If tax time is a hassle for small business owners, it may help if they thought as an after-effect of it instead.
Its cause things slide over the preceding year.
“Setting up proper taxation structures and monitoring the essential information — these are the things which should be happening during the year, instead of waiting until tax time to be worried about it,” said Paul McVean, tax partner in Anklesaria McVean Professional Corp. in Toronto.
“A lot of time people scramble to make the information they need to prepare their tax returns,” he said.
Business owners will need to go through their books quarterly or yearly, said an advisor with Sun Life Financial in Calgary, Blake Griffith. “Ensure you’re understanding your annual earnings position, your key revenue and cost trends, and that you’re putting enough away for tax time.”
Meals and entertainment
“That’s a really common one,” stated Mr. McVean, “where people may throw a whole lot of receipts to a shoebox, or wait until tax time to find out what receipts they have kept.”
Especially troublesome are expenses are paid in cash or with a credit card, ” said Mr. Griffith. “You should write the name of the customer and other details on the back of the receipt.” Business owners should use credit-card accounts that are separate.
For people who commingle personal and business expenditures, however, “many of them don’t understand that in Canada, the onus is on the company owner to show that the transactions are justified business expenses.”
Business use of vehicles
Tracking business kilometres is vital, yet few of Mr. McVean’s clients keep a mileage log, something he recommends.
“It is such good evidence if Canada Revenue Agency ever says, ‘Well, prove to me your business use of your car.’ So even keeping at least three months of the year that are representative of the rest of the time is far better than nothing.”
Business owners should think about designating a vehicle said operations manager with Farm Business Consultants in Saskatoon, Grant Diamond.
“What happens is, people purchase a new vehicle and figure it does some corporate business,” he explained. “You use it for personal use also, and then these enormous standby charges wind up on your personal tax return. And you wind up paying a huge tax bill for it.”
The charge is 2 per cent of the price of the vehicle for each month it’s readily available for use. The charge is two-thirds of the lease price if the vehicle is leased.
“If you’ve got a truck you use mostly to go back and forth from the lake with, by way of instance,” he said, “or your car that you use mostly for private use, keep those outside the corporation and charge it mileage for it. That is tax-free money for you, and an expense for the corporation.”
Home office expenses
These aren’t necessarily what we think of as typical business expenses, said Mr. McVean, “but you need to keep your utility bills, and maintenance and repair bills, together with things like property tax and mortgage interest. It may not be top of mind to hold onto those sorts of receipts.”
But small-business owners have to be careful. “If you’re spending money to renovate, as an instance, and improving the space, not only repairing it, that’s considered a capital expenditure, not a deductible expense,” he said.
Professionals and some business owners can be aggressive, he added.
“The Income Tax Act does not give us firm, hard rules and explanations for all of this, but there are a few overriding principles,” Mr. McVean said. “One is, did you incur the cost so as to make income, and two, is it reasonable under the conditions?
“So extensive maintenance in your backyard, if it doesn’t have anything to do with your home office, may not pass the reasonability test. But maintenance in your front yard, especially in the event you have clients regularly coming to your home office, that could be reasonable.”
GST and HST
“If someone is registered for HST, then we will need to understand when the HST is applied to the sales, when it’s put on the expenses, to be able to separate what we report for income tax purposes, and that which we report for HST/GST purposes,” said Mr. McVean.
He has clients, particularly those who do their own bookkeeping, show up with a list of their expenses that are deductible.
“Then it can be a challenge to work out, ‘Did you pay HST on these amounts over and above what you’re showing us, or is that amount including HST? If it’s the latter, break out the numbers and they might need to go through all those receipts.
“And we need to do that during a really busy time,” he said. “It really ought to be done during the year so that at tax time, it is that much easier to report.”
Some business owners and self-employed men and women are confused about when to pay their GST, Mr. McVean said. The deadline is April 30, although the deadline is June 15.
“That sometimes comes as a surprise,” he said. “Clients say, “I filed in time. Why are interest charging me? ”’
Mr. Diamond, who worked for the CRA for 15 years, said that another huge mistake he sees is company owners using collected GST, HST or payroll tax money to run the company rather than putting it into another bank account.
“All of a sudden they’re not remitting on time,” he said. “They aren’t filing on time. A whole lot of small business owners, when they’re first starting out, get into real problems with this.”