Thinking too much about taxes

For most Canadians, tax time is in the spring, but for shop owners everywhere, the year end is at least as important. Most businesses use a fiscal year that matches the calendar year, which although convenient, means that some important business decisions need to happen in December. A major concern I see every year is an obsession many shop owners have with using depreciation rules to best advantage by purchasing major equipment according to the rules of the dreaded Canada Customs and Revenue Agency. I often see the same behaviour around the lease-versus-buy debate around equipment purchases. And in both cases, I often wonder, why? Nobody likes paying taxes, granted, but let’s keep them in perspective. I’ve seen shops that won’t lease because they like to use the relatively quick depreciation allowed for some (but not all-check the CCRA website) capital equipment. In doing so, they put a real dent in their cash flow, maybe to the point where payroll gets iffy and the jobber slips to net 60 or 90 days. They’ve saved on taxes, but at what cost? Of course, leasing has its own issues, but my point is this: you buy equipment to make your business more profitable. If it makes money, buy on return on investment, not on tax planning. Don’t need the equipment right away? Then buy it when it makes sense from a productivity perspective, but not just because of the tax advantage. ROI is the key. In general, the faster the return, the faster you should get into the technology, since a quick ROI suggests either a highly profitable service procedure or a low cost to buy in, a winner either way. A slower ROI may still make sense right now, especially if your operation is hobbled by worn or ineffective equipment. If extended cab dually pickups are a small part of your business, for example, it may seem like a poor ROI to invest in an upgrade hoist, but if you need to replace anyway, the extra capability gives you some future options. But would you struggle with a worn or broken lift until year-end because of your tax position? Probably not, even though the upgrade capability doesn’t show up on the bottom line immediately. On the other hand, just because a piece of equipment is fully depreciated doesn’t mean that it’s automatically ready for replacement. If it’s making money, and most importantly, can’t be readily replaced with a unit that enhances productivity or profitability, leave it alone and look elsewhere. There are many issues, but my basic point is that you buy equipment to make money, not reduce your tax burden. Paying a lot of taxes? Then rejoice, because that means you’re making money. Think profits first, and then talk to your accountant or tax lawyer.