It’s that time of year again – tax season! As a small business owner in Canada, you may feel overwhelmed by the thought of preparing and filing your business tax return. The process can be complex and time-consuming, and mistakes can be costly.
But fear not! With some knowledge and preparation, you can avoid some of the most common mistakes that small business owners make when filing their tax returns. In this article, we’ll walk you through some common mistakes and provide tips for avoiding them.
Failing to keep accurate records
One of the most common mistakes small business owners make when filing their tax returns is failing to keep accurate records. Good record-keeping is essential to ensuring that your tax return is accurate, complete, and filed on time. Accurate records can also help you identify opportunities to reduce tax liability and avoid penalties and fines for non-compliance.
Record-keeping includes keeping track of all financial transactions related to your business, including income, expenses, and assets. It’s important to keep receipts, invoices, and other documentation to support your claims on your tax return. Without accurate records, it can be difficult to justify your deductions and credits if you are audited by the Canada Revenue Agency (CRA).
Tips for keeping accurate records
To avoid the mistake of failing to keep accurate records, here are some tips to help you maintain good record-keeping practices:
- Use accounting software: Invest in accounting software that can help you keep track of your income and expenses. Canadian small business owners have many software options available, including QuickBooks, Xero, Wave, and FreshBooks.
- Separate personal and business expenses: Keep your personal and business expenses separate by using a separate bank account or credit card for your business. This makes it easier to track and report your business expenses accurately.
- Keep all receipts and invoices: Keep all receipts and invoices for expenses related to your business, including travel, meals, office supplies, and equipment. These receipts serve as evidence of your business expenses and can be used to support your tax deductions and credits. Accounting software like QBO and Xero, employ Apps that make snapping photos of receipts extremely easy, with the receipt being logged directly into your transaction within the Accounting Software.
- Document all transactions: Document all financial transactions related to your business, including sales and purchases. Keep a record of your invoices, receipts, and other documentation to support your claims on your tax return.
- Regularly reconcile your accounts: Regularly reconcile your bank and credit card accounts to ensure that your records match your transactions. This helps you identify any discrepancies and ensure that your records are accurate.
Another common mistake small business owners make when filing their tax returns is misclassifying workers as either employees or contractors. The difference between these classifications is essential because it affects how you report and withhold taxes for each type of worker.
Employees are individuals who work for you regularly and are under your direction and control. You are required to deduct and remit Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and income tax from their paycheques. Additionally, you are required to provide your employees with a T4 slip at the end of the year, which reports their earnings and the amounts you deducted for CPP, EI, and income tax.
On the other hand, contractors work for you on a project-by-project basis and have more control over how they complete the work. You are not required to deduct and remit CPP contributions, EI premiums, or income tax from their payments. Instead, you are required to provide them with a T4A slip at the end of the year, which reports the payments you made to them.
Consequences of misclassification
Misclassifying workers can have serious consequences. If you misclassify an employee as a contractor, you could be liable for CPP, EI contributions, and interest and penalties. You could also face fines and penalties for failing to deduct and remit the correct CPP, EI, and income tax amounts.
How to determine worker classification
To avoid the mistake of misclassifying workers, you should determine their classification based on the nature of their work and the degree of control you have over how they complete the work.
The CRA uses a number of factors to determine worker classification, including:
- Control: Do you have the right to control the worker’s activities, or do they have more control over how they complete the work?
- Integration: Is the worker an integral part of your business, or are they performing a specialized service for you?
- Tools and equipment: Who provides the tools and equipment necessary to complete the work?
- Subcontracting: Can the worker subcontract the work to someone else, or are they required to do the work themselves?
- Risk of loss: Does the worker assume any risk of loss, or are they guaranteed payment for their work?
Missing deadlines or filing incomplete returns
Failing to meet important deadlines when filing your Canadian business tax return is another common mistake that small business owners make. The CRA has specific deadlines for filing various tax forms, including income tax returns and GST/HST returns.
For Canadian small business owners with a December 31st year-end, the deadline for filing the tax return is typically June 15th of the following year. However, any balance owing is still due on or before April 30th, so interest and penalties will apply if you don’t pay by that date. If you have employees, you’ll also need to file your T4 slips and summary by the end of February each year.
Consequences of missing deadlines
Missing deadlines or filing incomplete returns can have serious consequences. The CRA may charge penalties and interest for late or incomplete filings, which can add up quickly. In some cases, the CRA may also conduct an audit of your business if they suspect non-compliance, which can be time-consuming and costly.
Tips for avoiding missed deadlines
To avoid the mistake of missing deadlines or filing incomplete returns, here are some tips to help you stay on top of your tax obligations:
- Mark essential deadlines on your calendar: Keep track of important deadlines by marking them on your calendar or setting reminders in your phone or computer.
- File early: Don’t wait until the last minute to file your tax return. Filing early can help you avoid the rush and ensure that you have enough time to complete and file your return accurately.
- Keep up-to-date with changes in tax laws: Stay informed about changes in tax laws that may affect your business. Subscribe to the CRA’s email notifications or consult with a tax professional to ensure that you’re up-to-date.
- Use electronic filing: Consider using electronic filing options, such as the CRA’s My Business Account or tax preparation software, to make the process easier and faster. Strata-G employs WagePoint, Gusto and QBO Payroll, all of which allow businesses to automate the source deduction remittance function with the appropriate tax authority.
- Seek professional help: If you’re unsure about filing deadlines or how to complete your tax return accurately, seek professional help. A tax professional can provide guidance and support to help you avoid mistakes and stay compliant.
Forgetting to claim deductions and credits
One of the costliest mistakes that small business owners make when filing their Canadian tax return is forgetting to claim all the deductions and credits they’re entitled to. Deductions and credits can help reduce your tax liability and save you money, so it’s crucial to ensure you’re claiming everything you’re eligible for.
Some common deductions and credits for Canadian small businesses include:
- Home office expenses
- Vehicle expenses
- Business-use-of-home expenses
- Business meals and entertainment
- Advertising and promotion expenses
- Rent and utilities
- Employee salaries and benefits
- Capital cost allowance (CCA)
- Scientific Research and Experimental Development (SR&ED) tax credit
Tips for maximizing deductions and credits
To avoid the mistake of forgetting to claim deductions and credits, here are some tips to help you maximize your tax savings:
- Keep accurate records: Keep accurate records of all your business expenses and revenue throughout the year. This will make it easier to identify which deductions and credits you’re eligible for when filing your tax return.
- Work with a tax professional: Consider working with a tax professional who can help you identify all the deductions and credits you’re eligible for and ensure that you’re claiming them correctly.
- Keep up-to-date with changes in tax laws: Stay informed about changes in tax laws that may affect your business. New deductions and credits may become available, or existing ones may be changed or eliminated.
- Consider incorporating your business: Depending on your business structure, incorporating your business may provide additional opportunities for deductions and credits.
Don’t forget about carry-forwards: Some deductions and credits can be carried forward to future years if you can’t use them in the current year. Be sure to keep track of any carry-forwards and apply them in future years.
Not seeking professional help when needed.
Small business owners may also make the mistake of not seeking professional help when they need it. While it’s essential to be self-sufficient and manage your own finances, there may come a time when you need assistance from a tax professional. Here are some instances when you may want to seek professional help:
- You’re unsure about how to classify workers as employees or contractors.
- You’ve experienced a significant change in your business structure, such as incorporating or selling a portion of your business.
- You’re facing a tax audit or dispute with the CRA.
- You’re having difficulty understanding complex tax laws or forms
Benefits of working with a tax professional
Working with a tax professional can offer numerous benefits to small business owners. Here are some of the advantages of seeking professional help:
- Expert advice: Tax professionals are trained to understand complex tax laws and forms and can provide expert advice on minimizing your tax liability and staying compliant.
- Time savings: Tax preparation can be time-consuming, and a tax professional can take the burden off your shoulders by handling the process for you.
- Peace of mind: By working with a tax professional, you can have confidence that your tax return is accurate, complete, and compliant with all applicable laws and regulations.
- Potential cost savings: Tax professionals can help you identify deductions and credits you may have missed, potentially saving you money on your tax bill.
At Strata-G Tax, we offer expert tax services to small business owners across Canada. Our team of experienced professionals can help you navigate the complex world of tax compliance, ensuring that your tax return is accurate and complete. Contact us today to learn more about our services and how we can help your business thrive.
If you’re ready to take your business to the next level, contact Strata-G Tax today to learn how we can help you stay compliant, minimize your tax liability, and achieve your financial goals.