Jimmy$$s Painting

Jimmy$$s Painting is an owner$-$operator run sole proprietorship that operates in Galloway, BC$.$ Jimmy Davis started the company in several years ago. The business originally did primarily household painting services. Jimmy discovered there was a shortage of DIY paint supplies in town and expanded to a small retail shop carrying paint and paint supplies.

Jimmy$$s Painting operates out of a small, rented warehouse in the industrial part of town. He sub$-$leases a small portion of his shop in the summer to a university student painting crew. Jimmy hopes to build his own shop in the future and purchased some land which he is holding until he can afford to build.

It is January $10$th$.$ Jimmy$$s bookkeeper is moving out of town and you have been hired to finish off his year$-$end and to help with his personal tax return, as well as to take on the bookkeeping on an ongoing basis. His previous bookkeeper was keeping tracking his transactions in Excel and has shared with you the December $31$st financial statements. During the handover meeting the bookkeeper shared the following information:

$1.$ During the year Jimmy sold an old truck for $$10,000+$ GST$.$ He had originally purchased it for $$17,500$ and had been claiming CCA on it in class $10$ for the past three years. The bookkeeper recorded the original purchase transaction, but has not yet recorded the sale transaction.

$2.$ Jimmy made a large credit sale for painting supplies to an out of town painting store last year. The painting store never paid their invoice and they closed this year. The bookkeeper recorded the sale as bad debt expense and allowance for doubtful accounts. The bookkeeper wasn$$t sure how to deal with the GST collected on the sale $($$$200)$ and PST collected in sale $($$$280)$ which is still part of the accounts receivable balance.

$3.$ Jimmy made quarterly personal income tax installments of $$1,750$ to the Canada Revenue Agency. Jimmy did not make any GST installments during the year.

During your initial meeting with Jimmy in February, he shared the following information:

Included in the salaries and benefits line is $$100,000$ of salary I paid to myself. From the salary I paid myself, I made $$16,000$ in RRSP contributions during last calendar year, which is the amount my investment planner told me I need to contribute each year to reach my retirement goals.

Thinking forward to the future, once I build my new show I anticipate my annual revenues to double, with my expenses to also proportionately increase. I$$m starting to think I need some tax help. I have heard a lot about the tax benefits of setting up a corporation for my business, but I am not sure how that would change things for me$.$ Since you are working on my personal tax return this year, could you also tell me how things would be different if I were to incorporate? How would I go about transferring an existing business into a corporation? Are there any additional factors or tax planning opportunities that I need to consider when I take money from the business if it was incorporated? Would you recommend that I incorporate my business?

I really relied on my old bookkeeper to take care of everything for me with my personal taxes as well. I$$ve given you all the information I have. Can you make sense of it and explain anything you think I need to know.

$$

Jimmy's Painting

Income Statement

$($Unaudited$)$

January $1,20$xx to December $31,20$xx

Notes

Operating revenue

Painting sales $272,423$

Painting supplies $132,211$

Painting supplies retail sales $56,936$

Miscellaneous revenue $76$

Commission revenue $186$

Interest and dividend revenue $5,016$

Rental income $1,590$

Total revenue $468,438$

Operating expenses

Salaries and benefits $155,717$

Insurance $1,528$

Miscellaneous expenses $914$

Cost of goods sold $177,740$

Bank service charges $6,607$

Rent $24,000$

Supplies $16,518$

Telephone $944$

Utilities $8,507$

Office supplies $2,666$

Bad debt expense $4,0002$

Travel $1,002$

Meals and entertainment $532$

Advertising $2,475$

Amortization $25,566$

Total operating expenses $428,716$

Income taxes $7,0003$

Net income $32,722$

Jimmy's Painting

Balance Sheet

$($Unaudited$)$

As at December $31,20$xx

Notes

Assets

Cash $18,183$

Accounts Receivable $48,273$

Allowance for Doubtful Accounts $-8,720$

Net Accounts Receivable $39,553$

Inventory $20,488$

Prepaid expenses $1,739$

Capital assets

Vehicle $113,846$

Equipment $27,027$

Computer Equipment $10,279$

Land $150,000$

Accumulated Amortization $-50,618$

Total capital assets $250,534$

Total Assets $330,497$

Liabilities

Accounts payable

Trade accounts payable $27,402$

Payroll source deductions payable $2,336$

GST collected on sales $4,198$

GST paid on purchases $-1,289$

PST collected on sales $996$

Total accounts payable $33$