Canada: An Entrepreneur's Checklist: Prepare Now For A Smooth Tax Season

If you're an entrepreneur, you have a dream – and many priorities to manage along the way. Tax time is never top of mind, but likely always a worry.

However, an enquiring letter or phone call from the tax authorities can throw you seriously off your game, diverting time away from your business. There may be unexpected taxes, interest and even penalties to pay, taking cash you hoped would help build your business.

My experience helping entrepreneurs succeed shows that applying good habits throughout the year can turn tax season from a source of worry into just "business as usual." Here are some tips on what you can do now to prepare for a smooth tax season.

Build a paper trail of expenses

The important thing is to have a trail of all your expenses, so that the total of all the supporting invoices equals the amount showing on your tax return under each expense category. This adds to your credibility in a Canada Revenue Agency (CRA) audit situation. Keep receipts in case of an audit. And – don't mingle business and personal receipts.

Many entrepreneurs fail to maximize their deductions for automobile expenses, particularly if they use their personal vehicle for business. Keep track of all automobile expenses by category, so that the accountant or bookkeeper can expense the appropriate amount.

Reimburse yourself properly for expenses

If you pay for something such as office supplies out of pocket, be sure to reimburse yourself using a business cheque. This way, you can easily get that expense into the regular accounting system and claim the HST that you paid as an input tax credit. 

A business credit card

You need a credit card, separate from any that you use personally. Use the business card only for business expenses – that way, you can send the monthly statements to your bookkeeper, along with the statements from your business bank account. This means that if the CRA does come calling, you'll have a solid record of your expenses, building credibility and making it easier to answer the CRA's questions.

Pay tax and installments on time

Use calendar reminders or whatever is necessary to make sure your tax installments and the balance of tax owed is paid on time. Check with your accountant to see what these deadlines are, which will depend partly on the type of business entity you have (for instance, a corporation, sole proprietorship, or partnership).

Keep detailed records of capital expenditures

Make sure your bookkeeper gets detailed information on your expenditures on capital items – generally defined as any expense where the benefit continues over a long period of time, such as a forklift loader or a computer. Keep invoices for these expenditures. And, consult with your accountant to determine the best timing for making capital expenditures – particularly those you consider to be large expenditures.  

Maximize deductions

Help your accountant make the most of eligible deductions – for example, summarize all of your home office expenses including property taxes, utilities, mortgage interest, insurance, repairs and maintenance, and communication expenses. Also, provide the square footage of your house and your home office – if you work from home on a regular basis, you may be able to claim deductions on a portion of your home expenses.

Keep track of income tax credits and HST charged

The CRA recognizes the following formats for books, records and supporting documentation: produced and retained on paper; produced on paper and stored in electronic format; or those produced and retained in electronic format. Whichever format you choose, it's important to file documentation in a way that you can quickly put your hands on it or display it for CRA inspection.

Don't go it alone – get professional accounting advice

If you don't have a good bookkeeper on staff or retainer, you really need to have access to one, maybe on a freelance basis. This person can keep track of your business expenses and have them in a format that can be accessed easily.

It's almost certain that you also need to have access to an accountant with a Chartered Professional Accountant designation. This person or firm can help you find all possible ways to reduce your tax exposure. Having your documents prepared by a qualified professional gives the CRA greater confidence that the figures can be relied on and trusted. Your accountant can likely recommend an effective bookkeeper.

Book a pre-year end meeting with your accountant

At this meeting you can determine the best form of compensation. For example – deciding whether you should be paid by salary or dividends. This meeting is an opportunity for you to determine income-splitting possibilities, update your accountant with any changes in family status, and discuss ownership structure, including the use of holding companies and family trusts.

Don't put it off

No one really likes paying taxes, but putting this off will only bring you grief.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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