Five Steps to Tax Season Readiness

It’s here.

The season that is dreaded by (almost) everyone: tax season. It is a time during which you scramble to collect tax documentation, and try to jog your memory about events or transactions that might minimize your taxes. You know that, in the near future, you will have to muddle through bureaucratic forms with hundreds of numbered rows. Not fun, I know.

The stress is magnified if you are a small business owner. On top of a personal tax return, you also have to navigate the additional complexities of business tax. 

To ease some of the stress of the season, here are five things that business owners can do to ensure they go into the season prepared. 

1) Determine which tax return you should be filing. 

All residents of Canada have to file a personal tax return (a tax form called a T1). 

Business owners also have to file taxes for their business: 

• If you are self-employed, or your business is a sole proprietorship, you have to attach a Statement of Business or Professional Activities (T2125) to your personal tax return. This form appears daunting but is, in simplest terms, a declaration of your business’s profit and loss (P&L) statement. You can also deduct depreciation on any assets (cars, machinery, etc.) that you are using for your business.

• If your business is a corporation, you will have to file a Corporation Income Tax Return (T2). A corporate tax return is more complicated than that of a sole proprietorship. The additional layer of complexity is because Canada’s Income Tax Act (ITA) bestows more rights and responsibilities on corporations than on sole proprietors. 

One important distinction between the sole proprietorship ‘statement’ (T2125) and the corporate tax return (T2) is this: the income or loss that you calculate on your T2125 is added to or subtracted from your personal tax return, whereas the T2 is completely separate from your personal tax return. This is because, from a legal and tax perspective, your sole proprietorship is not separate from you as a person, whereas your corporation is. 

2) Know what the filing and payment deadlines are. 

The question that should be top of mind for entrepreneurs is: how do I ensure that I do not get any penalties assessed on my return?

This is important because the penalties for late payment or filing can be hefty: the Canada Revenue Agency (CRA) applies a flat penalty of 5% of the amount of your balance owing, plus an additional 1% of your balance owing for each full month that your return is late, to a maximum of 12 months. You can think of this as a ~5% to ~17% interest charge if you file or pay late.

The best way to ensure that you pay no penalties is to ensure that: (a) your return is submitted on time, and (b) that you pay any balance due by the payment due deadline.

Component	Sole Proprietors	Corporations
Filing	June 15th	Six months after year end (e.g., June 30th, if year end is December 31st)
Deadline for payment (if you owe tax)	April 30th	Three months after year end (e.g., March 31st, if year end is December 31st) Note: assumes that the business is a Canadian Controlled Private Corporation (CCPC)

3) Ensure that all transactions are captured in your accounting system.

The process of 'catch-up bookkeeping' should be done as soon after the end of your fiscal year as possible. Ideally, you should develop the discipline of closing your books on a monthly basis, which would allow you to skip this step entirely. However, this is often difficult to achieve for small business owners, which is one of the reasons the filing deadlines are up to 6 months after the end of your fiscal year.

During this process, you should: 

• Collect paperwork for all transactions. This includes paper / digital receipts for expenses, and paper / digital invoices for sales. My strong suggestion is to digitize all paper transactions by taking pictures of them and storing them on a cloud-based storage solution such as Google Drive or Hubdoc. You can also attach the digital record directly to the transaction in your accounting system. 

• Ensure that the transactions are recorded in your accounting system. For businesses with a low number of transactions (e.g., less than 50 a month), block off 2 hours and do this yourself. For businesses that have more than 50 transactions per month, I would suggest working with a bookkeeper on the catchup process. 

• Reconcile any bank accounts and credit cards to their year-end balances. You can use the ‘Reconcile’ feature of the accounting software that you use. 

• Consider any year-end adjustments that need to be recorded in your accounting system. This step only applies if you follow accrual accounting and includes things like:

  • recognizing depreciation on any assets that you have, 

  • recognizing any unbilled revenue that you have earned in the fiscal year,

  • capturing the expense for any work that was done in the fiscal year, but for which the bills have not yet been received.

If you are not familiar with any of the above requirements, or if reading this makes you want to jump off the nearest balcony, please consult a bookkeeper or accountant.

4) Familiarize yourself with tax deductions that are available to your business. 

You should not pay more tax than you legally have to. Familiarizing yourself with some of the common tax deductions that are available to your business will help you achieve this goal. 

These include: 

• Any expense that was incurred with the goal of earning business income. These include things like insurance, travel expenses, office supplies, advertising and promotion, rent any office space, etc.

• Capital Cost Allowance (CCA): this is the tax term for ‘depreciation’ and is available to both sole proprietors and corporations that own capital assets (computers, machinery, vehicles, furniture, etc.) and use them to run their business.

• Automobile expenses: depending on your situation, you may be able to deduct your vehicle’s gas, insurance, maintenance, mileage, etc. 

• For businesses that operate out of their homes: you are able to deduct a portion of your home-related expenses (e.g., utilities, property taxes, etc.)

• Charitable donations are tax deductible for both individuals and corporations.

5) When in doubt, contact the CRA.

The ability to call the CRA is a ‘phone a friend’ lifeline when it comes to preparing for, and completing, your tax return. I have found the support staff to be patient, knowledgeable, friendly and, most of all, helpful. 

This is particularly relevant for hyper-efficient entrepreneurs that have some knowledge of accounting and tax, and do not want to spend the money to enlist the help of a professional. 

Do you have any questions? Need help preparing your books for tax season, and filing the necessary return(s)? Please contact us today to find out how we can help.