For tax season there are a number of things that a small business owner can do to avoid Canada Revenue Agency (CRA) penalties. Below are 10 tax tips that will help discussed by Dawn McGeachy (Director, Public Practice at CGA Canada ):
1. Don’t miss deadlines
Missed deadlines are particularly harmful to SMBs, Ms. McGeachy says.
For example, she notes, when owners of private incorporated businesses learn they have six months after their corporate year-end to file their return, they sometimes fail to realize that any tax owing still has to be paid within 90 days. Consequently, they get slapped with three months of costly interest on the amount owed when they do eventually file.
The same thing occurs with non-incorporated businesses, such as self-employed entrepreneurs who report on a calendar year-end and file a personal return. Tax returns for the self-employed must be filed by June 15, but some entrepreneurs don’t realize that any tax owing must be paid by April 30; therefore interest accrues on the amount payable for the 46 days in between, she says
2. Don’t miss credits
SMBs also often miss out on special available tax credits, says Paul Woolford, a tax partner with KPMG Enterprise in Toronto.
“We’ve got a very healthy research and development tax credit program in Canada,” he says. He cites as an example Ontario’s apprenticeship training tax credit, which can pay up to a $10,000 supplement for the wages of an apprentice in many construction, industrial and other related trades.
SMBs should also be alert to special research and development tax credits that might apply to their enterprise. For instance, businesses involved in the manufacturing, food or high-tech industries, among others, might be entitled to scientific research and experimental development (SR&ED) tax credits available federally, and also in some provinces or territories, Mr. Woolford says.
These credits can be quite substantive. For instance, the federal SR&ED tax credit for a private Canadian company is worth up to 35 per cent on eligible expenses, if the CRA agrees the expenses were incurred to advance knowledge toward the resolution of a significant problem affecting business or industry. Missing out on such potential savings can be a real wallop to the bottom line.
3. Don’t miss deductions
There are many deductions business owners should be on top of, ranging from accounting and legal fees to home-based business writeoffs and vehicle expenses.
Don’t forget capital asset deductions. Assets belonging to the business, such as computers, automobiles and furniture, may be depreciated at varying rates.
And remember special deductions. For example, computers and accompanying software purchased last year are eligible to be fully depreciated for tax purposes on your 2010 return.
But handle all deductions accurately if you don’t want to raise the ire of CRA. And if you aren’t organized, it’s easy to miss some.
4. Keep organized records
Accurate, detailed record-keeping all year-round is another must.
“When I incur any business expenses, they go right from my wallet to a binder, and then I enter them in a small business accounting software program. That way I have a record, so come tax season everything’s ready to go, and it’s not this big, scary burden. I don’t want to present my accountant with a whole bunch of loose receipts in a shoebox,” says professional organizer Michelle Panzlaff, sole proprietor of Tidy Tiger Solutions of New Westminster, B.C.
Nearly every accountant has a horror story about receiving a boxful of receipts from a client during tax season. Not only do those clients risk losing out on available credits and deductions, failure to keep accurate, or complete records can also be a sure-fire way to end up in trouble with the CRA, the experts say.
5. Avoid audit red flags
There are many ways SMBs can raise the red flag.
For instance, entrepreneurs often claim a pro-rata share of their personal vehicle expenses, such as fuel, maintenance and insurance, when that vehicle is also partially used for business purposes. They need to keep a log of all business-related trips, along with receipts incurred – even for something as seemingly mundane as a short jaunt to purchase office supplies.
Last year, the CRA introduced a simplified method of reporting, whereby some taxpayers might be able to track motor vehicle expenses for as little as three months of the calendar year, and extrapolate an amount for the full year based on a CRA formula. However, this estimate is only valid provided the distance travelled and business use of that vehicle is within 10 per cent of the figures for the corresponding three months in a previous year.
Experts warn, however, that people using their personal vehicle for work purposes often have a tendency to over-estimate the proportion of expenses related to business. In many cases they assume, incorrectly, that most of their travel must be for business purposes, but those guesses ultimately prove far off the mark.
That’s a key red flag for CRA, and one that could easily lead to an audit.
“CRA is watching for that, and have several ways of determining whether you have overestimated vehicle expenses,” Ms. McGeachy warns. For example, “one area where people are often confused is they believe travel to and from their place of work is permitted when in fact, it isn’t.”
Business entertainment and meal expenses represent another potential trigger for a CRA audit, especially since this is an area where business and personal expenses can easily be mixed. Furthermore, many entrepreneurs aren’t aware that only 50 per cent of eligible expenses are deductible for business purposes, so they overstate.
This, too, is a red flag for the tax department.
The key message, stress experts: Learn and follow the rules about what’s deductible and what’s not – and record, record, record. Don’t guess.
6. Watch your home claims
Tracking accurate home expenses also requires good judgment.
Entrepreneurs who run businesses out of their home need to pay particular attention to their deductions.
“You may be able to claim a proportion of expenses like utilities, insurance, rent or property taxes, among others, if you run a business exclusively out of your home,” says Bruce Ball, a national tax partner with BDO Canada LLP in Toronto.
“But just as important is making sure you have receipts for your expenses and an explanation for the rationale you use for allocating a portion of the costs to your home office.”
That’s particularly important if the CRA calls, because disorganization that means finding incomplete records or none at all can result in a loss of deductions the business should otherwise be entitled to, Mr. Ball says.
Another important tip related to home business expenses: When determining the proportion of your home used for business, consider whether you use business storage space outside of your main office, because some or all of that space might also factor into the calculation.
7. Don’t mix personal and business
Whenever possible, separate personal and business items, such as bank accounts or credit cards, for ease of administration and to take advantage of different rules.
For example, credit card interest accrued for business purposes is tax-deductible, whereas interest on personal items is not. Having separate cards would eliminate any confusion.
“I absolutely keep my business Visa and personal Visa separate. If I tried to cross the two, it would be a real nightmare to try and account for,” Ms. Panzlaff says.
Separate banking can help in an audit. “If you have an audit from the CRA, it’s going to help if you can show them that all your revenue and expenses went through the business account,” Mr. Ball says.
8. Paying family can bring rewards
When entrepreneurs split income with other family members who assist with the business and are in a lower tax bracket, this can significantly reduce the overall tax bill for the family unit.
“If you have family members that work in the business, you can pay them a salary for their time, Mr. Ball says.
But, he warns, “you have to make sure it’s reasonable, (so) document the time they worked.”
9. Salaries or dividends?
Another key decision with tax implications for entrepreneurs of incorporated businesses is whether to pay salaries or dividends to yourself and other employees. This has to be thought through very carefully, warn financial pros.
“A dividend is not an expense to the corporation, so it obviously doesn’t qualify as a deduction for tax purposes. It is also taxed in the recipient’s hands at a much lower rate than a salary would be,” explains Don Goodison, a partner with certified general accounting firm Kemp Harvey Goodison Hamilton Inc. in Burnaby, B.C.
“But the downside is it isn’t eligible for the Canada Pension Plan, nor is it counted as an eligible amount for registered retirement savings plan contributions.” Up to 18 per cent of the previous year’s earned income counts toward RRSP contributions. Salary counts as earned income; dividends do not.
10. Do it yourself or hire a pro?
Many entrepreneurs turn to tax software programs to complete their returns – but whether you should be calling in a pro to do the deed depends a lot on the complexity of your business, pros say.
Some entrepreneurs who run very simple, unincorporated businesses and are, therefore, filing their business return as part of their personal tax return might be able to prepare it themselves, either manually or with tax software assistance. But they should have a fairly solid knowledge of tax issues, pros say.
“You don’t get full tax advice from a piece of software,” Mr. Goodison warns.
Incorporated SMBs, on the other hand, should almost always seek professional help to deal with a much more complex corporate tax structure in Canada, the pros say.
“Unless you are a micro-entity – and by that I mean you are a single person with a very simple business structure, I would advocate seeking professional help,” Ms. McGeachy says.
“The only time I would recommend a do-it-yourself approach is when the business has basically no, or minimal assets, and minimal activity. But I wouldn’t recommend it for a small or medium business that is incorporated, just because of the complexities involved with filing a corporate tax return,” Mr. Goodison emphasizes.