As our economy in Canada has evolved so has the nature of most people’s employment. Downsizing and outsourcing has become more prevalent, stable jobs have become more scarce, and more people are becoming self employed. While the freedom and potential for success are great, being self-employed brings its own challenges when it comes to managing business debts.
On this week’s podcast I talk with Ian Martin, Scott Schaefer and Ted Michalos about the potential debt problems that entrepreneurs and self-employed persons might face and provide tips that can help you avoid these common small business mistakes when it comes to managing your finances.
I also talk with our experts about how to deal with one of the most common business debts: tax debts owing to Canada Revenue Agency.
Financial Tips For Avoiding Small Business Debts
For the first segment of the show, Ian and I discuss the common mistakes new business owners make:
- They start a business without enough money to cover the start-up phase. This can cause the self employed person to accumulate debt before they are even start making money. Those wishing to start a business should have enough saved up to cover both start-up costs and personal living expenses until the business is generating enough cash flow.
- They do not put enough money aside throughout the year to cover income taxes, HST, and CPP contributions. Some self employed people may not be aware that they have different tax obligations or may use tax money collected for their living expenses hoping things will improve and they will catch up later which can cause problems and lead to significant tax debts. Ian adds:
Maybe the first year it’s not so bad and, you know, the business is getting a little bit stronger and you feel like you can build up and catch up but if that snowballs for two or three years, that can be a pretty big mountain to overcome.
Ian offers these tips to help you avoid mounting business debts when launching your new small business:
- Have some savings set aside for start-up & living costs.
- Have a good cash flow projection
- Make sure you have a comprehensive business plan including how you will deal with keeping up with all your payments.
if you don’t, it’s human nature that you rely on credit to get over that start up phase.
Self Employed & Tax Debts – What Should You Do?
It’s not uncommon for a self-employed person to find themselves deep in debt with CRA. When you are employed, your employer withholds income tax and other tax obligations from your pay and remits them to the government for you. As a self-employed person you have to make installment payments. You may also be collecting HST throughout the year but are using that money to fund your business or personal expenses and find yourself owing money to Canada Revenue at the end of the year.
In the second segment of the show, Scott Schaefer joins the podcast to discuss options for self-employed persons with tax debt.
To help small business owners and self employed professionals, Scott asks them a few questions to determine their options.
- Is the business viable? Does it generate enough revenue to cover business expenses, taxes, and your living costs?
- Is it viable after taxes? What taxes are owed? Have you remitted your HST? Have you made both the employee and employer contributions into CPP? Have you paid your income tax.
Scott offers these tips:
- Look at monthly statements. See how much you are actually bring in. Is the business making money month over month? How much do you need to live on? How much to you need to deal with outstanding debts.
- Start treating yourself like an employee. Pay your HST every month. Pay an installment towards your taxes as if you’re an employee. Then figure out a plan to deal with the past debt.
- Consider hiring an accountant or a book-keeper. They will help make sure you keep on top of your payments. A good accountant can ensure you priced your jobs right or create a financial plan to adjust to problems much quicker.
- Speak with the right professionals before deciding to do something like incorporate your business. Depending on your situation, it may or may not make a lot of sense. Be sure to do your homework and ask the right questions.
What do you if you owe taxes for multiple years?
For the last segment of the podcast, Ted Michalos, joins me to discuss what your options are if you are self employed and need tax debt help.
Most people once they get behind on their taxes, they become too afraid of the taxman to do anything about it. And that’s probably the worse response that you could have. The longer you let this problem go, the higher the number’s going to be.
Ted always recommends dealing with your tax debt as soon as possible. If you have the money in the bank, pay CRA. If you do not have the money in the bank, you could make a deal with the Canada Revenue Agency. You could negotiate to pay it off in 12 months and give them postdated cheques. Alternatively, you might be able to get the CRA collector to speak with their supervisor to negotiate 24 months – although the CRA is reluctant to do that.
Any payment plan longer than two years requires a formal procedure like a consumer proposal. He adds:
The thing that causes CRA the most grief, where they automatically say I’m not going to consider your proposal is if you don’t file your returns… The first thing you’ve got to do is get that stuff filed so they know what it is that you owe them. If you haven’t filed your returns then CRA is not going to agree to any terms of proposal, they’re simply going to say no.
However, once you filed your taxes returns, CRA will accept your proposal if you make a reasonable offer.
Whether you owe taxes or not, be sure to get professional advice when you are self employed. Get professional help if you need help balancing your books. And do not hesitate to reach out to a licensed insolvency trustee if you already owe taxes and other debts.
Read the full transcript of today’s podcast below:
Resources mentioned in the show
- The Self-Employed Debtor
- Keeping Your Small Business Afloat While Dealing with Debt
- Overcoming Business Tax Debts: Case Study
- Top 5 Bankruptcy Issues for Small Business Owners and Self Employed
- The Big Mistake That Lead To My Bankruptcy
FULL TRANSCRIPT show #93 with Ian Martin and Scott Schaefer
Doug Hoyes: Here on Debt Free in 30 we focus on how as a person you can become debt free. But what happens if you’re self-employed or you own a business and you have debt problems? Is having business debt different than having personal debts? It’s an important question because an increasingly number of people today are self-employed. Many years ago you got a job at the factory or in an office and you worked there your entire life. Today with all of the downsizing and outsourcing secure jobs are hard to find so many people become self-employed.
For some people being self-employed or owning your own business is great. You set your own hours, you don’t have a boss and if you’re successful you can make a lot of money. It’s great. But of course there are also disadvantages. Being your own boss really means being your own company. You’re not just the guy doing the work, you’re also the guy doing the book keeping and paying the bills and fixing the computer when it doesn’t work. You’re responsible for everything, good and bad. Some people like that. Others prefer to just do what they’re good at and nothing else.
There are many occupations where being self-employed is very common. Many truck drivers for example are self-employed. They aren’t employees of the trucking company, they actually own their own truck or tractor as it’s called in the business and they get paid by the kilometre. They can make good money but if they don’t work, they don’t get paid. If the truck needs repairs, they need to pay for it. So, there are advantages and disadvantages when you’re self-employed. Construction is another industry where I see lots of people who are self-employed: roofers, drywallers, frames, plumbers, electricians, they’re all often self-employed. So, what problems can it cause if you’re self-employed?
To find out I’ve asked Ian Martin to come join me. Ian is a chartered accountant, a CPA and a licensed insolvency trustee in the Hoyes Michalos Kitchener and Stratford office. Ian, welcome. As I said in the opening being self-employed has many advantages but there are also some drawbacks and one of those problems is that you’re responsible for all the money management, the finance, the bookkeeping. So, you’ve helped lots of people over the years, what problems do you see self-employed people or people who own their own business getting into?
Ian Martin: Well, I mean you can go a lot of different ways in answering that Doug. And I feel like your intro there kind of hit on kind of the highs and the lows. It’s easy to focus on the success stories that we’ve heard over the years. We can think of examples, my great uncle came to this country and he didn’t know very much, and he built his business with his own hands and now he owns his own house and he’s a true Canadian success story.
However, the opposite at the end of the spectrum is more often the case, meaning that it’s not successful. So, I think the biggest challenge if you compare to someone who’s an employee is with a regular pay cheque is that when you’re the ‘man’, when it’s your business is having the regular sustainable cash flow so you can manage all the other aspects of your life.
You said already that when it’s your business when you’re the ‘guy’, it’s not just raising the business and finding the clients it’s doing that, it’s doing the work, it’s paying the bills, making sure you’ve set aside all the money for all your different tax obligations, take care of the bookkeeping or finding the appropriate people to help you with those things. So, it’s not just an idea, it’s having an idea and also a comprehensive business plan to get through it. But then also having the financial backing to kind of whether the storm of kind of the ups and downs.
Doug Hoyes: So, let’s talk about that. Financial backing, so what do you mean by that? You’re saying that when I start a business it’s not like when I get a job, I don’t have to have any cash in my pocket when I start a job ’cause I’m going to get my first pay cheque in two weeks.
Ian Martin: Right, exactly. So, there’s lots of businesses where, when you’re starting the business there’s what we call the start up costs. Where, one of the examples that you gave was the truck driver, what we call the owner operator. Well, that means you own a truck. And it’s not like buying your Ford F150 where it might be 30, 40, $50,000, we’re talking about trucks. It can be hundreds of thousands of dollars. So, with that you’re either having the capital to pay for that or having like a huge, huge monthly payment that can be several thousands of dollars. Well then you need to be bringing in enough money to cover those costs.
Doug Hoyes: Yeah so even if I’m able to go out and finance a brand new truck and even if my monthly payment is going to be, I don’t know, $10,000 a month on the truck, I’ve also got to pay insurance, I got to put fuel in it and whatever other costs I’ve got associated with that. And I don’t get my first pay cheque the first day.
Ian Martin: Right. And what I find, I mean it’s probably part of the work that we do in helping people who are insolvent is that a lot of people, they go into business for themselves when other things haven’t worked out. I met with a guy just last week and, you know, nice guy, very articulate, very well educated but within his industry over the last 15 years he’s been the casualty of four or five different layoffs over the span of the last 15 years. And has become very I’ll say skeptical or cynical in the big corporation and working for the ‘man’.
So, understandably he’s decided he wants to be his own boss and we had a good conversation last week and he has opportunities to be an employee for somebody else and have a decent paying job. But he said to himself I need to give myself enough time to see if I can do this on my own. So, he’s given himself six months. He has some contracts, he is – to be true to himself he wants to make sure that he can make it good a business for himself. And if it proves at the end of the time period that he can’t, he’s got to fall back.
But I guess the point I was trying to make there was so many people they find themselves where they’ve been a casualty, where they’ve lost their job and then there might already be some debt problems. And then they go into business for themselves. So, instead of having saved up, you know, $10,000 or $20,000 or $30,000 to cover the expenses in the start up phase, they’re relying on credit or basically debt to get them through the start up phase.
Doug Hoyes: And you think about this particular guy so and we’re not going to talk about what kind of business he’s in or anything because that’s not necessary. But the first month he starts his own business he’s out there looking for clients, he maybe finds some clients, he’s probably not getting paid anything the first month. Maybe not the second or the third month but he’s still got to pay his own rent, still got to buy his own groceries. So, he’s still got to have 2, 3, $4,000 coming in every month just to pay his living expenses.
Ian Martin: Right, well that’s the key. We talk about business expenses but this specific person I’m referring to, he’s married, he has a couple of kids at home. So, it’s not only having enough money to cover your business expenses but then also it’s replacing the pay cheque to cover your personal, your living expenses as well and that can be a tremendous challenge if you don’t have the money saved up to get over the hump of the first however many months to have the regular contracts, the regular cash flow come in.
Doug Hoyes: Yeah. And most people aren’t super rich when they start their own business otherwise why would they bother? You’re right, they either have no money or they’re already in debt and they’re just trying to get back on track.
So, from a cash flow point or view then what you’re saying the number one problem you see that people run into when they’re starting a business or when they’re self-employed is not having enough cash in their pocket when they start and there’s two things you got to consider, your own personal expenses, which don’t go away, your rent, your groceries, whatever and then whatever it’s going to cost you to operate the business. So, if you’re going to be a truck driver and you’re not going to get your first pay cheque for six weeks, can you put fuel in the truck, can you pay the lease payments for those first six weeks? If you can’t it’s going to be a serious problem.
Ian Martin: Right exactly. And from the work that you and I have done, Doug, I mean we see people that, the ideal situation like we said is that you saved up the money, you have the cash flow projection, you’ve got your comprehensive business plan. And you know you have the savings to get over that hump of the first however many weeks or months. But if you don’t, it’s human nature that you rely on credit to get over that start up phase.
Doug Hoyes: Final question I want to ask you before we take a break is taxes. So, you in a past life worked for a big government agency that collects taxes, we won’t mention their name.
Ian Martin: You might guess what it is though.
Doug Hoyes: Their initials are CR and A. So, I start my business and it’s not like being an employee where the taxes are coming off my pay cheque every week. No taxes are coming off. I’m getting a cheque and then at the end of the year I file my taxes and if I’ve been successful I now owe money but I haven’t put any money away and now I’m really in trouble. Is that something you see quite commonly?
Ian Martin: Well, you set me up there. You know the answer is yes, Doug. And I feel like when people – with the tax end of the challenge that we’re talking about here it’s really twofold. Number one, I see a lot of people who get into being self-employed who don’t truly understand their different obligations to be setting aside the money for their tax installments or their HST account. So, sometimes it is a lack of knowledge.
But then also secondarily even if there is that knowledge and understanding just as we were saying earlier you’re getting through that start up phase and the cash flow is tight, even if you know that you should be setting aside the money for those different obligations for next year, you just can’t. You still have to pay for the rent or the mortgage, got to feed your kids and your family. You know it’s not the right thing but you take the government’s money and you’re paying for those other things. So, when you’re paying your taxes the following year it’s just not there. Maybe the first year it’s not so bad and, you know, the business is getting a little bit stronger and you feel like you can build up and catch up but if that snowballs for two or three years, that can be a pretty big mountain to overcome.
Doug Hoyes: Yeah and the government doesn’t just wait around, that’s the –
Ian Martin: Well, that’s the tricky part with them. They will kind of be asleep for maybe a couple of years. But by the time they do wake up then you’re behind on your taxes and your HST by two or three years, by that point unless the business is really, really grown and matured it can be tough to overcome that.
Doug Hoyes: Yeah and they’ve got lots of power to do lots of things. So, excellent. Well, I appreciate that. We’re going to talk about more in the second segment about taxes and some other factors that affect self-employed people. I’m going to bring your partner Scott Schaffer to talk about that. Ian, thanks very much for being here.
Ian Martin: Thanks very much Doug.
Doug Hoyes: Thank you. We’re going to take a break and we’ll be right back talking about issues that affect self-employed people and small business owners right here on Debt Free in 30.
Doug Hoyes: In the first segment we talked about how a self-employed person can get into financial trouble. The common scenario is that you start working as a self-employed person and you’re making good money. And then at the end of the year you realize you haven’t made any tax payments and now you owe the government a bunch of money. When you’re an employee working for someone else, taxes get taken off your pay cheque every week so at the end of the year when you file your taxes you’ve probably paid enough and may even get a refund.
But if you’re self-employed and you’re responsible for paying your own taxes and that’s where you can get into trouble. So, what happens if you haven’t paid your taxes? What are your options? To find out I’m joined by Scott Schaefer who is also a chartered accountant, a CPA, and a licensed insolvency trustee working with Ian Martin in our Kitchener and Stratford offices.
So, Scott when you meet with someone for the first time and you know potentially in the future taxes are going to be a problem, what’s your starting point with them? What’s the first thing you discuss to make sure that that’s not going to be an issue?
Scott Schaefer: Yeah so we first sit down and we look at is the business viable? So, we don’t think too much of the past right away, we look at the business as it is today. Is the business making money? Is it viable? If it wasn’t for the tax debts or the debts that you’re carrying at this point, could this business be a very profitable, a very viable business?
Doug Hoyes: So, by viable you mean in simple terms is more cash coming in every month than going out?
Scott S:: Yeah, are you making money?
Doug Hoyes: Are you making money, that’s really the question. And that seems like an obvious question, are you making money? Well, if I’m not making money wouldn’t I know it? Why would that be an issue?
Scott Schaefer: Well, if somebody hasn’t filed their taxes, if they haven’t put a reserve for it and they don’t have the money for that then they may not have been making money. They had enough cash flow to come in to pay for their own expenses but the business hasn’t actually been making enough money to pay for the taxes, the HST, the suppliers things like that. There’s accumulation of debt that may not be known at this point.
Doug Hoyes: So, if I’m a self-employed guy or girl and I’m, I don’t know, I’m doing some let’s say it’s a service kind of business, maybe I’m in construction, maybe I’m a massage therapist, whatever. And over the course of the year I’ve brought in $40,000 after paying my expenses, so, after paying my rent and everything. What kind of tax obligation am I going to have? I mean am I – is that like 10%, 20%, 50%.
Scott Schaefer: It’s not much higher. You’ll have the HST so if you haven’t remitted your HST that you’ve been collecting along the line because if you have sales of more than $30,000 you have to have an HST account, so have you set aside the HST?
Doug Hoyes: And that’s 13% of your revenue in Ontario.
Scott Schaefer: Correct.
Doug Hoyes: Different numbers in different provinces.
Scott Schaefer: And you’ll get some deductions for the input tax credits but 13% think of that as a starting point. Then you’re looking at your personal taxes. You would be paying both the CPP for the employee and the employer portion, which that’s you, you’re both sides. You’re the employee plus employer.
Doug Hoyes: And that’s a big difference from being an employee, because when I’m an employee they’re only taking off –
Scott Schaefer: Your portion.
Doug Hoyes: Effectively half as much as what the total is.
Scott Schaefer: Correct.
Doug Hoyes: Okay, so, I’ve got HST that I maybe wasn’t thinking about. I’ve got CPP that I’m responsible for.
Scott Schaefer: And those tax rates about 20, 21%. So, the first $10,000 being tax free so you’re going to be paying at least 20% on the $30,000. So, if you made 40, $10,000 tax free you’d be paying, so you’re at least $6,000 tax debt, plus the CPP and HST.
Doug Hoyes: And we’re talking obviously very rough numbers here because everyone’s situation is going to be different. You might be in a higher tax bracket than what we’re talking about. But let’s assume your number of $6,000.
Scott Schaefer: And that was barebones so chances are it’s going to be much higher.
Doug Hoyes: That’s very basic. It’s probably higher. And that’s ignoring HST and the CPP and everything. So, at the end of the year you file your taxes, now you own $6,000. Do you have $6,000?
Scott Schaefer: Right. Will the business allow you to make enough money to pay the current taxes plus this past tax debt.
Doug Hoyes: And $6,000 means I should have been putting aside $500 a month. Am I doing the math right there?
Scott Schaefer: Yeah.
Doug Hoyes: So back to your comment about viability then.
Scott Schaefer: Right. Is the business making enough to put $500 away for the current taxes plus pay towards last year’s taxes? And quite often for self-employed it’s a two or three year lag where they’re kind of playing catch up. New business, new experiences, they kind of get behind the eight ball, it happens, you’re out there pounding the pavement to get, you know, revenue in to make money to pay the bills. You may not be on top of your taxes or be so overwhelmed and afraid of that number to file it, it may be a lot bigger than you think it is.
Doug Hoyes: Yeah and often in the first year you’re not making any money anyways. So, it’s not the first year where you get the huge tax hit, it may be the second year. So, what’s your advice then to someone? Is it as simple as well make sure you’re putting money aside?
Scott Schaefer: First thing I’d like to look at is let’s do a monthly statement? How much are you making per month? Are you actually making money each month? So, we sit down, once again, not looking at the past, looking at the future saying is this business making money month over month? And if so, how much do you need to start putting away? How much do you need to live on? Now do you have money left over to deal with the past debts?
If the answer’s no first know that you can stay current going forward so you have to treat yourself like an employee, so you’ll pay your HST every month, you’ll pay an installment towards your taxes as if you’re an employee and it goes right away. And then we figure out a plan to deal with the past debt. Because it so big that you won’t be able to stay current and deal with the future plus the past.
Doug Hoyes: Are you a big believer in a self-employed person hiring a bookkeeper or an accountant or someone like that to help you with that part of the business?
Scott Schaefer: Absolutely. For me as an accountant, I would never do any electrical or plumbing on my house. I will always hire the proper service to do that. I think if you are brilliant at your trade, hire an accountant or bookkeeper to keep you current.
Doug Hoyes: And just so you don’t think we’re tooting our own horn here, you and I are both CPAs, chartered accountants, but we don’t do books for people.
Scott Schaefer: No.
Doug Hoyes: That’s not the business we’re in. So, we’re not saying come to us and we’ll be your bookkeeper, we’re not the experts in that.
Scott Schaefer: There are people who are brilliant at bookkeeping. The thing about accounting is, it’s always historic data, it’s after the fact. I like it if you have a bookkeeper you can drop off your box of envelopes and slips each month and they just kind of summarize it. You always know whether your priced your jobs right, you always know whether you’re making money, you know you can adjust to things much quicker.
Doug Hoyes: And it’s money well spent.
Scott Schaefer: Absolutely.
Doug Hoyes: And should I be incorporating if I’m going to be a business, first of all what does that mean?
Scott Schaefer: Incorporation is just a legal entity so you incorporate a business. My general suggestion is that if it’s a personal trade business so you are just a massage therapist, incorporating a business is just another layer so you’re now running through corporation, you know have to do corporate tax returns, everything’s running through that. You’ve added a lot more accounting fees. You’ve got lawyer’s fees and you got accounting fees. So the business is not making a lot of money or there’s no good business reason to do so, I generally don’t recommend incorporating.
If it is because you’re building widgets and you’re buying machinery, you’re building all these other things, an incorporation could be a very logical decision at that point because there’s a lot more strategies involved. The cost to incorporate through lawyers and accountants and doing corporate returns makes more sense because the business is making a lot more money, there’s a lot more reason to do so.
Doug Hoyes: Yeah. If you’ve got 15 or 20 employees, if the business has been around for a few years and it’s making good money then being incorporated makes sense, if you’re just starting out, probably not. And you’re right, you’ve got to pay a lawyer to incorporate the business. You don’t have to, I guess you could do that yourself but I don’t do my own dental surgery so you’re looking at paying someone up front to incorporate, that’s a onetime charge.
But then you’re right, every year you’re doing corporate tax returns and I mean I personally obviously am one of the owners of Hoyes Michalos & Associates Inc., which as you know is a corporation ’cause it’s got the word Inc. at the end of it. I don’t do our corporate tax returns; I hire someone to do that. There’s a cost for that every year.
Scott Schaefer: And a lot of people think that the corporation will prevent them from having personal liability. Some parts are true but really you’re the director of the corporation, you’re responsible for HST, you’re responsible for sourced deductions. If you don’t pay those, those debts will follow you personally. The government has a right to jump through the corporation to come after you for that. Most times the banks going to make you sign a personal guarantee anyways, so, the corporation is just another layer.
So, there’s times it makes a lot of sense and there’s times that don’t, that it doesn’t make sense. The key is to make those decisions off the bat, do you homework, think about it, ask the right questions, talk to an accountant, talk to a lawyer, figure out for yourself right at the get go if that makes sense.
Doug Hoyes: Yeah so in the first segment Ian and I talked about having adequate financing or cash flow to start your business. So yeah it is a good idea when you’re starting out to have $1,000 or whatever it’s going to take to get the lawyer to do his thing. Have some money to be paying the bookkeeper up front as well as obviously paying all your business expenses up front.
Scott Schaefer: I generally think the more the business will make, the more a corporation makes sense. Because you can afford those costs and there’s more strategies to avoid, to avoid certain things, to deal with it differently, to do different tax strategies, to do it differently. All legally, there’s things you can do for that stuff, it’s just a different strategy. But it has to be bigger numbers to actually have any bang for the buck. If it’s going to be a business making $50,000 there’s not a lot of bang for your buck. If it’s making millions of dollars, absolutely there’s some great strategies there.
Doug Hoyes: So start off as a self-employed sole proprietor as it were. So, your advice then as we wrap up this segment is when you’re starting out you want to set the ground work, get everything set up correctly if possible.
Scott Schaefer: Absolutely.
Doug Hoyes: And be thinking ahead that’s really what you’re saying.
Scott Schaefer: Absolutely.
Doug Hoyes: That’s why you’re saying do a budget or whatever try to figure out for example what your tax obligations are going to be next year so that you’re able to set aside the money or actually send it to Revenue Canada as you go.
Scott Schaefer: Absolutely. Worst case is you get a refund, which isn’t a bad thing.
Doug Hoyes: And there’s nothing wrong with that. Excellent well I appreciate that Scott. Some advice on how to be self-employed and how to avoid some of the problems that come up. We’re going to take a break and in the final segment I’m going to ask Ted Michalos to come in here and give us some advice on what to do specifically if you already have a lot of debt, hopefully with the advice we talked about that won’t be an issue but if it is we will talk about that. Thanks very much Scott, you’re listening to Debt Free in 30.
It’s time for the Let’s Get Started segment on Debt Free in 30 and today we’re talking about business issues. What kind of trouble can you get into if you’re self-employed and how do you avoid it? In the first two segments I talked to Ian Martin and Scott Schaefer and one of the issues they raised was that as a self-employed person sometimes, well it’s easy to get behind on your taxes. The first year you’re not making much money, you’re used to be an employee and having the taxes come off every pay cheque. And now all of a sudden, uh oh, it’s time to file my taxes, I haven’t put anything aside and now I’ve got a bunch of tax debts. What can you do if you’re in that situation?
So, the Let’s Get Started segment is where we give some practical advice so I’ve asked Ted Michalos to join me for this segment. So Ted first question have you ever dealt with people are self-employed who get into trouble with taxes and all sorts of other debts?
Ted M: You mean today or at any time in the past?
Doug Hoyes: So, this is not an uncommon scenario at all.
Ted M: Three text messages on the weekend from people that unfortunately I gave my cell phone number to on this very subject.
Doug Hoyes: So, there you go. So, this is a very common thing and it’s I assume as I described it you just don’t get around to setting the money aside and now you’re into a bigger situation.
Ted M: That’s right. The tax man isn’t on your shoulder every month saying you got to pay this bill, you got to pay this bill. So, they’re usually the last people to get paid.
Doug Hoyes: Okay. So, what do I do then? It’s now been a year or two and I’ve got X number of dollars owing on my taxes. Let’s assume I’m a self-employed guy, there’s no corporations or anything but I owe this tax personally. What’s my thought process, where do I start?
Ted M: Here’s the funny thing about this. Most people once they get behind on their taxes, they become too afraid of the taxman to do anything about it. And that’s probably the worse response that you could have. The longer you let this problem go, the higher the number’s going to be. The interest penalties from the taxman are absolutely obscene. It’s 1% per month for being late. And if you’ve been late for more than a month they double that so it’s 2% per month. That’s like a high interest credit card.
The correct answer is always to recognize okay I’ve got this problem, I’ve got this debt with the government and now let’s do something about it. We need a fresh start so you can move on.
Doug Hoyes: So, what are the different options that I’ve got then? I guess the first option is to pay them?
Ted M: Right if you’ve got the money sitting in the bank you can certainly pay them.
Doug Hoyes: So, if I owe, I don’t know, $20,000 or $30,000 can I go to CRA and say okay look I’ll give you $500 a month for the next two, three, four years and pay you off that way? Will that work?
Ted M: Yeah so a CRA collector will tell you that yeah you can take 12 months to pay off a debt for any kind of tax arrears. And if they go to their supervisor you can probably get 24 months although they’ll be reluctant to do it. Anything beyond that, and it’s probably not something you can do without some sort of formal procedure, a proposal to creditors is the most obvious solution if you want to make a payment plan. Or perhaps you should be looking at bankruptcy.
Doug Hoyes: So if I can pay it off in 12 months then I can deal directly with them.
Ted M: That’s right.
Doug Hoyes: And so how do I do that? I just phone them up and say here’s what I can do and I’ll send you a bunch of postdated cheques?
Ted M: Yep, that’s the most common example.
Doug Hoyes: Okay. And that’s what you would recommend then? I mean obviously you don’t want to be having to do a bankruptcy or consumer proposal if you don’t have to.
Ted M: If you’ve got the money to pay your debts, you should pay your debts. It’s very simple.
Doug Hoyes: So, very simple then. So, let’s say I’m in a position now where that’s not physically possible. I can’t pay them off in a year. So, I’ve got two other options that you mentioned. I mean other than going, borrowing from friends and family or something. I mean if you’ve got rich relatives great, that’s what you do then. But if that’s not possible then I’m looking at a bankruptcy or a consumer proposal. A consumer proposal is a deal.
Ted M: Yeah, where you offer to repay a portion of what you owe.
Doug Hoyes: And if CRA is the majority creditor they are the ones who are going to decide. What are the chances that they’re going to say yes to a proposal if I’m a self-employed guy?
Ted M: It’s actually pretty good. The thing that causes CRA the most grief, where they automatically say I’m not going to consider your proposal is if you don’t file your returns. So, if you’re somebody who has gotten behind and then buried your head in the sand you just become so afraid of the fact that you owe taxes that you haven’t filed your last year, your last two years, the last three years. The first thing you’ve got to do is get that stuff filed so they know what it is that you owe them. If you haven’t filed your returns then CRA is not going to agree to any terms of proposal, they’re simply going to say no.
Doug Hoyes: And as we talked about in the first couple of segments with Scott and Ian, it’s a good idea to get a bookkeeper, somebody who knows how to do it if filing taxes aren’t your thing, so, if your returns are up to date, obviously you owe money, CRA will accept a proposal in a lot of cases if it’s reasonable.
Ted M: That’s right. And usually their starting position is alright you’ve gone through the process of filing something formal, you’re exercising your legal rights, so they’re looking for as an opening offer, the basic tax.
So, let’s say you haven’t paid your taxes in three or four years and now you owe them 35, $40,000. Probably half of that’s interest in penalties. So if you owe them $40,000, they will say the basic tax is $20,000 and that’s what they’re looking for as an opening offer and proposal. Now most creditors, Canadian banks, credit card companies, financial institutions are looking for more than they get in a bankruptcy or about a third of their debt. And so, as trustees if we were making an offer to CRA we would say alright we’re going to offer a third of the total debt so we’re not – we’ll do the calculation to figure out what the basic tax is. But you’re going to offer them something less than that. So, the basic tax is their opening position, a third of the debt is our opening position and then we usually end up somewhere in between.
Doug Hoyes: And I guess to close the segment the obvious advice here then is come in to talk to someone who actually understands all these permutations, can help you tell what kind of amounts need to be offered. That’s where you go in. Obviously, it’s better when you can pay them but it’s better if not there are other options, a consumer proposal being one of them.
Great. Thanks very much for being here Ted. That was the Let’s Get Started segment. We’ll be right back to wrap it up here on Debt Free in 30.
Announcer: You’re listening to Debt Free in 30. Here’s your host Doug Hoyes.
Doug Hoyes: Welcome back. It’s time for the 30 second recap of what we discussed today. On today’s show we discussed debt problems that can arise from being self-employed or running your own business. Ian Martin explained that the starting point is to be adequately financed. Scott Schaefer discussed why it’s important to crunch the numbers and confirm that your business is generating positive cash flow even after accounting for taxes. Ted Michalos explained the options for dealing with business debt. That’s the 30 second recap of what we discussed today.
So, what’s my take on operating your own business? Well, this is one topic I know a lot about ever since Ted Michalos and I started Hoyes Michalos & Associates back in 1999. There are some big advantages to being the boss but you are responsible for all aspects of running a business. So, the advice I give everyone who was thinking of going out on their own is to start by getting some professional advice. Unless you have no choice don’t just quit your job and start your own company. Talk to a good accountant and perhaps even a lawyer. Figure out in advance exactly what you need to stay on side with the government and your other creditors.
I’ve personally dealt with hundreds of people who become self-employed but don’t know how to keep the books and a year or two into it they find they’re filing behind on taxes and filing HST returns and then they’re playing catch up. It’s no fun trying to come up with a bunch of money to pay CRA. Do yourself a favour and get your books set up correctly at the start and save yourself a lot of hassle later.
If it’s too late and your business wasn’t as successful as you had hoped and now you have a lot of debt, well again speak to a professional. There may be actions you can take on your own to get back on track. Maybe a consumer proposal or even a business proposal is necessary to deal with your debts. Take action now because business problems don’t usually get better on their own.