By Bruce Ball, FCPA, FCA, National tax partner, BDO Canada LLP, Incoming vice-president – taxation, Chartered Professional Accountants of Canada
Many business owners dread the time and expense associated with tax season. But it actually can be a great time to take stock and improve your financial situation. As a small retailer, here are five things you can do to make tax filing easier and even ring up some tax savings.
1. Get your records in shape
Start by making sure you have the needed records on hand. If you run your business through a corporation, the Canada Revenue Agency (CRA) will want to see formal accounting records — and an income statement and balance sheet prepared to the corporation’s year-end.
Gather your receipts for business expenses and other documentation, such as paid invoices, along with paperwork to prove the income you’ve made, including cash register summaries and bank statements. If the CRA audits you and you can’t produce the necessary records, your tax costs might rise. For example, your business expenses could be rejected or the CRA might think you’ve earned more income than you reported. You’ll need to keep the records for at least six years, and longer in some cases.
Not a corporation? You still need to keep detailed records, but formal financial statements aren’t required.
2. Rethink how you get paid
Deciding the best way to draw funds from a corporation for personal use is tricky. You can pay yourself by salary or dividends (or a mix of both), and each method has its pros and cons:
- Your corporation can’t deduct the dividends it pays you, but the personal tax rate for dividends is lower than for salary.
- Your corporation can write off your salary (if reasonable), and it will build room for tax-deductible RRSP contributions. However, you and the corporation will pay Canada Pension Plan premiums on your salary, and your salary will be subject to source deductions.
Whatever you decide, don’t mix personal and business transactions. Your corporation should have its own bank account. Money you need to live on should be paid to your personal account as salary or dividends.
3. Keep it in the family
Do family members work in the business? Pay a salary and you can deduct it from your corporate or self-employment income.
Again, you’ll need to document things fully. The CRA keeps an eye on money paid to family members. Be ready to prove how many hours your family members put in and whether the amounts you paid are close to what you’d pay a non-family member for the same work.
4. Consider bringing in a pro
Should you prepare your tax return yourself or hire a Chartered Professional Accountant? That depends on the complexity of your business structure.
If you have corporation, you might have a tough time figuring out how to complete your corporate tax return, draw income from the business and pay the least tax, and deal with other compliance issues. Although professional advice comes at a cost, you’ll be confident that you’re not paying too much tax and you’ll have an expert on your side should you be audited.
On the other hand, your personal tax return might be straightforward, with only your income from salary and/or dividends to report, along with the usual employee deductions and credits.
If you don’t use a corporation, your tax affairs will be simpler. Still, reporting business income and claiming expenses correctly can be challenging, and you might want to consider getting professional advice.
5. File your return and pay taxes on time
Finally, an easy way to keep your tax bill down is to file your return and pay your taxes when they’re due. Different costs apply for late returns and payments, so if you can’t meet one deadline, you can still save money by meeting the other.
For more tax filing tips, visit the CRA’s webpages for small businesses (http://www.cra-arc.gc.ca/selfemployed/) and corporations (http://www.cra-arc.gc.ca/tx/bsnss/tpcs/crprtns/menu-eng.html).
Tax deadlines – mark your calendar!
Individual earning business income:
- Unpaid personal taxes for 2016 due May 1, 2017 (as April 30, 2017 falls on Sunday)
- Tax return due June 15, 2017
- Unpaid corporate taxes generally due three months after year-end
- Tax return due six months after year-end