Tax time can be a headache for many small business owners, mainly because they have let their accounting slide over the year. It is important to set up a system for tracking information and to update it during the year rather than leaving everything to the last minute and worrying about it. Another solution is to hire a bookkeeping company such as NumberCrunchers® to do the work for you.
Business owners need to go through their books regularly at least monthly or quarterly, so that they understand their yearly earnings position, key revenue and expense trends, and to make sure that they are putting enough away for tax time.
Here are Some Expenses that can Cause Problems at Tax Time:
Meals and Entertainment
Many people throw a bunch of receipts into a shoebox or wait until tax time to see what receipts they have, and these can take a long time to find and sort. Expenses paid for with cash or a personal credit card can be particularly difficult. You should always write the name of the customer and other details on the back of the receipt. Ideally, business owners should use a separate credit-card account. Many people mix their personal and business expenses together not realising that in Canada the onus is on the business owner to prove that the transactions are justifiable business expenses.
Business use of Vehicles
To prove the business use of your vehicle for the CRA it is highly recommended that you keep a mileage log, however very few people do so. Should the CRA ever requests proof of the business use of your vehicle you will be able to provide it. Business owners should also think twice about designating a vehicle as a company car if you use it for personal use as well, sometimes it is better to charge the company for mileage which becomes tax free income for you and an expense for the company.
Home Business Expenses
The Income Tax Act does not give us firm, hard rules and explanations for claiming home business expenses, but there are two overriding principles. One is, did you incur the cost in order to earn income, and two, is it reasonable under the circumstances? For example, extensive maintenance in your backyard, if it has nothing to do with your home office, may not pass the reasonability test. But maintenance in your front yard, particularly if you have clients regularly coming to your home office, may be seen as being reasonable. Another test for home office is if you actually do see clients at your home office, you want to answer yes whenever this question is asked.
GST and HST
If you are registered for GST, then you need to record the GST on an expense so that it can be separated out from GST applied to company sales. Some GST will be reported for income tax purposes and some will be reported for GST purposes. Many clients especially those who do their own bookkeeping turn up at their accountant’s office with just a list of their deductible expenses where the GST has not been separated out. This can be challenging and time consuming for the accountant to figure out, and you are going to pay for his time. So, it is better that you record GST correctly throughout the year to save time and money.
Some business owners and self-employed people can be confused about when to pay their GST. The deadline to file taxes is June 15, but the deadline to pay GST is April 30, so they are sometimes surprised that they are charged interest.
Another big mistake that company owners, especially those first starting out, make is to use GST or payroll tax money to run the business, rather than putting it into a separate bank account or making payment instalments to the CRA. This can cause them to submit late because they don’t have the money to pay their tax bill.
From an article by Augusta Dwyer Globe and Mail 2017
Thinking About a Business Partnership in Canada?
Reasons to Build a Home Office for Your Home-Based Business
Does the Canada Revenue Agency Have Your Current Information?
Make Tax Time Less Stressful with These Seven Tips
Could you be Defined by the CRA as a Personal Services Corporation?
The Personal Tax Filing Deadline is April 30th – Some Last Minute Reminders
Need Help With Your Return? Where to Get Answers to Your Income Tax Questions
What is CRA ReFile and How Does it Work?