We share some practices that will save some costly errors during tax filing season. Every taxpayer’s situation is unique and offers various opportunities for tax savings and right tax strategy, so this post is for your reference only.
Keep track of all your transactions
Start by storing all invoices receipts bank statements, deposit slips, etc. Store in a separate file all documentation related to the startup (incorporation, minutes book) as you might never know when Canada Revenue Agency will request documentation related to your business.
Most importantly failure to keep accurate or complete records can also be a sure-fire way to end up in trouble with the CRA and have some deductions disallowed.
Many small business owners overestimate expenses when using their personal vehicle for business purposes or business entertainment and meal expenses. A good way to avoid being flagged by CRA and thus avoiding an audit, is to keep a log of all business-related trips and other expenses.
We recommend startups to get an accountant to set up your books and teach you the basics of entering the transactions in accounting software. There are lots of options and solutions that can make your life easier by recording your receipts in your phone or have monthly financial statements.
Separate Personal and Business elements
Bank accounts and credit cards should be different. It will help you get better organized and will eliminate confusion for filing purposes. Interest paid in a business credit card is tax deductible, interest on personal items is not.
Don’t miss deadlines
If you keep organized and filing on time, this will help you keep compliant and less concerned and earn some deserved peace of mind.
The CRA gives you 6 months to file the corporation tax return. However, this is not the case is if you have a balance owing. Avoid paying costly interest on penalties. Payment is due 3 months after the year end.
If you are self-employed your tax return must be filed by June 15th. Some small business owners don’t know that any tax owing must be paid by April 30, therefore paying costly interest on the amount owed for 45 days.
Salaries or Dividends?
How should you pay yourself? Do you have questions, about what is most convenient to you, contact your professional accountant for advice.
Tax Credits and Deductions
There are many deductions you can claim; accounting and legal fees, home based business expenses, vehicle expenses, capital assets (computers, software and furniture) can be depreciated at different rates. These potential credits can be significant to your bottom line.
Steer Clear of Tax avoidance
Most tax avoidance cases involve withdrawing funds without withholding tax. For CRA your net withdrawals from your corporation are taxable. The income you withdraw has to be declared in your personal tax return. An accurate calculation of what you withdrew less what you invested is key. So, if you withdraw funds for payroll purposes (subject to withholding tax) this transaction has to be properly recorded.
Should you hire an accountant?
The small business owner (unincorporated business) that has minimal or no assets and minimal activity (up to 10 invoices a year) could certainly manage their accounting and taxing needs.
The incorporated business on the other hand faces a complex corporate tax structure. If this your case, we recommend you hire an accountant as it will save you headaches in the long run.
Please check now steps to get ready for this tax season.