What is benchmarking and why is it important for my business?

In simple terms, benchmarking is a tool to compare business performance against the industry. It is one of the ways to judge what the best practices are and how you can improve your business process. For example, if the industry is earning 10% return on assets, while your business is earning only 6%, you can pin point the problem areas. However, it is important to know that when you use benchmarking data it should be relevant to your industry, business size and region. In other words, you should be comparing apples to apples. Achieving parity against the best in the industry may not always guarantee success.

Another factor you should consider when you use benchmarking data is how accurate the information is. This can be a difficult task given the data dynamics, sources of the data, sample size, timeliness and NAICS classification. A challenge business owners face is to which specific financial metrics should we compare and which ones are important to achieve the strategic goals. Another issue is how to measure non-financial metrics. Benchmarking techniques can be used both in service and product based businesses.

Benchmarking can result in frustration and failure if the business matter is not selected strategically. In order to appropriately select and prioritize benchmarking tasks, corporations need first to understand their critical success factors and business environment. This helps them identify their key business processes and drivers. The whole process of benchmarking should be aligned to the corporation’s mission, vision, values and strategy. All leading-edge corporations such as Xerox, DuPont, and HP use benchmarking as a valuable tool to improve their competitiveness and effectiveness. It is an integral part of their strategic planning.

In order to be a successful business you need to implement benchmarking effectively. It allows you to evaluate your business performance and ensure that your business is operating at an optimal level. Outside professionals can be engaged to streamline the whole process who will carefully select the relevant KPI’s for benchmarking critical to achieve your business objectives and strategic goals.

Why do I have to pay tax by Installments?

Personal Installments

You have to pay tax by installments for the same reason that most people have tax withheld from their income throughout the year. If you earn income that has no tax withheld or does not have enough tax withheld for more than one year, you may have to pay tax by installments.

This can happen if you earn rental, investment, or self-employment income, certain pension payments, or income from more than one job.

Who has to pay?

If your net tax owing is more than $3,000 in 2014 and either in 2013 or 2012.

When payment are due?

For current year, payments are due on Mar 15, Jun 15, Sep 15 and Dec 15

Penalties

You may have to pay a penalty if your instrumental payments are late or less than the required amount. CRA apply this penalty only if your installment interest charges for 2014 are more than $1,000.

Corporations Installments

Corporations generally make monthly or quarterly payments called installments towards their tax liability. There are three options you can use to calculate the least amount of tax you have to pay in installments for the current tax year.

Monthly installment payments

You can calculate your monthly installment payments using one of the following options:

• Option 1 – One-twelfth of the estimated tax payable for the current tax year is due each month of the tax year;
• Option 2 – One-twelfth of the tax payable from the previous tax year is due each month of the current tax year;
• Option 3 – One-twelfth of the tax payable from the year before the previous tax year is due in each of the first two months of the current tax year. One-tenth of the difference between the tax for the previous tax year and the total of the first two payments is due in each of the remaining 10 months of the current tax year.

Are you eligible to make quarterly installment payments?

• A small CCPC is eligible to make quarterly installment payments if, at the time the payment is due:
  • - it has a perfect compliance history;
  • - it has claimed a small business deduction for the current or previous tax year;
  • - together with any associated corporations, for the current or previous tax year:
•                                     – it has taxable income of $500,000 or less; and
•                                     – it has taxable capital employed in Canada for the tax year of $10 million or less.

When you do not have to pay installments

Tax payable of $3,000 or less

You do not have to make installment payments on your federal taxes if the total of your taxes payable under Parts I, VI, VI.1, and XIII.1, determined before taking into consideration specified future tax consequences prior to the deduction of current-year refundable tax credits for either the current or previous year, is $3,000 or less [subsection 157(2.1)].

If your Part XII.3 tax is $3,000 or less in the current or previous year, you do not have to make installment payments on this tax.

Similarly, you do not have to make installment payments on your provincial or territorial taxes if the total of your provincial or territorial taxes for the current or previous year is $3,000 or less; however, you have to pay your taxes, if any, on your balance-due day.

New corporations

Except for Part XII.1 tax, you do not have to make installment payments for a new corporation until you have started your second year of operation. However, for your first year of operation, you have to pay any tax you owe on or before your balance-due day for that tax year.

This information is extracted from Canada Revenue Agency Website. For more information click following links

Personal tax installments
Corporation installments 

Income Splitting with Minor Kids

One way to reduce your taxes is to split income with your family. This is one of the popular tax planning strategy. Under this strategy, you hire your children and pay them salary which is deductible to your business as long as wages are reasonable in relation to the services they have provided. CRA checks the reasonability of the amount in terms of what would you pay to an arm’s length party for similar job.

Some of the jobs that a kid can perform including:

-          Cleaning office

-          Washing automobile

-          Mailing letters

-          Products delivery

-          Data input

In some cases these expenses can be denied by CRA.  In one of Tax Court Case Bradley v The Queen, TCC 2006 500), CRA challenged the expenses. In 2001, Nancy Bradley, employed her daughter who was 8 year old and her son Mathew who was 12 years old. She paid them salary $2,000 and $5,000 respectively. Nancy claimed these payments as salary expenses on her taxes. CRA said these payments were not based on the duties they performed or the hours they worked and lastly, they are not reasonable, therefore, CRA denied these expenses. Nancy and kids said these are legit and payments were made however, judge ruled in the favor of CRA since mom had the control over funds withdrawal and kids did not have full control over the funds. So a lesson we learned is:

-          Payments should be reasonable

-          Work description should be in place ….. what they did

-          Working hours record should be maintained

-          A separate bank account should open under the kids name on which they should have a sole discretion to withdraw the funds