The Forms of Business Risks and Practical Ways of Managing Them

Business risks are the likely dangers that a business enterprise may encounter if preventive measures or safety precautions are not put in place to avoid them. When an enterprise experiences a particular business risk, the entrepreneur should not point finger at witches, ghosts or enemies. They happen as a result of poor planning and failure to set out measures in managing these risks. There are two main types of risks that a business enterprise is likely to face.

These are Direct risks and Indirect Risks.

1. Direct risks- This is a type of business risk that could entirely collapse a business enterprise. They directly affect the enterprise and halts down all of its business activities. Due to the severity of direct risks, entrepreneurs should set out preventive measures of curtailing them. Examples of direct risks include theft, fire, bankruptcy, misuse of capital through irresponsible expenses etc.

2. Indirect risks- This type of business risk slowly causes the collapse of the enterprise. If extreme care is not taken, it can be hidden from entrepreneurs. Like a slow poison, indirect risks if left unchecked can ruin a business enterprise. They are quite difficult to control and account for greater portion of business losses. Examples of indirect risks are lack of sales due to faulty or low quality products, wrong business locations, currency inflation, introduction of new taxes, changes in labour laws etc.

Business risks whether direct or indirect can be managed or controlled. The entrepreneur should be very vigilant and alert in his supervisory role. There should be regular or routine check of stocks and finished products. Only the entrepreneur cannot do this work. An accountant or book keeper should be employed and assigned to check the accounts of the business every month or even daily depending on the size of the enterprise or the rate of purchase of products.

Also, the entrepreneur has to increase vigilance and security by beaming up the security such as employing security personnel and installing security devices. These measures would help minimize or entirely stop the cases of theft.

Most of the fire outbreaks that occur in the enterprises are as a result of faulty electrical connections and appliances. The entrepreneur must employ a qualified electrician to do all the electrical connections or wiring in the enterprise. He has to replace all weak or faulty wires and other electrical appliances to avoid the likelihood of fire outbreak.

Low sales and patronage of the products of an enterprise can be as a result of several factors. Paramount among these is due to the low quality nature of the products and wrong business location. The entrepreneur must undertake training for his staff members while constantly checking for product quality. He has to use quality and durable materials for the manufacture of his products. Furthermore, if wrong business location is causing the drop in sales of products, the entrepreneur should relocate the business to a more promising area where there would be high patronage for his products.

Inflation and constant changes in labour laws can affect the success of a business enterprise. An entrepreneur should be always alert to these changes. He can do this by keeping in touch with the relevant ministries to know what new changes have been planned that may affect one’s business.

It takes a great deal of time and efforts for entrepreneurs to set up enterprises. Owing to this, they must vigilantly guard against any internal or external dangers that might result in their collapse. Identifying and controlling potential threats to businesses is the guaranteed way to succeed.

Ultimate Practical Tax Lawyer Secrets to Tax Audit Survival

CRA Income Tax Audit – Toronto Tax Lawyer Introduction

As Toronto tax lawyers we deal with CRA audits and auditors on a daily basis. So what is a tax audit? This article will explain what you can expect to happen if you are audited for taxes.

The Canadian income tax system is based on self assessment. In other words it is up to every Canadian taxpayer to fully and properly report their total income from all sources on their annual T1 or T2 income tax return. The Canada Revenue Agency performs tax audits and issues income tax assessments to ensure that the self-assessment income tax system continues to work properly. While most Canadians are truthful on their tax returns, there are some who are not. CRA is looking for errors or disputable positions or deliberate misstatements on tax returns that have been filed.

What is a Tax Audit?

An income tax audit is an examination of a taxpayer’s returns and supporting records to make sure that income and expenses have been properly reported and are supported by accounting records and receipts. The CRA tax auditor will ask to see the individual or corporate books and records and bank account and receipts for expenses. A corporation will normally have to provide its minute book to support any dividends or bonuses. There may be questionnaires to be filled out. Any information that is wrong, even if due to an error, will be used against the taxpayer.

Most audits are done to ensure compliance with the Income Tax Act for income or payroll deductions or under the Excise Tax Act for GST/HST.

Canadian Tax Audit Procedures

CRA auditors will often search for relevant information on the Internet, and a taxpayer’s web site or other sources located on Google might contradict information the taxpayer provides to the auditor. This information will then be used for further enquiries possibly including 3rd party requests for information. Furthermore open social media accounts are publicly accessible, and CRA auditors will gather this data from taxpayer social media accounts to build a case against a taxpayer. CRA officials have publicly discussed using taxpayer’s social media accounts in this way. If taxpayer lifestyle and reported income don’t match up the CRA tax auditor may decide to look into the taxpayer’s situation to see what’s actually going on.

CRA’s practice on income tax audits is to do a GST (and HST) compliance review; if problems are found, the matter is normally forwarded to a GST/HST auditor for a full GST/HST audit. Similarly, an income tax compliance review is often done during GST/HST audits. Combined income tax and GST/HST audits were discontinued in July 2010. These compliance reviews are not always carried out and sometimes income tax audits may miss large GST/HST problems and vice versa.

CRA Audit Statistics

CRA issues an annual report to Parliament. The latest one was released in January 2016. The audit statistics from CRA Annual Report 2014-2015 provide less detailed information than for the previous year.

For small & medium enterprises no statistics were given. CRA reports that they reviewed 12,981 international and large business files and 9,440 aggressive tax planning files that resulted in identifying $1.4 billion in fiscal impact. For international and large business files CRA audited 6,540 income tax and GST/HST underground economy files and identified over $448 million in fiscal impact. In all cases there were fewer audits in 2014/15 that the previous year. Presumably this reflects the results of budget changes.

Reasons for Tax Audit

CRA may choose to audit a taxpayer for several reasons. Amongst them are:

  • Industry audit projects
  • Random selection
  • Third party tips
  • Past history of non-compliance
  • Comparison of information on returns to information received from third-party sources – in other words are all T-slips reported

Since 2011 CRA has been auditing high net worth individuals and families, sending questionnaires asking for information about all companies, trusts, etc. that they control.

CRA has also been concentrating additional audit resources on the underground economy in an attempt to deter unreported cash sales.

What is the Tax Auditor Looking For?

The focus of the tax audit is to find errors in tax returns. Here are some examples of typical issues that may arise in a tax audit that would cause a taxpayer to receive a tax assessment at the end of the tax audit and that could result in penalties or a referral for a tax evasion investigation:

  • Overstated Expenses
  • Overstated Deductions
  • Over claimed Income Tax Credits
  • Under reported or unreported Earnings
  • Unreported cash sales
  • Unreported internet income
  • Unreported offshore income
  • Unreported offshore assets
  • Credits, such as for charitable donations, that are not supported by receipts
  • Personal expenses deducted for business
  • Shareholder loans not repaid within 2 corporate year ends

Right of CRA to Audit and CRA Audit Policies

Section 231.1 of the Income Tax Act gives CRA the statutory ability to carry out audits. In particular it entitles auditors to request and examine documents including computer records. Section 231.2 is a more formal provision whereby a “demand” or “requirement” is issued, but it need not be used by a tax auditor in the normal course where s.231.1 suffices.

The CRA can choose to audit anyone, but case law has held that such discretion does not permit a vexatious audit made for capricious reasons.

The Canada Revenue Agency has an internal policy in CRA Audit Manual §9.12.3 that audits should normally be limited to “one plus one” years that is to say the most recent year for which a return has been filed and assessed, plus one year back, with limited exceptions. This policy can be pointed out to a tax auditor to try to limit the scope of audit requests, but it has no legal effect and cannot be used in court to challenge a tax assessment that has been issued. Of course this rule of one plus one years does not apply in the case where CRA suspects unreported income. They will typically look at three years, and in some cases even more than 3 years.

In theory, the CRA has no discretion in applying the Act and must “follow it absolutely” by issuing a tax assessment for all otaxes wing. The reality is that in practice tax auditors have wide discretion not to assess an amount, however once it is correctly assessed; a Tax Appeals Officer or Tax Court judge will have no power to cancel it on grounds of equity, fairness or compassion.

Tax Audit Assistance from Toronto Tax Lawyer

Our top Toronto tax lawyers fight CRA tax auditors every day. A taxpayer has the right to professional representation at all times. This is specifically provided for in right 15 of the Taxpayer Bill of Rights which says “You can choose a person to represent you and to get advice about your tax and benefit affairs. Once you authorize us to deal with this person, we can discuss your situation with your representative.” A taxpayer should never meet with a CRA auditor without a professional Canadian tax lawyer present. Any information that is wrong, even if due to an error, will be used against the taxpayer. The auditor will also take notes and may misunderstand what the taxpayer has said or may wrongly record responses. An Ontario tax lawyer will have his or her own notes to contradict any auditor errors. Contact our Toronto tax law firm for tax help as soon as a CRA tax auditor contacts you.

Turning Practical Buying Into a Profitable Purchase Model for SME

SME Finance

Practicable Buying to Profitable Purchase Model

In the economic fabric of India, Small and Medium Enterprises (SME) have a significant role to play. A sector with an assortment of 6,000 products, contributes to an approximate 8% of the GDP in India and facilitates 45% of industrial output and 40% of exports from the country. This seemingly small yet vibrant and dynamic sector holds the potential to accelerate industrial growth and is truly a facilitator and leading partner in the process of inclusive growth for India. But, somewhere down the line these enterprises face challenges that not merely stunt their growth but even clip their wings while on their road to success. India falls short in boosting the advancement of SME’s through financial aid. Why? One of the reasons we reckon is that mere 6% of these enterprises are registered with the Registrar of companies, while 94% fall under the category of unregistered enterprises.

Handling various processes such as bulk buying, circulation of working capital, handling finances, customer satisfaction, compliance related activities, handling purchases etc prove to be cumbersome for SMEs when all the activities have to be dealt with together. Typically these are businesses which run on low investments. A sound cash flow and good deal of working capital can encourage an entrepreneur to keep his firm afloat.

So how does an entrepreneur ensure his money is circulating well?

Dealing in Discounts

Reaping the most benefits from every penny invested helps gather the best profits. Creditors are the happiest when cash transactions are on the table and will go that extra mile to ensure the deal closes at the earliest. Here that extra mile refers to offering appealing discounts, deals like pay upfront and avail a 10% discount are common. In other credit scenarios, retailers are urged to reduce the credit duration through discount period offers. Here a creditor offers slab options, the earlier you pay off your debt the larger discount can be availed. Consider:

Pay immediately and get 5% cash discount

OR

Pay within 10 days and get 2% discount

If a trader wishes to purchase goods worth Rs.100,000/-, then options available are:

Payment upfront availing cash discount: 100,000-5% discount = Rs.95,000/-

If paid after 15 days = Rs.100,000/-

If credit availed= 100,000-2% = Rs.98,000/-

Annual Savings due to upfront payments availing cash discount= 5000 per month*12 = Rs.60,000/-

Volume Game

Another powerful medium of keeping product costs at its lowest, is through bulk buying of inventory and goods used in production. If your business is stable and you have the foresight to plan ahead keeping in mind product pricing, seasonal requirements and ensuring product availability to meet demand constantly, then long-term contract with vendors is apt.

A retailer could crack a deal for constant supply of material for a couple of years at a competitive price. Payment terms could involve instalment options, either quarterly or half-yearly, ensuring your flow of funds are controlled. A well-planned and executed deal could garner excellent profits.

Another avenue to bulk buying is through middlemen or agencies who are linked to a multitude of SME’s. They group their specific requirements to crack volume based deals with wholesalers. This tie up and constant business results in cutthroat competition for business by wholesalers.

Today, with current access and connectivity online, a number of platforms have emerged which promote bulk buying through a group method. Couple of enterprises with a common requirement of material or goods, club together to strike a bulk deal with wholesalers. The outcome, elimination of middlemen, juicier deals for the retailer and higher sales turnover for wholesaler.

All the above scenarios do include blocking of working capital. And MSME’s as we know face difficulties in that zone. The only option that remains is to take a loan to increase their power of spending to derive its benefits. But then again, banks loans charge interest rates as high as 10-19% on business loans. This dilutes the value of the discount received, even if it the average discount is as high as 8-10% as in the scenarios above. The only medium to make the deal profitable for a MSME is the availability of loans at lower interest rates. This gap in demand was noticed by some FinTech start-ups who with their expertise in technology and varied allies in the lending space have made business loans beneficial. From availing loans in couple of days to lending interest rates as low as 1.5-3% per month, which is around 18% per annum. However after considering the negligible transaction costs and ease of obtaining loans within 48 hours, these FinTech companies have proved to be a boon to the MSME world. Getting such short term loans from banks without collateral is cumbersome to say the least. Now entrepreneurs can be unperturbed and confident when discussing large deals.

Conclusion

Today, there are numerous platforms that initiate bulk buying among wholesale and retail markets. The requirement still remains the same, need for a hefty working capital. SME’s continue to face challenges, both financial and otherwise, lengthens their path to success. Acknowledging this multiple FinTech start-ups have ventured into the lending space for MSME’s. Organizations like FlexiLoans, which provide working capital loans to these small enterprises, boasts of quick and easy disbursal of loans within barely 48 hours. It is refreshing to see the paradigm shift in the way entrepreneurs are now approaching business ideas, with certainty and confidence. Bearing in mind these advancements MSME’s now have a much brighter future and will be leading partners in the process of inclusive growth for India.

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