Banking Assists
Business Record Keeping

by Chung

I've been looking at your site and come to realize that you're also in the online business - as am I - so hopefully you'll be able to answer my question below.


I've just set up a business bank account for my company (incorporated). I'm not able to get a business credit card until I've had the bank account open for 3 months.

I'm going to see if they can make it happen - if not, I will dedicate a personal credit card solely to expenses incurred related to the business. Do you see any problems with dedicating a personal credit card for business expenses for the incorporated company?

Also, if I'm going to dedicate a personal credit card for the expenses of my incorporated business - this brings up the question of paying off the credit card. Should I be paying off the credit card using my personal bank account or business bank account? and why?

And 2 - do you have a list of 'legitimate' deductible expenses for an Internet business? or know where I can find one?



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Hi Chung,

I'm going to chat about two things to respond to your questions; and (a) the importance of separating business and personal expenses and (b) reasonable expectation of profit.

Separating Business and Personal Expenses



In my article on Audit Trails, I talk about a GAAP concept called the Business Entity Concept. Here is an excerpt from that article:

"This principle provides that the accounting for a business should be kept separate from the personal affairs of its owner. This is not to be confused with the legal concept where, if you are a sole proprietor, you are your business."

Having a separate bank account for your business ... and a separate credit card for business expenses is an easy way that banking can assist you with your business record keeping ... although it doesn't replace actually doing your books; it just facilitates data entry ensuring you never claim personal expenses as a business deduction. It also helps you capture your business income ensuring you are not inadvertently skimming.

As your business is incorporated, it has a separate legal identity from your own person. CRA requires you keep records for your business. To open a bank account for an incorporated company, you don't have any options ... it must be a corporate account. Due to its separate legal entity, banks will not allow you to have a personal account for an incorporated company. (This is not the case for sole proprietorships.)

Unfortunately, the cost of operating a business banking account is more expensive than operating a personal bank account. Banking fees are higher, cheques cost more, obtaining overdraft protection can be harder to get and it often feels like they are getting to sign your life away with all the paperwork.

You will need to remember to have customers pay your business, not you personally in order for you to deposit your customer
payments to your business banking account. (This is not the case with sole proprietors.)

As you discovered, obtaining a credit card for your incorporated business is harder than obtaining a personal credit card.

Most CCPCs that obtain any kind of third party financing require a personal guarantee from the shareholder/director, in effect removing the liability protection a corporate structure offers.

So if you are truly going to set aside a personal credit card for corporate business ... not charging any personal expenses to it, I think for bookkeeping purposes, I would treat it as a corporate card.

I would setup a separate liability account for it called "Owed to Owner" to distinguish it from your true shareholder loans, as you have an expectation of being reimbursed for your business expenses. If you are using QuickBooks, I would use a "credit card" type account to facilitate ease in reconciling.

I would have the company make all payments to this card. I would not pay the credit card debt from your personal account.

So as long as you keep all your ducks in a row, you should be fine ... but that is just my opinion as a bookkeeper. You would be well served to have this conversation with your accountant who would be familiar and aware of all of your circumstances.

While you should be fine using a personal credit card solely for business purposes, I do recommend submitting an expense report prior to having the company pay the credit card amount each month. You need to remember to keep all receipts to attach to each expense report.


Reasonable Expectation of Profit




With regards to your second question on 'legitimate' deductible expenses. Use one of the search boxes located on the site and key in the phrase reasonable expectation of profit. That is the key to legitimate expenses.

CRA expects income earned online (electronic income) to be treated the same way as traditional commerce income.

You may be interested in my chat on web related outlays.

You may also want to peek at CRA's "E-commerce" link which is all about conducting business on the internet. You can find the link by going to their website (www.cra-arc.gc.ca). Click on Businesses. It will be on the top navigation bar or on a drop down menu in the upper right hand side ... it depends on the size of your browser how the home page shows up. Then look on the left hand side navigation bar mid way down the page until you find Information For> E-commerce.

While there, make sure you take time to read / click on GST/HST and e-commerce> GST/HST zero-rated supplies (exports).







P.S. I would like to remind you there is a difference between information and advice. The general information provided in this post or on my site should not be construed as advice. You should not act or rely on this information without engaging professional advice specific to your situation prior to using this site content for any reason whatsoever.



Comments for Banking Assists
Business Record Keeping

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Apr 15, 2011
 Getting Opinions From Different People
by: Chung

Hi Lake,

I decided to ask my account manager to apply for a biz credit card so just waiting for it to be approved :-)

I've asked an accountant previously to reading your article but I don't believe they understand my situation in terms of which expenses are expenses for Internet business.

After reading your article on the 5 different bookkeeping filing systems - I'm thinking #3 makes sense to me so thank you.

My last question is about deducting business expenses (as a sole proprietor) against my personal employment income for 2010.

In 2010, I had employment income and I was running a business the same time. The business did not make money and was not incorporated or registered with the registry of joint stocks.

Now, would the expenses from operating that business - eg. training, programs, online seminars - be tax deductible against my personal employment income?

I'm hearing Yes and No from bookkeepers and accountants ...

What is your opinion on this?
Apr 16, 2011
 Information Is Not Advice
by: Lake

Chung,

Your accountant is the best person to give you advice on this. The information on this site is for informational purposes only and should not be a substitute for advice from an accountant.

Much of the information should actually be used as talking points when holding a conversation with your accountant ... after all it is sometimes hard to have a convervation when you don't know what to ask.

That said, you need to go back and follow all the links I have given you. You also might want to brush up on these concepts:

The Business Journal

HST and eBay and eBay Income Earned Online is Taxable

CRA Intrepretation Bulletin IT-334R2 Income Tax Act Miscellaneous Receipts has this to say about hobbies:

"In order for any activity or pursuit to be regarded as a source of income, there must be a reasonable expectation of profit. Where such an expectation does not exist (as is the case with most hobbies), neither amounts received nor expenses incurred are included in the income computation for tax purposes and any excess of expenses over receipts is a personal or living expense, the deduction of which is denied by paragraph 18(1)(h). On the other hand, if the hobby or pastime results in receipts of revenue in excess of expenses, that fact is a strong indication that the hobby is a venture with an expectation of profit; if so, the net income may be taxable as income from a business. The current version of IT-504, Visual Artists and Writers, discusses the concept of "a reasonable expectation of profit" in greater detail. Where a hobby consists of collecting personal-use property or listed personal property, dispositions should be accounted for as described in the current version of IT-332, Personal-Use Property."

I'll leave you with this thought from my chat on CRA Tax Audits:

"Remember in the Canadian tax system, you are guilty until proven innocent. Your best defense is proving due diligence through accurate and honest bookkeeping."

In my chat on Employers' Advisers I word it this way:

"While ignorance of the law is not a defense, due diligence is. This requires everything to be in writing ... otherwise your due diligence does not exist."

I hope the information here gives you food for thought and assits you in formulating the decisions you need to make about your bookkeeping and tax prepartion ... and whether you need to consult an accountant or tax specialist regarding your situation.
Apr 17, 2011
 Thank You
by: Chung

Hi Lake,

'We don't know what we don't know' and since accountants charge an arm and a leg, this site really helps get to the point of things.

Very glad I came across this site.

Thanks for all your feedback.

Speak soon,
Chung
Apr 17, 2011
 Talking Points
by: Lake

Hi Chung,

You are right. That is one of the reason I started this site ... so small business owners could have talking points to discuss with their accountant.

It's tough to ask the right questions when "you don't know what you don't know".

I wish you much success in your business.
Aug 04, 2015
 Education
by: John

It is delightful to read this post and I have received many useful points through this post. Please keep posting these kinds of post.

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