If tax time is a headache for many small business owners, it might help if they thought of it as an after-effect instead.
Its cause: letting things slide, accounting-wise, over the previous year.
"Setting up proper tax structures and tracking the necessary information – those are the things that should be happening during the year, as opposed to waiting until tax time to worry about it," said Paul McVean, tax partner at Anklesaria McVean Professional Corp. in Toronto.
"A lot of time people scramble to generate the information they need to prepare their tax returns," he said.
Business owners need to go through their books monthly or quarterly, said Blake Griffith, an advisor with Sun Life Financial in Calgary. "Ensure you are understanding your yearly earnings position, your key revenue and expense trends, and that you are putting enough away for tax time."
Here are specific areas that can cause problems for entrepreneurs.
Meals and entertainment
"That's a very common one," said Mr. McVean, "where people might throw a bunch of receipts into a shoebox, or wait until tax time to see what receipts they've kept."
Especially troublesome are expenses have been paid in cash or with a personal credit card, said Mr. Griffith. "You should write the name of the customer and other details on the back of the receipt." Ideally, business owners should be using separate credit-card accounts.
For those who commingle personal and business expenses, however, "many of them don't understand that in Canada, the onus is on the business owner to prove that the transactions are justified business expenses."
Business use of vehicles
Tracking business kilometres is important, yet few of Mr. McVean's clients keep a mileage log, something he recommends.
"It is such good evidence if Canada Revenue Agency ever says, 'Well, prove to me your business use of your vehicle.' So even keeping at least three months of the year that are representative of the remaining time is better than nothing."
Business owners should think twice about designating a vehicle as a company car, said Grant Diamond, operations manager with Farm Business Consultants in Saskatoon.
"What happens is, people buy a new car and figure it does some corporate business," he explained. "You use it for personal use as well, and then these huge standby charges end up on your personal tax return. And you end up paying a large tax bill for that."
The standby charge is generally 2 per cent of the original cost of the vehicle for every month it's available for personal use. If the vehicle is leased, the standby charge is two-thirds of the lease cost.
"If you have a truck you use mostly to go back and forth from the lake with, for example," he said, "or your car that you use mostly for personal use, keep those outside the corporation and charge it mileage for it. That is tax-free money for you, and an expense for the corporation."
Home office expenses
These are not necessarily what we think of as typical business expenses, said Mr. McVean, "but you should keep your utility bills, and maintenance and repair bills, along with things like property tax and mortgage interest. It might not be top of mind to hold onto those kinds of receipts."
But small-business owners using a home office need to be careful, too. "If you are spending money to renovate, for example, and improving the space, not just repairing it, that is considered a capital expenditure, not a deductible expense," he said.
Some business owners and self-employed professionals can be too aggressive, he added.
"The Income Tax Act does not give us firm, hard rules and explanations for all of this, but there are some overriding principles," Mr. McVean said. "One is, did you incur the cost in order to earn income, and two, is it reasonable under the circumstances?
"So extensive maintenance in your backyard, if it has nothing to do with your home office, may not pass the reasonability test. But maintenance in your front yard, particularly if you have clients regularly coming to your home office, that may be reasonable."
GST and HST
"If someone is registered for HST, then we need to know when the HST is applied to the sales, when it's applied to the expenses, in order to separate what we report for income tax purposes, and what we report for HST/GST purposes," said Mr. McVean.
He often has clients, especially those who do their own bookkeeping, show up with just a list of their deductible expenses.
"Then it can be a challenge to figure out, 'Did you pay HST on these amounts over and above what you are showing us, or is that amount including HST?'" If it's the latter, they will have to go through all of those receipts again and break the numbers out.
"And we have to do that during a really busy time," he said. "It really should be done during the year so that at tax time, it is that much easier to report."
Some business owners and self-employed people are confused about when to pay their GST, Mr. McVean said. The deadline to file is June 15, but the deadline to pay is April 30.
"That sometimes comes as a surprise," he said. "Clients say, "I filed on time. Why are they charging me interest?'"
Mr. Diamond, who worked for the CRA for 15 years, said that another big mistake he sees is company owners using collected GST, HST or payroll tax money to run the business instead of putting it into a separate bank account.
"All of a sudden they're not remitting on time," he said. "They are not filing on time. A lot of small business owners, when they're first starting out, get into real problems with this."