Property Insurance: Are You Covered?

By JoAnne Sommers

Insurance isn’t necessary… until you need it. And then it may be too late.

Small business owners wear many hats: visionary, service provider, marketer, administrator and financial manager, to name a few. And in the midst of juggling all those responsibilities it’s easy to overlook the details of property insurance coverage. Easy but potentially dangerous.

“Few people take the time to analyze their property insurance policies in detail,” says Adrian Mastracci, portfolio manager with KCM Wealth Management Inc. in Vancouver. “But you don’t want to be underinsured, whether you own or rent. That’s why it’s important to be proactive and conduct risk management assessments for your property needs.”

Property insurance can be purchased on the basis of « replacement cost » or « actual cash value ». Replacement cost is the amount it would take to replace or rebuild your business, or the damaged part of it, with materials of like kind and quality, without deducting anything for depreciation. Actual cash value is the amount it would take to repair or replace the damaged or stolen property after deducting for depreciation.

Small business people often make the mistake of not getting replacement cost insurance, says Laurie Gottenbos, commercial insurance agent with Johnston Meier Insurance Agencies Group in Kelowna.

“Even though it costs more, always insure for the replacement cost of equipment and fixtures,” she advises. “But remember that stock is always valued at actual cash value, which means you get what you paid for it minus the depreciation.”

Gottenbos says that because every business is different, it is up to the owner to estimate the cost of replacing the business premises (if owned), any improvements you’ve made (if leased), plus inventories, equipment and other materials, and insure accordingly.

“Look at your receipts for major purchases and talk to your accountant about what it would cost to replace everything,” she advises.

Liability Protection

A lawsuit could mean a catastrophic loss to your business, so be sure to carry enough liability insurance to protect yourself in the event of injury, death or property damage caused by your products, business operations or employees.

Think of liability insurance as a safety net that protects your financial assets, says Mastracci. “Start with the third-party liability needs for each of your business locations. A minimum of $1 million coverage is a start, although coverage in the $2-to-$5-million range may be more appropriate.”

The maximum third-party liability coverage on most policies is $2 million, he notes. However, an umbrella liability policy can provide protection over and above the limits of commercial general liability and commercial automobile policies. To decide whether you need an umbrella policy, think of the most extreme situation that could happen in your business and determine whether your current liability policies would cover this risk.

Other Coverages

Depending on the size of your business and the nature of your operations, there are other coverages that you should consider.

A business interruption rider covers loss of earnings as a result of damage to or destruction of property. This coverage generally provides reimbursement for salaries, taxes, rents, and other expenses, plus net profits that would have been earned during the period of interruption, up to the limits of the policy.

“We recommend that business owners insure for loss of income in the event that premises are temporarily unusable due to fire or some other disaster,” says Gottenbos. “Insurers provide forms that can be used to estimate how much of a company’s profits and salaries will be lost until the business is up and running again.”

If you lease or rent your place of business, you may require tenant liability insurance in the event of fire, explosion, water leaks and other mishaps, she adds. “If, as a tenant, you are held responsible for a loss, even an accidental one, the landlord’s insurance company may go back to you to recover their losses so you should consider protection to cover that. The limits are usually $500,000 for a standard small policy.”

Coverages may be purchased to cover your stock and fixtures in the event of burglary and robbery, to protect money and securities, or to protect against counterfeit currency or employee dishonesty.

Exclusions and Expenses

Make sure you understand the exclusions in your policy. For starters, investigate whether damage from broken pipes or sewer backup is covered.

Most companies also have a rider for earthquake and flood coverage. Your location and the probability of occurrence determine the premium and availability.

The Bottom Line

Make a real effort to understand your property risks and review your insurance coverage needs annually, says Mastracci.

“Having a long chat with one or more property insurance agents is time well spent. Remember that protecting your business from a financial disaster deserves your full attention.”

Federal Budget Brings Victories for Small Business

By JoAnne Sommers

Your MoneyThe recent federal budget contains several pieces of good news for the small business community but important battles still loom on the horizon. That’s the verdict of the Canadian Federation of Independent Business (CFIB), which represents more than 108,000 owners of small- and medium-sized businesses across the country.

“This is a pretty good budget from a small business perspective,” says Dan Kelly, CFIB’s senior vice president, legislative affairs. “It contains a couple of important measures, including an employment insurance (EI) Hiring Credit for Small Business, which was our top budget priority.”

The program will apply only to firms that paid less than $10,000 in EI premiums in 2010. That means the company would have to have less than $413,000 in EI assessable payroll to qualify.

If such a company increases its EI bill in 2011 for any reason (such as adding a new position or raising salaries), it will receive a refund of the EI increase to a maximum of $1,000. “For example,” says Kelly, “if an employer creates an additional job at a salary of $40,000 annually, they will get a refund of their entire additional EI bill (approximately $1,000).”

Since the federal budget forecasts rising EI premiums in each of the next three years (beginning with five cents per $100 in payroll in 2012), this credit will be a big help to small firms that want to grow their workforces, he adds.

“We pushed for this program to encourage companies to hire more people, give their employees more hours and expand their payrolls. It means that for a lot of people who expected an EI hike the impact will be reduced or eliminated.”

The second victory involves a commitment by the Canada Revenue Agency (CRA) to develop a system that provides written responses to small business inquiries. It comes after a CFIB report earlier this year that criticized the CRA’s customer service experience. In addition to difficulty connecting with agents CFIB’s assessment found that 21 per cent of inquiries resulted in an agent providing incorrect or incomplete information. If the business filed a return using the information and was subsequently audited, it could be held liable for the tax consequences arising from the error, because the business had nothing in writing to fall back on.

“Based on our report we lobbied government to ensure our members have access to written advice from CRA for their inquiries. The new budget stipulates that the e-filing system called MY BUSINESS ACCOUNT allows a company to ask questions via email to which the CRA will provide a written response. The responses will be stored, which will provide business people with the necessary support if a problem arises after the fact.”

Requiring CRA to provide written interpretation on tax inquiries when requested through CRA’s online window will bring a significant improvement in transparency and accountability, Kelly adds. “In addition, the measures to review penalty levels for information returns will be welcomed by firms struggling to meet government paperwork requirements.”

As a member of the government’s Red Tape Reduction Commission, CFIB also welcomes the budget’s commitment to continue BizPaL, which provides firms with one-window access to permits, licences and fees at all three levels of government.

In other good news Kelly cites the extension of the 50 per cent straight-line accelerated Capital Cost Allowance for manufacturing or processing machinery for another two years, as well as the fact that the federal deficit is dropping faster than expected.

“The budget notes an improvement in government finances and highlights several spending reduction measures. They are keeping to the plan to balance the books by 2015 and it looks very possible that this will happen in 2014, a year ahead of schedule. Still, there are very few measures in this budget to deal with the costs of the civil service – particularly pensions and retirement benefits. We will continue to lobby for a greater focus on spending restraint in the months ahead.”

CFIB also remains concerned that EI premiums are scheduled to rise annually between 2012 and 2014. “This comes after the government took $57 billion of EI surpluses and put it into general revenues, restoring only $2 billion to the EI program. That was inappropriate and we want that money replenished without business taxpayers having to cough up more money.”

Another concern is retirement income. “While CFIB welcomes the ongoing work to introduce Pooled Registered Pension Plans, we remain concerned that the budget notes that, ‘federal, provincial and territorial governments are continuing work on options for a modest enhancement to the Canada Pension Plan (CPP)’.

Kelly says his organization will lobby hard against any increase in CPP premiums. “CFIB members need to take seriously the potential of a future round of increases and we will continue our lobbying efforts in this area.”

Tax Planning a Year-Round Activity

By JoAnne Sommers

The June 15 deadline for self-employed Canadians to file their income tax returns is rapidly approaching but it’s not too late for entrepreneurs to consider money-saving tax strategies, says Mark Shoniker, director of commercial banking at BMO Bank of Montreal. In fact, notes Shoniker, in order to derive the greatest benefit from your tax planning efforts you should be thinking about them on a year-round basis.

“Small business owners need to take a holistic approach to tax and retirement planning in order to wind up with a lower overall tax rate and a good diversity of income when they retire,” he says.

Tax planning should be part of your overall financial plan, agrees Adam Salahudeen, senior manager of taxation advisory services at Scotiabank. Rather than filing your taxes and forgetting about them it’s wise to think about how to make the most of your tax deductions throughout the year, he says.

A variety of tax-planning opportunities are available to help small business owners boost their bottom line. Here are some to consider:

Income Splitting
Family-run businesses can take advantage of income splitting by hiring a spouse or children as employees. They earn income while you get to use their wages as a tax deduction.

“Many small business owners think it’s verboten to have family members on the payroll but provided their compensation is market-driven and they’re performing an actual service, it’s a great way to split income among several people at lower tax rates,” says Shoniker. “The keys are to ensure that their pay is reasonable, their roles in the company are clearly defined, and their performance is well documented.”

• Incorporation
Consider whether or not to incorporate your business. Sole proprietorships are advisable when you’re starting out because you may be facing losses and you’ll want to be able to deduct them against your other income, says Salahudeen. You can’t do that when you’re incorporated.

According to Adrian Mastracci there are two main reasons to incorporate: the first is to protect your personal assets from creditors; the second is to take advantage of the small business tax deduction, whereby the income of qualifying Canadian-held corporations is taxed at a special « reduced » rate. The combined corporate tax rate on the first $500,000 of active business income can be as low as 10.5 per cent, depending on the province, compared with as much as 50 per cent if you file as a sole proprietor, says Mastracci, portfolio manager with KCM Wealth Management Inc. in Vancouver.

Remuneration Options
Small business owners who have incorporated have greater flexibility in determining how they will be compensated. Their options include paying themselves a salary, dividends, or both. According to BMO, a reasonable salary can create personal RRSP room, provide a business deduction and help bring taxable income below the $500,000 threshold for the small business tax deduction. On the other hand, a dividend may be taxed at a lower rate for the owner than a salary or bonus would be, but would not be deductible for tax purposes.

“Review your personal compensation and that of other family members,” advises Mastracci. “A blend of salary and bonuses totaling $125,000 in 2011 creates the maximum RRSP room for 2012.”

• Capital Gains Exemption
When you sell your business, you are entitled to a lifetime capital gains exemption of $750,000 on qualified small business corporation shares. If your spouse, or children through a family trust, own shares in the corporation, you effectively increase the number of exemptions accordingly.

“When you set up your business make sure to create a share structure that will allow you to maximize the capital gains deduction,” says Shoniker. “The first $750,000 of capital gains accrue to you tax free and since you and your spouse are both eligible for that you can get up to $1.5 million tax free.”

Some rules apply, including a requirement that the claimant must have owned the shares for at least two years before selling, notes Mastracci.

• Work with a Professional
It’s important to work with an expert, such as a chartered accountant and/or tax advisor, to take full advantage of the deductions available to you, says Salahudeen. “This is one area where you really need professional help,” he says. “Besides, you don’t want to take time and energy away from your business to do your taxes.”

Adds Shoniker: “Smaller accounting firms can be very helpful with this. Find someone who knows how the tax rules apply to your business because there can be major financial consequences for you now and in the future.”

Note: while self-employed Canadians have until June 15 to file their tax returns, any tax owing to the government was due to the CRA by April 30.

For further information on tax-planning strategies for small business owners, visit BMO SmartSteps for Business(TM).