How to establish an effective franchisee network
Expanding your business through franchising requires...
Understanding financial reporting requirements as a franchisee
Franchisees are business owners who are fully responsible for the day-to-day running of their business. For this reason, they are required to maintain strict financial records and report them transparently throughout the year.
There are many people and organizations that will be interested in your financial information, including your franchisor, any lenders or investors who have supported your startup costs, and the Canada Revenue Agency (CRA). The CRA has a special interest in your financial information to ensure that you pay appropriate taxes.
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What taxes should you pay?
Canada's multi-layered tax system can make financial recording more complicated. Unless you are a financial whiz with a deep understanding of the requirements, it is generally recommended that you enlist the services of a business advisor to ensure that you get off on the right foot.
It is also helpful to hire an accountant to handle your financial affairs because they can ensure that your data is recorded and handled in accordance with a specific accounting framework, minimizing the risk of errors and penalties.
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Taxes that you will need to pay will include corporate tax, GST/HST taxes, and payroll tax.
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- Corporate tax
Corporate tax is charged on a corporation's taxable income, and your franchisor or a dedicated franchise accountant will explain to you how you are affected based on the type, size and turnover of your particular franchise business.
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- GST/HST
This value-added tax can allow franchisees to claim input tax credits where tax is paid on purchases that are necessary for the running of their business. A franchise accountant will advise you on whether you should apply to become GST/HST registered before you join the franchise, noting that the majority of taxable costs incurred will be during the start-up phase.
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- Payroll taxes
If you employ anyone, you are responsible for paying payroll taxes and for remitting the portion of the payroll that is withheld from your employees to the CRA. You must register with the CRA as an employer and make regular payments for any amounts that you owe.
At the end of the calendar year, you must report the total income and deductions applicable to each of your employees on T4 forms.
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Reporting your financial position
Different financial bodies will require different information from you, depending on your individual circumstances and the type of business you are operating. Lenders such as banks and investors may require your financial statements to ensure that your business remains viable and that they will receive the promised return on their investment. You should submit NTR financial statements prepared by your accountant annually, unless you are specifically asked for a different document set.
If you are audited, an external financial specialist will seek assurance that your financial submissions are accurate and complete by gathering and reviewing evidence and corroborating it against control tests.
In short, financial reporting is an essential but complex process, but it is one that you do not need to shoulder entirely by yourself. Lean on experienced professionals, and they will keep you compliant, provide tailored advice, and help you maximize your business.
