Guide for accounting & tax tips for Canadian Law Firms
Working with lawyers over the years, we understand the unique financial challenges law firm owners face. Effective accounting and tax planning can make a significant difference in your firm's financial health. Here are six strategies to help you stay on top of your accounting and taxes that will save both time and money.
Guide for Smart Accounting & Tax Tactics for Canadian Law Firms
Navigating tax planning for Canadian law firms is like mastering a complex case—strategic, precise, and essential for a winning outcome!
Let’s start with the base: Accounting
1. Practice Management and QBO Integration
Integrating legal practice management software like Clio or PracticePanther with QuickBooks Online (QBO) is essential for maintaining accurate financial records. These integrations allow you to seamlessly track billable hours, manage expenses, and automate invoicing. By connecting Clio or PracticePanther with QBO, you can sync client data, invoice details, and payment information, ensuring that your financial data is always up-to-date and reducing the risk of errors.
For instance, Clio’s integration with QBO allows you to synchronize contacts, create invoices directly from billable hours tracked in Clio, and manage trust accounts efficiently. This streamlined approach saves time and ensures compliance with accounting standards and makes tax filing so much easier.
2. Watch out for HST pitfalls on reimbursements
To avoid inadvertently paying HST on reimbursable expenses, it’s crucial to keep these expenses out of the scope of HST. When you incur expenses on behalf of a client, such as court filing fees or expert witness fees, ensure these are billed as disbursements rather than expenses subject to HST. By doing so, you pass the exact cost onto your client without adding HST, which can otherwise increase the total amount you owe to the CRA.
For example, if you pay a $1,000 LMIA fee or a court filing fee on behalf of a client, it’s common to bill this amount directly to the client as a disbursement. This way, you avoid adding HST to this amount and prevent paying taxes on money that merely passed through your firm. Ensure it is created as ‘Out of Scope’ of HST on your accounting platform.
3. Automate Receipt Capture and Storage
Automating receipt capture and storage is a massive time saver for maintaining accurate financial records. With QBO’s app, you can snap a photo of your receipts such as restaurant bills, fuel etc. and QBO will directly attach it to the payment you make. You can also email any bills you receive directly to QBO. This automation ensures that all expenses are recorded accurately and eliminates the need for manual data entry.
For example, when you purchase office supplies, simply take a picture of the receipt using the QBO app. The app will automatically extract the necessary information and categorize the expense and you can edit it in case any info is missing. This process not only saves time but also ensures that you have all documentation needed for tax filings.
Now the fun stuff: Taxes
1. Tech Upgrade Tax Break
The Federal Budget 2024 introduces a new provision allowing corporations such as law firms to claim 100% amortization on productivity enhancing tools such as system software, laptops and computers in the year of purchase. This change benefits law firms by providing immediate tax relief (as compared to the prior amortization rate of 55%) on these essential business tools.
For instance, if your firm purchases new laptops for $10,000, you can deduct the entire amount in the current tax year, reducing your taxable income by that amount. This provision encourages investment in up-to-date technology, enhancing your firm’s efficiency and productivity.
2. Salary vs. Dividends: A Balancing Act
Deciding between taking a salary or dividends from your law firm is a critical tax planning decision. While salaries are subject to personal income tax and provide CPP contributions, dividends are taxed at a lower rate but do not contribute to CPP.
For example, if you plan to buy a home and require a mortgage, taking a salary could be more advantageous since it shows steady income and builds CPP contributions, which can be beneficial for mortgage approval even though it may have a slightly higher tax bill. Conversely, if your goal is to invest in property or save on taxes, taking dividends could be more tax-efficient. Balancing salary and dividends according to your personal and financial goals can optimize your tax position and meet long-term objectives.
3. Tax planning beyond death via Corporate Owned Life Insurance
If your corporation owns assets that you want to pass down to the next gen and protect it from taxes, tax-exempt insurance is an extremely valuable tool for your beneficiaries. Assets of your law firm can accumulate within a tax-exempt life insurance free from tax. When you pass away, proceeds of the policy are distributed to your beneficiaries on a tax-free basis.
Here's a simplified example
Let's say Lisa Law Professional Corp has a $900,000 whole life insurance policy with $400,000 of cash value. While Lisa is alive and kicking she can use the cash value of this policy to collateralize a loan for $400,000 and spend it on whatever she likes. When Lisa passes away, the corporation will receive a death benefit of $900,000 cash while Lisa still owes $400,000 to the bank. The purpose here is to pass the entire $900,000 cash to Lisa’s beneficiaries.
They will use that cash to pay back the $400,000 loan to the bank and be left with $500,000. The corporation would then receive a credit in their CDA (Capital Dividend Account) account for $900,000. This means Lisa’s beneficiaries would be able to sell assets and withdraw retained earnings up to the credit maximum of $900,000 tax-free. They would then be left holding $1,300,000 of cash - tax free.
This strategy can be both lucrative and complex, please consult an expert (like our firm!) to see how it applies to you.
By implementing these accounting and tax strategies, Canadian law firms can better manage their finances, reduce tax liabilities, and achieve their financial goals.