A: When buying a franchise, you might focus on selecting the right franchise system, developing a sound business plan, and securing the necessary financing. However, once you own your franchise, your focus will be on day-to-day matters like tax and financial reporting requirements.
As a franchisee, you will also have various people request financial information from you, such as a lender or investor, your franchisor, and the Canada Revenue Agency (CRA).
What tax reporting is required?
Canada has a multi-layered tax system, which can sometimes make reporting complicated for corporate taxes, GST and HST, and payroll taxes. As a franchisee, you will need to become comfortable with the different systems and tax reporting types.
Every corporation in Canada must file an annual Canadian corporate tax return, wherein the federal and provincial tax is calculated. Corporate tax is charged on your corporation’s taxable income, and any related salaries or dividends to the owners will result in tax charged to the owners personally.
A franchise accountant can guide you on appropriate tax structuring and remuneration planning to effectively manage the overall tax payable by your business and yourself personally.
GST/HST is a federally imposed value-added tax that applies to many services and property (including real, tangible, and intangible property). Franchisees that are GST/HST registrants are typically required to collect GST/HST on supplies that are made in Canada and the tax the franchisee collects must be remitted to the CRA. Registrants that incur GST/HST on purchases may be eligible to claim input tax credits, i.e., refunds of the tax paid. Therefore, where some other taxes are an expense, GST/HST is generally cash neutral at the commercial level.
Registration for GST/HST is typically required for businesses engaged in commercial activities that are not small suppliers. Many of the most significant costs and fees for a franchisee are at the very beginning of the business, so it is crucial to be registered as early as possible to prevent lost GST/HST refunds.
Franchisees viewed as carrying on business in Quebec may be required to register for Quebec Sales Tax (QST), and those that sell to British Columbia, Saskatchewan, and Manitoba may be required to register for provincial sales tax (PST). QST applies similarly to GST/HST on supplies made in Quebec and may also be eligible for recovery when incurred on purchases related to a franchisee’s commercial activities. PST paid on purchases is typically not recoverable unless paid in error.
When a company hires employees, it becomes responsible for employer payroll taxes. The company is also responsible for remitting the portions of the payroll taxes withheld from employees to the CRA. To remit payroll taxes, a company must register for payroll with CRA, and make regular periodic payments for any amounts owing. After the calendar year is complete, total income and deductions must be reported for each employee, on T4s.
What financial reporting is required?
When different financial users, such as lenders, banks, and franchisors, ask for financial statements, there might be additional reporting requirements. Some common types of reporting requested include the following:
Notice to Reader (NTR)
In an NTR engagement, an accountant will compile the financial statements from your bookkeeping records. The accountant is responsible for ensuring that the financial information is mathematically correct but gives no assurance that the information provided is accurate. However, accountants may not knowingly associate themselves with misleading financial information.
When a bank or lender does not perceive significant risk related to lending, they are often comfortable with receiving NTR financial statements.
A review engagement is a report where the accountant will perform procedures including inquiry and analytical procedures, to provide limited assurance that the financial statements are prepared according to a financial reporting framework. A review engagement provides financial statement users more assurance than an NTR, though not as much as an audit.
The highest level of assurance is an audit engagement. The auditor will provide an opinion as to whether the financial information in the financial statement is prepared, in all material respects, in accordance with a specific accounting framework. The auditor obtains evidence to support this opinion by testing detailed financial information, through corroborated analytical procedures, or control tests.
Understanding reports for your business
When finalizing agreements with your bank or franchisor, it is important to understand the distinctions above. There may be opportunities to negotiate a lower level of assurance, resulting in significant cost savings.
With the help of a trusted business advisor, tax compliance and financial reporting can be one less thing to worry about, allowing you to focus your attention on operating a successful franchise.
Lyn Little, CPA, CA
BDO Canada LLP