For small businesses in Canada, the challenge of getting all the paperwork right at tax time is not so small. Entrepreneurs make common mistakes and must pay attention to details to avoid them.
Small businesses make up 98 per cent of all businesses in Canada, according to Statistics Canada 2012 data, with nearly 1.1 million businesses, so the tax collected is important to the Canada Revenue Agency.
In general, most mistakes seen by David Goldsmith, a chartered accountant and partner at Goldsmith & Poulos LLP in Vancouver, are documentation-related. By this he means reporting the details of what you earned in your small business's tax year and what it cost to make this money.
Mr. Goldsmith advises keeping track of potential deductions as you go. For example, if you take someone out for a business-related meal, "just jot the name of the person on the back of the receipt. Hopefully, if it comes to a time that you're audited, you'll remember who that person was and whether it was a business expense."
"There's a lot of flexibility" as to what is a business expense and what is not, Mr. Goldsmith says.
For instance, real estate agents go out with people all the time, entertaining clients, prospective clients and business leads, so it's reasonable that many of these costs qualify for the 50-per-cent deduction for meals and expenses.
"What we see a lot of is over- or under-claiming expenses," Mr. Goldsmith says. "If it's legitimate, you should claim it."
Despite what many people say, "I've never been told of any particular thresholds or red flags" exhibited by the CRA, Mr. Goldsmith adds. Extreme circumstances, however, would stand out. If your business does not require extensive travel and you deduct $75,000 in travel expenses, it will be noticed.
The CRA offers small businesses a checklist for creating a tax filing regime. It includes rules for setting up online accounts, registering and filing for GST or HST and reporting income and expenses.
Entrepreneurs need to understand which category their business fits into for tax filing, Mr. Goldsmith says. "The filings are quite different depending on what structure you have set up," he says. Whether you are self-employed, a partner or a shareholder in a corporation determines which forms to file.
Business owners may find advantages to operating as an individual, a partnership or a corporation, Mr. Goldsmith says. For example, partners can split the income the business has earned, which may be an advantage to those who have other, outside income and want to minimize their business income by sharing it.
Shareholders of incorporated small businesses can leave earnings in their company as long as they declare a reasonable amount of income for the work they did.
It can be an advantage to incorporate, but it's not always necessary and it costs money, so you should seek advice from a lawyer, Mr. Goldsmith says.
"It's worth it if the tax benefit outweighs the cost of incorporation. There's a win for you if you're making more money [in a business] than you need to live on." He points out that the small business corporate taxation rate is 13.5 per cent, while the top marginal rate for individuals is 46 per cent, Mr. Goldsmith adds.
Whatever you do, don't cheat.
"It can be very punitive," Mr. Goldsmith says. "If they find that self-employed people are claiming personal expenses in their business they're very quick to impose gross-negligence penalties."
Missing deadlines: Tax filing deadlines can be different for different types of businesses. And tax-paying deadlines are different from the filing ones. If your corporation owes tax it has to be paid within 90 days of the corporate year-end, and unincorporated businesses have to pay by April 30.
Sloppy recordkeeping: It doesn't just hurt your relationship with the Canada Revenue Agency if you can't remember what those slips you threw into a shoebox were for. You also might be losing out on legitimate deductions.
Not dealing with GST or HST: Businesses have to charge HST only after they have earned $30,000 in a year. Many experts advise registering and collecting right away when you start up.
Inaccurate claiming of credits and deductions: Businesses can miss out on valuable tax credits that are sometimes available only for limited times, such as research and development or environment-related credits. Knowing about these requires research and, often, professional advice.