Guest bio David Barnett is a three-time best-selling author, consultant and business coach who has been working with small-business owners for more than 20 years. For the past 10 years, he has been helping people buy and sell businesses. David works directly with clients and produces online education products to teach aspects of small business purchase and sale transactions and local investing.
“(As one progresses in doing business) The deals keep getting bigger and we need these little ones to teach us not to make mistakes when we get into the big ones.”
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Worst investment ever Background on value-added taxes in Canada David was approached by an entrepreneur he knew quite well who had run several businesses. The latter was building a new business. In Canada, they have a value-added tax called the HST. When a business buys goods it pays HST, when its sells goods or services, it collects the HST, and then business then sends the difference to the government. So when building a business, the founders have to lay out all kinds of money. All of the contractors and suppliers are charging new tax, but the founder has yet to make a sale. So a business pays paying out money in taxes, and it is not returning. Usually when a new businesses is founded it gets a check from the government because when it files a tax return, it has overpaid sales taxes versus what it has collected, and David had been through this many times.
Deal done to pay partner’s advance and win off the government rebate In the first filing for a business, the business should get a check back from the government. After that, if it is doing well, it sends money to the government. David’s partner started to run short of cash in building the business because there were unexpected events and he had extra expenses. He offered to sell David and his investor group his HST return at a discount. So the idea was that the group would give the partner an advance and then, within three months, this money would come back to the group because the return would come in and the group would be paid. So the group proceeded.
Once business was operating there was more to learn about tax liability David then started to learn more about how the government processes HST. It turned out that when the figure is high enough, the government do not blindly issue checks, it looks at the company more closely. So a few months went by and the government wanted the partner to submit some of those bigger invoices. So he did and when it found out the nature of his business, that there was a lot of cash involved, it required him to do anti-money laundering training, so the partner would become aware of current rules and laws. By this time, it was month five, and because there was so much cash in the business, he had to go through the training. So the group has gone from the business being built and all the money was going out to active operations. But the government withheld the money due to the business because it wanted him to send in more information. It wouldn’t release the funds because he had to do the money laundering training.
Business had failed to send in payroll tax, which killed the investment’s chances Sadly, the business’ sales failed to come in as fast as was forecast, and another problem was that the partner had failed to send in source deductions – There were no income tax deducted from employee paychecks. By the time month six had come along, and the tax office was ready to return the HST, it didn’t, because it did some final checks and found that the business actually owed the tax offi