To the books!

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axes are relatively simple when you're working for someone else: deductions come out of your paycheque and you only really need to pay attention to them once a year. But when you're working for yourself, things get a little more complicated.

From a legal standpoint, owning a franchise is essentially the same as owning any other small business, explains Edward Levitt, a partner who specializes in franchise law at Dickinson Wright. He says the key to avoiding surprises at tax time is being prepared.

"The tax regime sets up an awful lot of responsibilities for employers such as withholding tax on wages, remittances, and GST filings and collections," Levitt says. That means good bookkeeping and financial tracking is essential.

Levitt's colleague, Ted Citrome, a lawyer who specializes in tax law at the same firm, agrees. "When the Canada Revenue Agency knocks on your door to audit your books, they're going to want a detailed explanation of all the inflows and outflows. It really is one of those areas where an ounce of prevention is worth a pound of cure."

DECIDING TO INCORPORATE

One of the first questions a new franchisee has to ask themselves is whether or not to incorporate their business.

With the right advice, Levitt says it might be a good idea not to incorporate at first, "if you do generate an initial operating loss, which in many situations can be set off against a prior year's income." Having an unincorporated business also provides a level of simplicity, says Rajiv Mathur, a member of the Canadian Franchise Association's (CFA's) board of directors and the organization's treasurer. This is because it requires filing only one set of taxes.

But there are also advantages to incorporating. Incorporated businesses can use the small business tax rate on the first $500,000 of business income. They can also benefit from a capital gains exemption when the owner sells, explains Mathur.

"When the Canada Revenue Agency knocks on your door to audit your books, they're going to want a detailed explanation of all the inflows and outflows. It really is one of those areas where an ounce of prevention is worth a pound of cure."

- Ted Citrome, Dickinson Wright

But if a business owner does decide to incorporate, they have to remember that the corporation now has a separate legal identity.

"At law, particularly at tax law, the corporation is a different person," explains Citrome. "A lot of times people can get into trouble when they ignore the separate identity of their personal holding corporation and dip into the piggy bank and they take money out."

That doesn't mean a business owner can't take money out of their corporation — they just have to do it in the proper way, by paying themselves a salary and/or dividends.

While dividends are taxed at a lower rate, the tax implications of a salary can be reduced through various personal exemptions and deductions. As a result, most business owners will want to take a mix of the two, though just what that mix will look like depends on their personal situation.

Another benefit to incorporating is the ability to limit liability, says Andrew Reback, who specializes in tax law at law firm Cassels Brock.

"You want to incorporate a company because you don't want to have any liabilities. If a brick from your restaurant falls on somebody's foot and there's a huge issue there, you're insulated to some degree by having a corporation," he says.

DEDUCTING EXPENSES

Regardless of whether a business is incorporated, franchise owners will be able to deduct business expenses from their income.

"One of the things that's going to become clear very quickly is that they can deduct activities in their lives that they may not otherwise have been able to deduct from their income because if you spend money to make money, speaking very generally, those are deductible expenses in a business context," says Levitt.

Here, too, it is essential to keep proper records, especially if a business owner wants to make deductions related to the use of a home office or their personal vehicle.

"You need to keep a trail — avoid messy shoebox situations," the CFA's Mathur advises.

Some franchise owners will put family members on salary as a way to reduce their tax burden, but those family members have to work if they're getting paid.

"Yes, you can pay your children, you can pay your spouse," says Mathur. "But it has to be reasonable and it has to be in relation to the work performed."

While most tax issues are the same for franchises as for any small business, Reback warns that if the franchisor isn't located in Canada, franchisees could end up paying a withholding tax of between 10 and 25 per cent on their royalties.

He says it's important for franchisees to plan ahead: "I always tell my clients, it's easy for me to start from scratch and put you in a place where you want to be, as opposed to taking you out of a place where you shouldn't have been."

Citrome has similar advice. "The sooner that you involve an expert, whether it's your accountant or tax lawyer, in crafting a plan and coming up with a strategy, the better off you'll be."

But while a professional can do the work, it doesn't mean the business owner should leave everything to them.

"As a franchise owner, you certainly should be taking ownership of your taxes, even if you have it prepared by a separate professional," says Mathur. "You are responsible for your taxes."

This content was produced by The Globe and Mail's advertising department. The Globe's editorial department was not involved in its creation.