A better chart of accounts

Originally published in OVMA Focus Magazine March/April 2025

BY GREG TONER AND EMILY STEEVES

One of my friends, Peter, is an engineer, and he’s very detailed-oriented. Recently, he was shopping for a new car and put together one of the largest spreadsheets that I’ve ever seen. He used it to compare all the crossover SUVs that he and his wife were considering, evaluating more than 50 different factors for each car. It was impressive, but it was also easy to feel overwhelmed when looking at it, and it was hard for anyone but him to understand.

Peter’s spreadsheet is a little like a profit and loss statement assembled using the AAHA/VMG Chart of Accounts. Just as Peter’s spreadsheet has an overwhelming number of rows, the AAHA/VMG Chart of Accounts has an overwhelming (and arguably unnecessary) number of accounts, and an excessive level of granularity. While the chart is intended to cover a wide array of transactions and financial categories, the reality is that many veterinary practices find it unnecessarily complicated, creating confusion and inefficiencies in day-to-day financial management.

With so many accounts, consistency both within a practice and across practices is challenging, as revenue types may not be consistently categorized, making monthover-month and year-over-year comparisons difficult.

Overwhelming number of accounts

One of the most significant issues with the AAHA/VMG Chart of Accounts is the sheer number of accounts it contains. At first glance, the chart seems comprehensive and well organized, but when it’s put into practice, the number of categories can be overwhelming. For a typical veterinary practice, navigating many accounts can be cumbersome and time-consuming, as it forces business owners, bookkeepers and accountants to deal with excessive subcategories for relatively simple transactions.

While it’s useful to track major categories of expenses, the extreme level of granularity isn’t necessary for all practices. A small practice will find it more effective to group related expenses into broader categories without the need to separately account for every individual item. This high level of detail leads to increased administrative work, especially when some of these subcategories may only involve a handful of transactions over the course of a year (or none for the average practice in Ontario: How many have an MRI on site?). Additionally, the AHHA/VMG Chart of Accounts doesn’t mirror the system for categorization that the main veterinary supply distribution providers use, further creating additional administrative processes required to reflect the granularity in the AHHA/VMG Chart of Accounts.

Categories such as labour costs often demand intricate breakdowns of different types of staff compensation into 19 different accounts for compensation and five different categories for employee benefits. While these distinctions may be useful for larger practices with numerous employees, smaller practices may find that tracking every aspect of labour costs in such detail is excessive.

Instead, a more streamlined system could give practice owners the flexibility to track major categories without becoming bogged down by excessive detail that doesn’t add significant value to the overall financial picture.

Consistent classification is a challenge and leads to poor quality data for analysis and decision making.

Increased risk of error and inaccuracy

The high level of detail in the AAHA/VMG Chart of Accounts, while theoretically meant to provide a thorough financial picture, can increase the risk of errors and inaccuracies in bookkeeping. When there are so many accounts to manage, it becomes easier for mistakes to happen and expenses to be applied to the wrong accounts, especially if staff members aren’t trained to categorize each transaction correctly. Furthermore, the time spent maintaining many accounts diverts attention from more strategic financial management tasks.

For instance, a bookkeeper might inadvertently record a supply purchase under the wrong subaccount or forget to parse out the different segments of an expense, especially if they’re dealing with hundreds of accounts in the chart. As the number of accounts increases, so does the complexity of maintaining and reconciling them. This administrative overhead can be a significant drain on resources, particularly for smaller practices that cannot afford to dedicate substantial time or personnel to bookkeeping. For practices using third-party bookkeeping and accounting, the substantial level of additional adjustments, and admin time required to comply with the AHHA/VMG Chart of Accounts results in higher bookkeeping and accounting costs.

Inefficiencies in financial reporting

Why do practices maintain accounting records? The base use is to support sales tax and income tax filings. These two filings need very little detail and generally result in many of the AAHA/VMG accounts being rolled up to fit into the limited fields for reporting income and expenses. Even the simplest chart of accounts will support sales tax and income tax filings for Canadian practices.

The second major reason a practice maintains accounting records is to track and optimize performance. Tracking and optimizing performance can take various forms based on a practice’s lifecycle, but at any stage, a practice needs consistently categorized expenses and timely information.

The number of accounts in the AAHA/VMG Chart of Accounts makes bookkeeping a more time-consuming process and increases the risk of incorrect or inconsistent account classification. It doesn’t work for most owner-managed veterinary practices, as it forces them to dedicate more resources to bookkeeping that could be diverted elsewhere to help grow their practice. Even with those additional resources, it increases the risk that the records produced aren’t necessarily comparable to last month’s or last year’s.

These issues are what led to the development of the OVMA/ VetCPA Chart of Accounts, which balances detail and unnecessary complexity and is suitable for a privately owned practice. The goal is to build a system that allows practices to generate monthly accounting records quickly and efficiently, with limited chances for inconsistencies month-overmonth or year-over-year, so the records can be reliably used to highlight opportunities and threats in a practice so they can be managed appropriately.

A limited chart of accounts also increases the reliability of industry-wide reporting, such as the OVMA Economic Survey. Peter’s spreadsheet was useful for him, but the funny thing was that all the crossover SUVs he was considering had roughly the same warranty, horsepower, cargo volume, seating space, features and reviews, and were priced within $5,000 of each other. He ended up picking a model with a dealership that was closest to his home. Through the process, he got caught up in the overwhelming amount of details, and it wasn’t until the last minute that he realized the most important factor for him, assuming the other factors were relatively even, was that the dealership was close by for services.

You can find the OVMA/VetCPA chart of accounts HERE.

Greg Toner, CPA, CA, TEP, CLU, is principal at VetCPA.

Emily Steeves is the bookkeeping manager at VetCPA.

Reprinted from the Ontario Veterinary Medical Association’s Focus magazine www.ovma.org

Tax instalments

Originally published in OVMA Focus Magazine January/February 2025

BY GREG TONER

Last year, I went to a corn maze with my daughter. I stumbled along for a few minutes and was thoroughly lost. Everywhere I turned, there was another dead end. I felt like I couldn’t get ahead, and my daughter was providing less than helpful suggestions.

For many Canadians, managing taxes can feel like navigating a maze of rules and deadlines. One area that often confuses taxpayers is the concept of tax instalments. Let’s break down what tax instalments are, the process for paying them, and some common misunderstandings that can create unnecessary complications.

Tax instalments are essentially prepayments of your estimated tax liability, allowing you to pay in smaller increments rather than in one large sum at the end of the year. This system, overseen by the Canada Revenue Agency (CRA), is especially useful for individuals with income that isn’t subject to regular payroll deductions, such as self-employed individuals, business owners or those with significant investment income. By making these scheduled payments, taxpayers can budget for their tax obligations more effectively, reducing the stress of a large annual payment and ensuring compliance with the CRA.

If you anticipate owing more than a certain threshold—usually $3,000 in most provinces—the CRA may require you to make instalments. This threshold is lower in Quebec, set at $1,800.

The frequency and amount of instalments depend on each taxpayer’s unique situation, including income stability and past tax liabilities. Instalments are typically due on a quarterly basis. However, individuals with fluctuating income may find it helpful to adjust their payments based on changes in income, helping to avoid overpayment or underpayment. The CRA provides tools to assist taxpayers in calculating their instalment amounts, simplifying the process of staying current with tax obligations.

Why are tax instalments necessary?

The tax instalment system serves as a fair and organized way to collect taxes on income that doesn’t have automatic payroll deductions. Regular contributions help fund public services and programs throughout the year, rather than waiting for a large lumpsum payment at tax time.

Failing to keep up with instalments can result in interest charges and penalties from the CRA, which aims to keep taxpayers current and compliant with their tax obligations. Not only can missing payments create unexpected financial stress, but falling behind on instalments may also impact a taxpayer’s liability in subsequent years. Staying on top of tax payments throughout the year can prevent a cycle of financial uncertainty.

How to determine your tax instalment amount

The CRA provides three primary methods to determine your tax instalment amount:

1. Prior year’s tax method: if you owed more than $3,000 on last year’s tax return (or $1,800 in Quebec), the CRA generally expects you to make instalments based on this amount.

2. Current year’s estimate: if you expect your income to change significantly, you can calculate an estimate for your current year’s tax and base your instalments on this projected figure.

3. Average of previous years: some individuals prefer to use an average of the past few years’ tax obligations to determine instalments, which can be especially useful for taxpayers with income that fluctuates year-to-year.

The CRA offers multiple options to make instalment payments. These include online banking, direct transfer, pre-authorized debit and mailing a cheque. Many people prefer online payments, as they allow easy tracking of due dates and instant confirmation, ensuring payments are received on time.

It’s wise to keep thorough records of each instalment payment. This not only assists in reconciling taxes at the end of the year, but it also provides an audit trail in the unlikely event of a CRA discrepancy.

Common misconceptions about tax instalments

There are several misconceptions around tax instalments that can lead to non-compliance. Let’s clarify a few of these:

MYTH | INSTALMENTS ARE OPTIONAL

Some individuals mistakenly believe that they can choose to skip instalments if they think they’ll owe little or no tax by year-end. However, once the CRA requires instalments based on your prior year’s taxes, skipping these can result in interest charges.

MYTH | INSTALMENTS ARE THE SAME AS ANNUAL TAX RETURNS

Another common misconception is confusing instalments with the annual tax return. While instalments are periodic payments toward your total tax liability, the annual tax return is a comprehensive filing of income, deductions and final tax obligations. Instalments aren’t a substitute for filing your annual return, nor does the final tax return eliminate the need to make instalments if the CRA has specified them.

Failing to make required tax instalments can lead to interest from the CRA. Unpaid instalments accrue interest based on the CRA’s current interest rates, compounding the debt and creating additional financial strain. While missing a single instalment payment might seem minor, repeated non-payment can escalate into serious tax problems, including collection actions and further penalties. Staying compliant with instalment payments is the best way to avoid these consequences.

Tips for managing tax instalments efficiently

One of the most effective strategies for managing tax instalments is proactive planning. Setting reminders or calendar alerts for instalment due dates can help ensure payments are timely. Additionally, you might consider setting up a separate savings account for tax purposes. Contributing regularly to this account can make it easier to manage instalments without disrupting other financial goals.

For those who find tax instalments overwhelming, working with a tax professional can make a significant difference. Tax advisors and accountants are skilled in calculating instalment amounts, advising on adjustments based on changes in income and ensuring that clients meet all CRA requirements. Investing in professional guidance can often save time, reduce anxiety and help avoid costly mistakes, particularly in complex financial situations.

Understanding the landscape is essential. With a map of a corn maze, it’s no big deal. Similarly, understanding what instalments are and why they’re due makes them far easier to understand. If you’re not sure whether your instalments make sense, talk to your accountant for help.

And if you’re wondering, we did eventually make it out of the corn maze.

Greg Toner, CPA, CA, TEP, CLU, is principal at VetCPA.

Reprinted from the Ontario Veterinary Medical Association’s Focus magazine www.ovma.org

The VetCPA / OVMA Chart of Accounts

We’ve been working closely iwth the OVMA over the last few years to tailor a chart of accounts for an owner-managed veterinary clinic in Canada. A lot of the other standard options are overly granular in a way that is impractical to implement for an owner-managed practice. We’ve aimed to keep this as lean as possible. If you have any comments, please email Greg at greg@vetcpa.ca.

Our Chart of Accounts is available here.

Secure your practice’s future with an Employee Ownership Trust

Originally published in OVMA Focus Magazine September/October 2024

BY WILLIAM HILLOCK

Thinking back, university seemed like an endless parade of group work. Some group projects were more enjoyable than others, specifically the ones where students could choose their own group. Having the right people involved and knowing what each of us brought to the table made the project more enjoyable and often resulted in better grades.

Employee Ownership Trusts (EOT) could be thought of as a modern-day group project. An EOT is a specialized form of employee ownership, where a trust holds the shares of a company on behalf of its employees, ensuring they collectively benefit from the business’ success. An EOT provides veterinarians with a strategic option for succession planning that fosters a unified approach to practice ownership. In 2023, the federal government introduced new EOT rules, and, be aware, there are a few additional considerations for veterinarians to satisfy the regulations set out by the College of Veterinarians of Ontario.

For veterinarians contemplating retirement or transitioning ownership, an EOT offers a structured mechanism that differs from a traditional sale to an external buyer. Instead of selling to outsiders, practice owners can sell their shares to the trust, which is then held collectively for the benefit of all employees to share in the profits of the practice. This model not only facilitates a tax-efficient sale and smooth transition of ownership to the right people, but it also preserves the practice’s culture, values and commitment to high-quality pet care.

At a high level, implementing an EOT involves establishing a trust to acquire the shares of the qualifying business. A trust isn’t a legal entity, although it’s treated as such for Canadian tax purposes. A “trust” is simply the word used to describe the relationship created when property is transferred by one person (the “settlor”) to another (the “trustee”) to hold for the benefit of specified persons or a class of persons (the “beneficiaries”). The share purchase can be funded through a combination of internal financing mechanisms, bank loans or future profits.

As the trust acquires ownership, each team member becomes a beneficiary of that trust, aligning everyone’s interests toward the long-term success of the practice. This inclusive ownership structure not only empowers employees, but it also strengthens their dedication and engagement, fostering a culture of shared responsibility and pride in the practice’s achievements.

From a financial standpoint, an EOT can offer significant benefits to both the practice and its employees. The structure can provide tax advantages such as:

• The first $10 million in capital gains realized by the vendor would be tax-exempt for the 2024 to 2026 tax years.

• Ten years (instead of five) to claim the capital gains reserve and defer the tax resulting from a qualifying sale.

• Qualifying business can lend funds to an EOT to purchase shares with a repayment period of up to 15 years (instead of one year).

• Exemptions from the deemed interest on shareholder loans and 21-year deemed trust disposition rules.

An EOT also helps to ensure stability and continuity in operations. This financial security enables practices to reinvest in facilities, equipment and professional development, ultimately enhancing service delivery and client satisfaction.

Employee Ownership Trusts represent a forward-thinking approach to practice management and succession planning for veterinarians. An EOT not only secures the future of the practice, but it also promotes a collaborative work environment where every team member contributes to the practice’s growth and prosperity. By sharing ownership, veterinarians, technicians and support staff are incentivized to work together toward common goals, such as improving pet outcomes and expanding community outreach.

This model upholds a practice’s core values and standards of care, and it ensures that veterinary professionals can continue to serve their communities with dedication and passion, embodying the ethos of “we’re all in this together” in every aspect of practice ownership and management.

William Hillock, MAcc, CPA, CA, is director of tax compliance at VetCPA.

Reprinted from the Ontario Veterinary Medical Association’s Focus magazine www.ovma.org