONTH

Share with a Friend

Copyright (C) " target="_blank">unsubscribe