There's a reason the Canada Revenue Agency hones in on small businesses and the self-employed when deciding whom to audit: They make plenty of tax-related errors. Here's how to be on top of filing, paying and making nice with the taxman, not just leading up to the next filing deadline, but all year.
Know your deadlines
Self-employed? Circle two dates on the calendar each year: April 30 and June 15. The second date is your filing deadline. But don't be too hasty making fun of those stressed and struggling to file their personal income taxes at the end of April. If you're a small-business owner who owes money, you've got to pay it by that date, too.
But how do you know what you owe without going through all the work of collecting receipts and tallying income? You don't, says Hugh Neilson, director of taxation services at KRP Group in Edmonton and a member of the Chartered Professional Accountants of Canada's small and medium practitioner tax committee. You might as well file April 30 as well. In fact, forget the mid-June deadline altogether.
"There are an awful lot of accountants who are of the view that we don't want our clients to find out about that June 15 deadline, that it will only make trouble," he says.
Incorporated business deadlines are even more complicated. The general rule: The company has six months to file taxes after its fiscal year-end, but must pay within two months of its year-end. For active businesses, however, their payment date is generally extended to three months. Most small, incorporated businesses meet the requirements for the extension, explains Mr. Neilson, but it's still a good idea to get an accountant's expert opinion.
Know the fees
Figuring out what the average tax professional charges is like asking for an average actor's wage. There's a wide range. Tax preparers, who typically work during tax season, tend to cost about $150 for a standard business return. But certified accountants may charge hundreds or even thousands of dollars to file complicated taxes and deal with obscure issues.
While price doesn't necessarily mean better service – there are plenty of cases of mistakes made by high-end professionals – paying more for a recommended accountant who offers tax planning strategies can save money and a headache in the end, particularly if you're audited.
Refunds? Yes, please
Although most successful small businesses wind up paying tax money by April 30, it is possible to receive a refund instead. Businesses that pay quarterly tax instalments sometimes overpay when following CRA's recommendations. If business actually dropped that year, compared to the previous stellar years? Hello refund.
Unfortunately it's difficult to know if business will sink or spike upward, so it's wise to just pay the number CRA sends you, unless you think it's going to be wildly off in the end.
File. Just file
Owe money, but can't pay right away? File anyway, says James Bell, director of tax solutions for Toronto-based Tax Solutions Canada, which helps clients negotiate with CRA. "Owing money to the CRA is not a criminal offence, but not filing a return is," he cautions. Not only will filing on time keep you on the right side of the law, but you'll avoid onerous interest and late fees.
Just because you've hired an accountant, it doesn't mean you can plead blissful ignorance if the CRA finds an error. You're still responsible for any problems that crop up. Always take the time and review your tax return before signing it.
Not everything you've heard about filing small-business taxes is correct. Here are four myths debunked.
You're less likely to be audited if you file a hard copy of your return by mail.
According to James Bell, director of tax solutions for Tax Solutions Canada in Toronto, who worked for Canada Revenue Agency for decades, this is an urban legend. "It's not true at all. I would say it's the reverse, probably."
Sending a personal note to CRA explaining why your business performed as it did in the previous year will prevent you from being audited.
Again, sorry. Tax returns go to CRA's data entry folks who don't have time to read notes while they're punching in numbers and filling in fields.
Being audited once means you'll be off the hook for years.
Er, no. Some businesses are randomly selected, while those in specific industries such as construction, real estate and food services get pulled for audit more often. If an audit reveals you've made a mistake one year, you're more likely to be chosen again.
If you don't sign your tax return, you don't have to pay.
Nice try. "Things go in unsigned all the time," says Hugh Neilson, director of taxation services at KRP Group in Edmonton. "The CRA has never failed to process an unsigned form."