Regardless the size of your business, often, as the owner, there aren’t enough hours in the day to cross everything off your list. But just as you need to ensure that sales are closed and orders fulfilled, you must be absolutely certain that your finances are accurately, diligently, and professionally managed.
The obvious and most pressing reason is for the financial health (and survival) of your business, which includes keeping you out of hot water with the CRA. Consulting tax experts before you file your taxes (ideally, at the start of your fiscal year) can make you more financially efficient, reduce your tax bill, and help you avoid the following tax mistakes business owners commonly make.
1. Improper Bookkeeping
One of the most egregious tax mistakes business owners make is not properly maintaining their books. Failing to maintain organized and accurate financial records can cause a cascade of negative consequences, such as:
With lax record- and bookkeeping practices, when tax time comes, you may not have an accurate record of all the eligible expenses and deductions your business is entitled to claim – resulting in a higher tax bill for no good reason.
When your records are disorganized, it’s unlikely that your financial statements and tax filings report accurate and reliable information to the CRA. Inaccurate reporting may result in penalties, interest charges, or an audit – which are often time-consuming, disruptive, and may result in additional taxes, penalties, or fines if inconsistencies or non-compliance are found.
Late Penalties and Interest Charges
Unprofessional bookkeeping practices can also lead to missed filing deadlines, resulting in penalties and interest charges imposed by the CRA. Late filing penalties can range from a percentage of the taxes owing to a fixed amount per day, depending on the type of tax return and the number of days past the deadline. Interest charges accrue on any outstanding tax amounts, including penalties, from the due date until the date of payment.
How to Avoid These Mistakes
To mitigate these issues, establish a systematic record-keeping process and proper bookkeeping practices from day one:
- Consider using accounting software to invoice customers, process payments, pay recurring expenses, track cash flow, and update your financial statements.
- Separate business and personal finances, keep all relevant receipts and documentation, and reconcile your accounts regularly.
- It’s also crucial to, even occasionally, seek the assistance of a professional bookkeeper or accountant to ensure accurate record-keeping, that you’re writing off business expenses optimally, and to help you navigate the complexities of CRA business tax reporting.
Remember, maintaining accurate and organized financial records is not only essential for complying with tax obligations but also for gaining valuable insights into your business’s financial performance and making informed decisions.
2. Misclassifying Employees and Independent Contractors
Improperly classifying workers as contractors (whether accidentally or to avoid tax obligations) when the CRA considers them employees openly invites their scrutiny.
The CRA investigates employee misclassification because it results in the following:
- Incorrect payroll tax withholding. Employees are subject to income tax deductions, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums, while independent contractors are responsible for their own tax obligations.
- The loss of employee benefits and protections. Aside from CPP and EI benefit contributions that support workers when they need them most, employees are entitled to other employment benefits such as statutory holidays, vacation pay, and employment standards protections that independent contractors aren’t.
Keep in mind that misclassified workers can file complaints or claims seeking a ruling from the CRA regarding their status and/or to pursue legal compensation for withheld entitlements.
If a CRA investigation or audit concludes that workers have been misclassified, they may reassess tax liabilities, impose penalties, and charge interest on any unpaid amounts.
3. Not Keeping Up with Tax Law Changes
Tax laws are constantly evolving, and it’s essential for you as a business owner to stay updated to ensure compliance and take advantage of available tax benefits.
Always stay informed by checking the CRA’s official website for updates on tax laws and regulations. But the importance of consulting a certified public accountant regarding changes to tax laws can’t be stressed enough.
Ignorance regarding changes in tax rates, deductions, or filing requirements can start a chain reaction of extra work, added stress, and the loss of so much valuable time.
4. Not Claiming ALL Eligible Expenses
One of the most significant missed opportunities for tax savings is overlooking business owner tax deductions, eligible expenses, and tax strategies. As a business owner, you must know ALL deductible expenses allowed by the CRA for your specific industry or business type.
Some commonly overlooked deductions include:
- Home office deductions
- Vehicle expenses
- Asset depreciation
- Professional development costs
It’s worth restating that you must keep accurate records and retain receipts to substantiate these deductions during an audit. Working with a tax professional on a tax strategy for your business can ensure that you identify every legal expense, credit, and deduction, like the $500,000 small business deduction, to maximize your tax savings.
5. Failing to Plan for Estimated Taxes
Many corporations and individuals, including business owners and self-employed individuals, are required to make quarterly instalment payments on their estimated taxes to avoid underpayment and/or late payment penalties.
Ignorance of the rules regarding instalment payments and failing to plan ahead, budget, or take advantage of available resources to avoid these mistakes are the usual suspects behind deficient instalment payments.
Get to know when you must pay in instalments, due dates, and the calculation and payment options for you as an individual and for your corporation. The CRA also provides calculation charts and step-by-step guides on how to accurately pay your tax instalments.
7. DIY vs. Hiring a Tax Professional
Attempting to handle complex tax matters on your own can be risky, especially if you lack expertise in legal jargon and tax regulations. Engaging a qualified tax professional provides peace of mind and helps you understand how to navigate the complexities of tax planning and compliance.
Moreover, on top of the multitude of creative solutions a tax professional can supply a business owner with a tax concern, a CPA can also provide deep financial analysis, forecasting, and insights on your business and industry, helping you make the right business decisions in your business’s unique circumstances.
How to Avoid Common Business Tax Return Mistakes
Penalties for tax return mistakes in Canada can get quite costly fairly quickly. In a nutshell, the best ways to avoid them include:
- Proper record- and bookkeeping,
- Staying informed about changes to tax regulations
- Ensuring that you are accurately and legally maximizing your deductions
- Proactively planning and budgeting for tax payments
- Getting professional guidance when needed
And while proactive tax management is key to minimizing wasted time and money and reducing tax liabilities, professional tax accounting insights and services are crucial for making financially sound, data-driven business decisions.