How can I know for sure what’s in the bank? The bank statement isn’t the same as my books…

It’s typical for the bank statement to show a different month-end balance from your general ledger.

Now that online access to banking records is so prevalent, it’s easier to keep track of the differences. However, they still exist, and you need to understand why.

For one thing, you need to pick up bank charges and any interest earned. For another, there may be errors to deal with – yours or the bank’s – which must be identified and corrected by comparing the two sets of records. Finally – and most significantly – there are timing differences between when you initiate a transaction and when the bank sees it.

Your books record payments and deposits in the order in which you issue them. The bank’s records will also contain these amounts – but in the order in which they were presented at the bank. That might be quite a different thing!

Let’s say you issued a batch of cheques dated on the 25th of the month. Getting them signed and into the mail took a couple of days. Some payees may have received and banked their cheques before the 30th, but others won’t cash them till the new month. As far as your books are concerned, these cheques are all current month items – but from the bank’s point of view, some belong to this month and some to next.

Therefore, at the end of this month, the bank will have a higher balance than your books, because the bank doesn’t know what cheques may be in transit.

As this example demonstrates, it’s very important for you to keep your bookkeeping up to date, and use your balance rather than the bank’s. Once you’ve issued a payment, you need to assume the money is gone, even if it hasn’t cleared from your account. You don’t want to try spending the same money twice!

The same problem can happen with other transactions. The deposit you made at the ATM on Friday may not be processed by the bank until Monday. The online purchase you made, or the online donation that a supporter made from their home may be logged on your system today, but may not arrive in the bank’s records until tomorrow.

The tool that you need to understand is the bank reconciliation. It is the document that proves your bookkeeper has compared your general ledger to the bank statement, and identified all problems and timing differences to the penny. If you put your general ledger at your right hand, the bank statement at your left hand, and the bank rec document in the middle, you should be able to see your balance, the bank’s balance, and an itemized explanation of any differences.

I got a bonus, and I had to pay a huge chunk of it as tax. What happened?

The bonus becomes part of your total compensation for the year. Let’s say your salary is $36,000 and your employer gives you a $500 bonus. You now need to be taxed as though you’re making $36,500. The bonus calculations need to adjust for the boost in your annual earnings.

Employment Insurance (EI) is a straight percentage of earnings up to an annual maximum. It’s not the culprit, here.

Canada Pension Plan (CPP) is a straight percentage of earnings over $3,500, to an annual maximum. The first $3,500 of earnings is not pensionable. This exempt amount is spread over all of the pays in the year. So, on a salary of $36,000, your weekly gross would be $36,000 ÷ 52 = $692.31. Your weekly non-pensionable earnings would be $3,500 ÷ 52 = $67.31. You pay CPP on only $692.31 – $67.31 = $625.00.

However, if you receive the $500 bonus on a separate cheque, you need to pay CPP on the whole bonus, because you’ve already had the exempt amount on your paycheque. That may make the CPP feel extra expensive.

Tax works in a similar way. In Canada, the first chunk of our income is tax-free: the basic personal exemption (for 2012, $10,822 federally). Thereafter, increasing tax rates apply to different slices of our income. Here are the rates for 2012.

The tax amount on your weekly paycheque is a blended rate: 0% on the first slice, 15% on the next slice, and so on. However, a lump sum such as a bonus must be taxed at the marginal rate: the tax rate that applies to the next dollar of earnings. This can feel very costly, but in fact it’s fair.

To work this out for yourself, you can use the CRA Payroll Deductions Online Calculator, or your can try the manual method, explained in more detail here.

What is split receipting and how do I do it?

Sometimes a charity acknowledges a donation with some sort of advantage. Common examples include providing a donor with complimentary tickets to a performance, or providing anyone who purchases a ticket to a fundraising event with a catered meal. In cases like these, where the patron is both making a gift and buying something, it is possible that only a portion of the amount of the donation would be eligible to be tax receipted. This is called split receipting.

Anytime a donor receives an advantage, the charity must deduct the value of the advantage – (click here for information on calculating fair market value) – from the amount of the donation and determine whether split receipting is necessary. The donation, less the advantage, must still represent a voluntary transfer of property by the donor to the charity.

Sometimes, even when a donor receives an advantage, split receipting is not necessary. It is important to remember the following:

• The 80% rule – If the advantage the donor receives is valued at more than 80% of the amount of the donation, the CRA does not consider the donor as having intended to make a gift and the charity cannot provide a tax receipt at all.
• The de minimis rule – Some advantages are too small to warrant split receipting. The de minimis rule dictates that if the value of an advantage (or combined advantages) does not exceed the lesser of $75 or 10% of the value of the gift, it is too minimal to have any effect on the amount of the gift. In these cases, a charity can issue a tax receipt for the full amount of the donation.

Visit this page on the CRA website for information on split receipting.

Employee or Self-Employed? HR story highlights hazards

Staff Post
By Heather Young

From time to time I will share stories from the field – names and details obscured!

One company went through a nerve-wracking time when a former worker – who had been hired on a fee-for-service contract as a freelance consultant – tried to claim EI and insisted to the folks at HRSDC that s/he had been an employee.

The government responded by notifying the company that they were responsible for remitting both the employer and the employee portions of EI and CPP for the duration of the contract. It was up to the company to appeal this decision, and prove that the worker had been properly treated as a freelancer.

To help the organization prepare its appeal, the government provided a lengthy questionnaire, much of it based on concepts you can read about in the CRA publication Employee or Self-employed?, published online.

The company also did some research, including checking the former worker’s social networking activities, where the individual clearly self-identified as a consultant for hire. It’s unclear whether that influenced the happy ending – but I can tell you that in at least one comparable case the defendant’s Facebook page did him in.

After many hours of work and months of waiting, the company finally received the happy news that their appeal was successful.

The CRA ruling made a strong effort to be balanced, stating that “the parties did not share a common intention as to the worker’s employment status” – although the company feels the status was always clear.  It outlined all the terms of employment in some detail, noting that the level of “control”, or supervision, of the employee and ownership of tools and equipment were neutral factors – they could have been interpreted to either party’s benefit. The fact that the worker was providing services personally and was not able to subcontract assigned work was deemed  consistent with the worker’s contention that s/he was an employee, but  the fact that the worker was free to take on other projects for personal profit, and promoted him/herself as a freelance communication consultant suggested to the CRA that s/he was “embarking on a business enterprise on his/her own account.”  Weighing all factors, the CRA ruled in the company’s favour: but in reading the written ruling, it looks like it was a close call.

Arts organizations and charities secure all sorts of services on part-time, part-year contracts. It’s worth the effort to research how a particular position should be treated (employee or self-employed?), and to be crystal-clear with the worker both verbally and in a written contract.

Annual T-Slip Deadline – February 29, 2012

Staff Post
By Heather Young 

The annual payroll reporting deadline is looming. T4 and T4A slips must be filed by Wednesday, February 29, 2012.

T4 Slips

In preparation, you should reconcile your payroll accounts: make sure that the balance on your PD7A form (i.e. the total source deductions that the government acknowledges receiving) matches the total of the cheques you issued.

Conduct your own “pensionable and insurable earnings review.” The Canada Revenue Agency (CRA) checks this for every filer. Before you submit your T4s, you should confirm that the correct CPP and EI amounts were withheld, and were properly matched with employer contributions. If you find any shortage, it needs to be accrued to the employee record and remitted to the CRA.

Review your company’s employment relationships for any taxable benefits. Taxable benefits are items above and beyond payroll that have a value for employees, and that the CRA considers taxable income. Check this page on the CRA website for information about cell phones, parking, transit passes, insurance, gifts and other benefits.

Taxable benefits should be processed on a pay period by pay period basis, as required by law. If you’ve overlooked something, though, be sure to record it and remit the appropriate taxes at payroll year-end.

T4A Slips

Here’s the CRA’s word on when you need to issue T4A slips.

For small not-for-profits, including arts organizations, the most common requirement is to document “fees or other amounts for services.” This includes freelancer and self-employed contractor fees and, indeed, fees paid to any unincorporated business. (That is, cases where the fees are to be reported on a personal income tax return.)

Amounts paid to freelancers are to be reported on Box 48 of the T4A slip.

Here’s what the Canadian Payroll Association says about T4As: “The CRA is currently conducting a review of the types of payments that payers will be required to report in this box (i.e. Box 48). While this reporting requirement may be expanded in the future, it currently applies only to payers of independent or self-employed contractors, who should report any fees (excluding GST/HST) on the T4A using Box 48.”

Late filing

The penalties for late filing of T4 and T4A information returns can be found here on the CRA website.

Questions? Please contact us or comment below and we’ll do our best to help!

Ten Tips on Being a Better Bookkeeper for Smaller Organizations

1. Plug into the bigger picture. Maintaining the accounting records is a foundational element of financial management, and of the management decision-making process. If you only think about posting entries, then you’re probably not giving the client everything they need. Most small organizations need a bookkeeper who can help them manage their financial statements.
2. Keep your eyes on the prize. The ultimate goal of bookkeeping is to issue financial statements. Each session should probably end with you giving the client a report of some sort, e.g. year-to-date statements, or at least a progress update describing what was accomplished today. This engages the client in the process, and reinforces your value to management.
3. Check your own work. The bank reconciliation is a standard verification step. So is checking the invoice detail contained on supplier statements to the invoice detail in the General Ledger. What other steps can you take to prove the accuracy of your work before you issue reports? You may use different techniques in different circumstances, depending on the nature of the transactions.
4. Read reports before you hand them over. Beyond doing account reconciliations, it’s important for you to read the financial statements before you hand them to the client. This will help you pick up misallocations and other errors that your verification steps may not have caught. It also ensures that you are familiar with the statements as complete documents. This is of much higher value to the client than handling a bunch of individual transactions!
5. Encourage the client to read their statements. This may be more easily said than done, depending on the client. Clients who don’t read their financials are always bad news. Sooner or later something will go wrong that will require them to respond. If they aren’t familiar with those documents, look out! It’s much harder to explain something “under the gun.” Regular review builds their ability to interpret both good and bad news, and encourages them to understand and trust your work. Reading the statements with them can offer an excellent opportunity for you to share your expertise – and for the client to keep you fully up to date with the organization’s activities as they affect your work.
6. Be aware of the tax rules. Whether you handle the client’s government reporting, or whether you hand it to an accountant, it’s to your advantage to be aware of the rules. Even the smallest organizations are likely to have some dealings with the Canada Revenue Agency, and perhaps with provincial and municipal tax departments. You’ll almost certainly need to know the basics of payroll and sales taxes. If you’re working for charities or not-for-profits, you need to be aware of the particular filings they may need to make (e.g. T3010B, T2 Short, GST/HST rebate claims).
7. Maintain proper documentation. Ideally, each transaction will be documented by an invoice, contract, receipt, petty cash report, cash register tape, or other third party or internally generated explanation. Decide what you need to retain in the case of direct debits, electronic funds transfers and other online transactions. Know the Canada Revenue Agency records retention rules, which are available on their website at www.cra.gc.ca. In most cases (but not all), you must maintain full detail for the current fiscal year plus six previous. Financial statements and general ledgers must be maintained back to the start of the organization. Make sure that your electronic records can be read for the full retention period. This may mean updating software and transferring documents off old media (remember floppy discs?) onto something current.
8. Maintain a good audit trail. The audit trail links the steps in the bookkeeping process, from source documents to financial statements. Your software probably enforces a certain amount of audit trail notation – for instance, by making you enter invoice numbers in the purchases journal, to link the entry back to the paperwork. You can strengthen the process by recording the account number and a posting reference (e.g. journal entry number) on the invoice. If the organization hires a chartered accountant to perform an annual audit, they will appreciate the clarity this adds to the records. A good audit trail will also help you to review your work and respond to client questions.
9. Keep pace with change: adapt your system and processes. “The way we’ve always done it” can’t last forever – or we’d all still be adjusting our eyeshades as we bent over our quills and inkwells! As new technologies emerge, and as the client’s needs for reporting change over time, think about your software, paper and electronic records, office processes, and the layout of the financial statements (chart of accounts). From time to time, it will probably be to your and the client’s benefit to update. Your ability to take the lead in proposing improvements underscores your value to the organization.
10. Help the client to help you. Determine what you need from them in the way of documentation and instructions. Work out a clear process for getting the information, and for storing records once they’ve been entered. Establish reasonable deadlines – for them providing the raw materials, and for you providing reports. Discuss what reports are required, in what format, and who will receive them. A good bookkeeper can help to create a structured process that makes accounting clearer and easier for everyone – including you!

This tip sheet was created by Heather Young of Young Associates. Founded in 1993, Young Associates provides bookkeeping and financial management services in the charitable sector, focused on arts and culture. Young Associates also provides consulting services in the areas of data management, business planning and strategic planning. Heather Young published Finance for the Arts in Canada (2005), a textbook and self-study guide on accounting and financial management for not-for-profit arts organizations.

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