Monday, July 16, 2012

Return to the Accountant-cy

This will be part one of a two-part post.

I've been keeping a growing list of accounting questions since starting Blue Bottle Games. Mainly, they're questions that didn't need answering immediately, but soon. I've finally reached a critical mass, and figured it was time to start seeking those answers.

As usual, I figure other indies will probably run across similar questions in their adventures, so I'll be sharing my findings.

I've reached out to a local accounting firm to see if they'll sit down with me for an hour (or less) to go over my questions. As such, many of these questions' answers will have to wait until a future post.

However, two questions have already been answered by my payment provider, FastSpring.

Payment Providers & Taxes


My province (BC, Canada) has a sales tax (GST), and I was wondering if FastSpring handles that tax, if I must pay that tax, or if it is not an issue?

Also, regarding tax reporting, will FastSpring send me tax forms at the end of the year, or am I required to send tax slips to FastSpring? If so, which forms? (This second one was prompted when I learned that businesses must prepare tax slips for services they contract. I wondered whether FastSpring was therefore considered a contractor, since they take a percentage of each sale, and that might be considered payment.)

As usual, FastSpring was quick to respond, and the answer was better than I expected:
Technically FastSpring is a reseller.  This means payment we send you are for wholesale sales, and we become the retailer.  As such, sales tax would become purely our responsibility.  Current laws between the US and Canada do not require collection of GST on sales of digital goods by US retailers, so no GST will be collected, and you don't need to and can't charge it on sales through FastSpring.

We won't send or don't need any tax related docs with you, and you should simply claim payments we send to you as "wholesale sales".
Getting this answer only reinforces my feeling that indies should find a good payment provider if possible. Having an expert handle not only the prospects of customer payment and security, but also international sales tax and VAT has been a huge weight removed from my shoulders.

I'll list the rest of the questions here, even though I have no answers yet. Once I've spoken with an accountant, I should have some more info to share. Without further ado, the questions.



Taxes

To whom do I pay taxes? CRA or IRS? I'm pretty sure this is the CRA, as it would be with regular income, but I might as well ask the expert.

Do I need to pre-pay or withhold any taxes this year? I know I've heard somewhere that self-employed-types are expected to withhold and pay taxes during the year, so I want clarification.

Business Expenses


Should I back-pay myself for work done between the day Blue Bottle Games was started to the first day of customer sales? There's about a three-month period during which BBG was active and a fully-registered sole proprietership accruing expenses before I received any sales income. While I of course would like to be paid for that period, I want to know if start-ups usually do this or not. My hunch is that they do, and this is just a line-item in the "accounts payable" for the company until it can afford to settled the debt.

Should I back-pay myself for work done on NEO Scavenger before 2012? I was working on the game before BBG became a company for almost seven months. Should I back-pay this effort as well? This is a bit trickier, since I was technically not allowed to be employed in Canada until December 2011. I may have to write that off as volunteer work.

What should I do about paying myself during the period before BBG can afford to pay my salary? This is related to the question above. BBG is making some money, which is deposited into a bank account. Should I be paying myself out of that account right away? Should I wait until BBG is in the black? Since BBG and I are essentially the same tax entity, it's not a question of taxes as much as just general good accounting practice.


Should I deduct home office space on my taxes? I've heard a number of people (whom I trust) say "yes" to this, particularly if I'm careful about realistic claims. Still, while I have an accountant captive, I might as well ask. Particularly since the office is just another room in our apartment, and gets used for other things (especially during evenings and weekends).


Can I deduct any other expenses? Like with the office above, there are some things I'm considering purchasing which have simultaneous use for both work and play. (e.g. an android tablet, video games, pc hardware) Can all or a portion of these items be considered business expenses, if they are used for pleasure some of the time?

Volunteers and Employees

How do I account for volunteer/unpaid help? I've had some design help and forum moderation help which was voluntary, and I want to make sure there are no tax reporting needs I'm missing.

Is there any limitation on who can work for me, in terms of their location and visas? I want to know if there are any restrictions on my hiring or accepting volunteer help from foreign workers or companies.


US Presence

Should I establish a US subsidiary? Normally, this would seem unnecessarily complicated. However, some services will only work with a US company. (e.g. Kickstarter, Amazon and Google payments, etc.) Is it worth my setting up a US branch to take advantage of these services?

Government Programs

Are there any provincial or federal business programs I should be participating in or applying to? Since I'm not employing anyone nor creating any jobs, probably not. However, there may be programs to support entrepreneurs in my area, and it's worth asking.


GST/HST

Do I need to register for GST? Even though I trust FastSpring on this, I figure I might as well ask the accountant while I've got them.

Hopefully, these are questions I can knock-off in a single sit-down with an accountant. I'll be sure to share once I get some more info!


6 comments:

  1. In sole proprietorships, you can’t pay salary to yourself. Any net gain between sales, expenses, and depreciation will show up on CRA T2125 and on your T1 as self-employed income. Net losses are carried forward. Note all amounts need to be in Canadian, so you need to choose one accepted form of conversion (daily or average). One thing I’m not too clear about is how an accrual method would work with Fastspring’s sales reporting period. My guess is that you can take the lump sum at each payment period and its date as long as you remain consistent. I’d make sure to check that point with your accountant. Also learn a bit about rules surrounding currency exchange gains if you keep separate CAD/USD accounts (I blindsided by that one recently).

    Direct tax withholding is only for employees. However, you may be required to start tax installments for next year when CRA notices a large payment gap. They’ll tell you.

    As for home office expenses, ideally it should be a small percentage of your full home expenses. They either take space allotment (eg: 10% of the house) or time spent. Also check with your condo board or lease about running a business from home. Don’t be greedy, pick an accepted method of calculation and stick with it. Don’t forget the other recurring things, like server rentals, domains, email services, office supplies, etc. Those luckily are more clear cut.

    Capital costs is a fun one and it’s just a whole lot easier if you can show that having it makes a material difference in your ability to earn income (eg: android tablet for compatibility testing). Potential dual-use things such as PC should be ok even if you spend some time gaming on it. You can go full bore and calculate personal part adjustments for the CCA, but that's probably overkill. If you spend less than a reasonable (~40hrs/wk) of your time on that piece of equipment doing work, then I wouldn't bother claiming it. Anyway, the main costs to you would be things like software purchases which don't have personal use components. With that said, I would NOT put video games as an expense.

    Sign up for GST/HST if you’re planning on purchasing equipment and software from Canadian suppliers. You are allowed ITC on any purchase that goes towards producing non-exempt goods and services. Despite not charging tax to Fastspring, it’s not exempt – but instead, it’s just zero rated so that ITC is cash you get back. The rules for what’s allowable for ITC is the same as CCA.

    Federally, look at SR&ED and the Canada Media Fund. BC also has the BCFM.

    I’d be interesting in hearing about the other topics. Adding to your list, you might want to ask about medical expenses for the self-employed too. Taxtips.ca is a good starting point if you’re coming fresh to this whole tax thing – but nothing is more priceless than an accountant telling you that you were wrong :) Also read publication http://www.cra-arc.gc.ca/E/pub/tg/t4002/README.html

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  2. Hey Ted!

    Great info! Your comment has more of it than my post. Ladies and gentlemen, our gets speaker, Ted! :)

    Re: sole proprieterships and my salary, I think I see what you're saying. I've been bookkeeping my business as if I were a separate entity, mostly to keep home and work finances straight. However, you're right that come tax time, money in is money in, regardless of whether I move money from my work account to my personal account. I guess the other part of my question is answered by that, which is that operating losses can probably count against my revenue back to Jan 2012, but not before (since I didn't report any losses in 2011, before I registered a business).

    The CAD/USD conversion rate is a familiar thing to me :) However, I'm not sure if I've been accurately tracking exchange gains. Though in truth, it's a net loss since I've come to Canada (when USD/CAD was 140%).

    Regarding home office, if the room is 10% of the total home's square footage, should that be multiplied by 24% (40/168 hours/week), for a total of 2.4%? Or do folks count the room even during evenings/weekends? Since I used the office outside of work, I'm curious how that gets tracked.

    Monthly services and office supplies, as you point out, are a much easier thing for me to track. I think I've got those taken care of. Software too. Good to know about the video games, though :)

    I wasn't aware of the GST/HST thing. That's a handy thing to know! And SR&ED...I remember those journals we had to keep :)

    I've added medical expenses to my list, so I'll let you know what they say.

    And thanks for the links! I'm sort of a DIYer when it comes to taxes. However, I'm sure I make mistakes every time I file :) Learning about Canada's self-employment taxation will make for an interesting (and likely, frustrating) 2013!

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    Replies
    1. Hehe,

      Exchange gains: Check http://www.valenzanoandpillo.ca/page12.html and see if that makes sense to you. Related, if you use an USD account to avoid paying expensive exchange fees at the bank, you may have a sizable exchange gain/loss accumulated that hits when you finally convert the remaining money into CAD for living expenses possibly years later. I find the book keeping annoying, almost enough to let the bank take its usual 4%. Almost.

      Home office: right, dual use places should prorate by time spent too.

      Video games: that's more of a personal choice, than any hard rule. Your accountant might suggest otherwise.

      DIY taxes: this is one of those things I think everyone should at least do once or twice themselves just so they know the questions to ask. And boy, is it frustrating. I can't find good software to do this >:(

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  3. Ugh. I forsee several hours of work for reporting +/- fractions of percentile gains and losses in my future...

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  4. This is exactly the kind of info I am interested in, unfortunately living in Australia means none of it applies to me!

    Also I'm a long way off getting any income, but maybe I can claim expenses / losses.

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  5. Hey Daniel! Claiming operating losses is probably a good start, since it'll help offset future income. If Australia is anything like the US/Canada, there's a way to carry those losses both into the future and a year or two into the past, to offset any other income during those years.

    The tax preparation might suck, but the savings may be worth it!

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