Many businesses (this one included) are funded on a loan that the owner(s) and founder(s) of the company take out personally, perhaps a second mortgage or a secured line of credit.

In Canada, the interest paid on loans and mortgages is tax deductible if that loan money is used for investment.  This isn’t just for mutual funds - it applies to investing in your own business as well!

As an owner of a Canadian corporation, there are two ways for you to provide this loan money to your business which make your interest tax-deductible:

1. Buying shares of the business (investing in it)
2. For corporations, lending money to the business as a shareholder loan plus the interest you pay on that part of the loan

In the first case, the interest is deducted on your personal tax return.   In the second case the interest is deducted on the business’ tax return because the interest payments you receive as income cancel out the tax deduction from the interest you pay, whereas the business reports this as an interest expense.

In our business, developing online accounting software, most of our loan goes to paying our own living expenses, which are not an “investment” by the Canada Revenue Agency’s definition.  For that reason we have to track the amount of our shareholder loan and periodically charge the business interest if the loan balance is positive in order to make that interest tax deductible.

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Accountants and accounting software vendors (like us) generally agree that accounting, and accounting software, is important for the survival and success of a business.  But why?  And when?  And how many resources should you spend on accounting, based on the size of your business?

It occurred to me that the importance and use of accounting software varies depending on the type of business you are in, and what stage in its development.  Here are a couple of examples:

Start-Ups, Before Making Money

This is where our business is - we have a business, but we’re not really making money.  How does our accounting software help us?

• By tracking our expenses, we can claim tax deductions for what little income we have
• We can monitor our expenses closely to make sure our burn rate isn’t going out of control
• We can compare our project plan to our runway to make sure we have enough money to get to profit
• If we want to apply for financing, loans, or government programs, we’ll be able to produce standard financial statements
• By tracking our GST paid on expenses, we can claim a refundable GST tax credit

Companies that are Making Money

In addition to the above, business that are making money need good financial records for other purposes:

• Tracking Income and Expenses is needed to calculate and pay income taxes
• Businesses making sales on credit need to make sure that they have sufficient cash to provide the products and services sold
• Tracking metrics becomes important for business decision making; questions like “What products and services are the most profitable?” and “How do we keep our best clients?” lead to “What product lines should we expand on?”, “What can we do about our bad customers?”, and “Which customers should we reward for their loyalty?’

Companies For Sale, Public Companies

It’s common for a business owner who has reached some level of success to want to sell the business and start another - or retire.  They can either sell it to a buyer privately, or to the public in an IPO.

• Investors and lenders will want to see standard financial statements
• The public stock markets have strict record-keeping requirements

Closing Remarks

Now that you’ve seen some examples of how accounting software is beneficial, I hope you’ll consider trying our online accounting software.  It’s affordable and easy to use, and you can use it from the beach sipping a tropical cocktail.

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