Good morning and welcome to another episode of always up to date. I’m Denise and this is Yahweh and we are co-owners of always bookkeeping here in Edmonton. Uh, so how are you today? EOE? Good. Um, we have a good weather and yeah, we had birthday cake from yesterday for he’s thing. Yeah. Perfect. Uh, so today you were talking about intercompany transactions between small businesses. Um, so our quote is Jim Collins, author of six books. Um, and the quote is a culture of discipline is not a principle of business. It is a principle of greatness. Um, so our statistic today is from Intuit who are the makers of QuickBooks. They did a survey of small business owners and quiz them on some basic business, financial literacy questions. Uh, for example, the role of the balance sheet or accruals, how to improve cashflow. So 82% of the respondents scored less than 70% on the test. Um, so the story that we have is, um, you know, your accountant advises that, um, your partners in, you should use your holding company. Uh, now I have two companies that, um, have to file that you have to file for a, but you don’t know why the intercompany accounts are not matching. Um, so we get a lot of that, right. There’s different companies involved and um, just how they relate to each other and what transactions need to go with Edmonton Bookkeeping.
Yeah. Cause now you have two companies that you have to look for and that you don’t necessarily have the same year and yeah.
Yeah. When you tell us what a holding company,
so a holding company is a corporation that owns another corporation. So it has, um, it has a stake on another corporation. Meaning if you have, uh, uh, for example, if you’re dealing with a partner and you have that extra layer of protection, um, you will have, uh, you will, you will most likely have a holding company that owns the operating company. So that in that way your, um, your, your corporation or your holding company will be a letter will be treated a little different than your partners. Yeah. And you’re, uh, sorry, the assets, if something goes wrong to the operating company, it doesn’t necessarily direct, um, all the liabilities to you in your, uh, and your partner. Um, it might, um, it again gives you a, another layer of protection through the holding company that you, yeah. Um, so what are intercompany transactions? So intercompany transactions are dope with Edmonton Bookkeeping.
The transactions up between, I’m sorry, that happened between your operating company and your holding company or a related company. So a related company. Um, it could be anything really. I know a lot of people, um, have mistake that if you own another corporation for more than 25%, that becomes a related company to the corporation you own now. So, um, for example, the holding company, if you own the holding company 100%, and it owns, um, it owns the other company, those two become related. If you, uh, if you, for example, own, uh, your company here and your wife owns, um, or is it the rector of another company that becomes a related company too. So, um, intercompany transactions are the ones that happens in between those related, uh, companies. So, or um, yeah. So those related companies are, or inter companies. Yeah. And so what are some bookkeeping errors that can happen with intercompany transactions?
So some bookkeeping errors that could have is, um, let’s say they receive a deposit, um, on the op call and they, a bookkeeper doesn’t know what the deposit for our, our normal, um, reaction to a deposit is. It says it’s a revenue, right? So if it’s an intercompany transaction, you want to make sure that, that, um, because uh, that gets classified correctly because, um, you want your operating company too much, whatever the holding company is having with, uh, weed relation to what the old each other because, um, at the end of the day they’re going to have to declare a dividend, uh, to that corporate, uh, to the holding company. And if that number is wrong, then you might get taxed or penalized differently based on that specific transaction. So it’s very important that you mash them all the time. So what does it mean to have an asset or liability account for the related party? So on, um, the operating companies, uh, perspective. For example, if you do have a do to from a account that’s on the asset side, that means, um, that the holding company or that related company is offering you money so you have an asset because this is technically a receivable from the related party. Um, so that becomes, um, an asset account. But if it’s on the liability, that means you owe that corporation money, which is, which means that, that um, the whole coal is contributing more to the operating company with Edmonton Bookkeeping.
Um, so what are the common mistakes on handling intercompany bank transfers?
Yeah, so bank transfers, again, it comes to deposit if, if it comes to an unknown account. Uh, normally it’s a personal account that the bookkeeper didn’t know that it was personal and they didn’t see that it was from the, the account of the intercompany or sorry, the holding company as well. Our pre, um, our, our first interaction is if it’s a transfer from a client. So you put it as a revenue, which you’re going to be tax on B’s under sales. Right. So that’s one big mistakes. Uh, a more common mistakes, uh, happen. Um, w during bookkeeping with regards to the intercompany, um, transactions. Um, another thing is the expenses. Cause sometimes you will have expenses that the operating company will be paying for, but it’s actually the holding company’s expenses. You don’t want to expense that at the operating company. Um, you want to make sure that that gets expensive in the holding company where it’s supposed to. So it’s, it’s one of those, um, errors too that you want to watch out for because if nobody expense that, then that’s a missed opportunity.
[inaudible] yeah, I think too sometimes like if there’s a, um, sort of around larger number that goes out of the operating company to the HoldCo, um, and we don’t realize that’s what it is. Sometimes the mistake that B can be made is that we think it’s a shareholder loan. So then again, your tax, your tax differently and um, you know, instead of that going to the, um, the operating company, it’s going to your shareholder loan. So like there’s lots of mistakes that can be made with the, Edmonton Bookkeeping. And sometimes they would, uh, for example, if you want to pay the shareholders, they would put the name in. But yeah, they don’t know that the, um, the, there was a sheriff structure that it should go through the local. So it’s, it’s one of those things where the shareholder would get tax personally because it was named to him and it was labeled to him directly as a person as opposed to going through the holding gophers. Yeah.
So should I try and match all transactions for both companies?
Yeah, absolutely. If you have a lot of intercompany transactions, it’s very important that you match it specially on a monthly basis. Um, because again, you want that to match all the time because the end of the op call, when they do the year end, they want to make sure, um, they, they want to look at that related company, um, related company transactions or related, uh, party accounts because that’s when they decide how much to declare for dividends to those corporation. And so if that’s wrong, then possibly, possibly you’re gonna end up paying more taxes for when you remove that from your hope coal. Because they, they put too much dividend to, uh, towards your whole goal. Um, or if you have a partner, uh, and the intercompany transaction is wrong, then it’s not, it’s not fair to the other person who has the, they error, the error.
Right. So, yeah, very important. Yeah. So how are the dividends treated if it’s issued to a Canadian corporation? So, um, if, if it’s issued to as a Canadian corporation, it’s tax free. So the flow as if the dividends are declared, the op co to the whole going, it’s usually tax free until you, until they, uh, issued the dividends from the whole core personally to you. So, um, and that’s another reason why you want to HoldCo is, um, that separate, um, layer of protection. Yeah. And, uh, another set of a mechanism to flow through the income from, uh, from the operating company through the holding company before it goes to your personal account. Yeah. Yeah. Um, so is it a separate filing for each of the corporations? Yeah, absolutely. So, uh, holding costs, et cetera, although it’s related, it’s still a separate entity from you and your corporation.
So it comes with another set of, um, depending on how it was registered, it’s gonna be, it’s gonna have a GST account, a separate payroll account. If you pay yourself through that, um, holding co holding company or you declared a salary from the holding company and of course it’s going to have its own, uh, corporate accounts, which is, uh, the corporate tax and provincial. Yeah. Yeah. And what benefits can I get from having a holding company? Um, I think we touched on it before again, uh, first of all, the first, uh, the extra layer of protection. Second thing is that since you have a different urine from the operating company, um, it gives you a little bit of a mechanism to delay paying yourself, right? So if you have, um, if you find that you have a, um, an overdrawn shareholder account and, um, uh, they have to issue a huge set of dividends to the ho to your holding company, then it, um, it kind of gives you that extra number of days where you can put money to decrease that dividend to, uh, before you pay yourself or, um, altogether with Edmonton Bookkeeping!
Just keep that, um, that dividend into the corporation and not take money out from you personally. So, um, yeah, so it’s, uh, it’s, um, it’s a great advantage of delaying, um, your, uh, personal taxes depending on what dividends or salaries are issued from your opco or your whole goal. Yeah. Great. Yeah. So, um, I th I hope you guys find that informative. We didn’t go too into much detail to related party because we are, uh, focusing on small businesses and small transactions. Um, unfortunately, uh, intercompany transactions still happen with small businesses. So we just want to address the more common items that happens for those, um, for especially for Edmonton bookkeeping. Uh, if you do you find it, uh, informative, please click like and subscribe. If you have any ideas on what you guys want us to talk about. Um, please come in down below and we’ll see you guys next time on our next episode of always up to date.