Be Prepared: Taking (some of) the Pain out of Tax Season
Let’s face it. Most businesses – and most people, for that matter – find tax season to be, well, taxing. This is nobody’s favourite time of year, save for the accountants and tax preparation companies; people who earn their bread and butter from that last-minute panic to create order out of a year’s worth of paperwork.
If you’re dreading the looming tax season, take heart, because it really is possible to ease the stress of filing taxes. There are steps you can take to file your taxes on time, and avoid attracting undue attention from the Canada Revenue Agency (CRA).
Here are a few dos and don’ts:
Do keep an accurate vehicle log. The Income Tax Act doesn’t require businesses to keep a log, but doing so will make your life easier, because the CRA needs to know exactly how much your vehicle is used for business and how much is personal. And according to Dale Barret, tax lawyer and author of Tax Survival for Canadians: Stand up to the CRA, this is one of the areas the CRA loves to audit. Says Barrett, “You’ve got to break it down, or they’ll just deny it all.”
Don’t spend the money you collect from payroll deductions and GST. A business facing tough times might be tempted to use this money to subsidize operations, but the money eventually must be paid to the CRA. If you get into a position where you can’t pay what you’ve collected, the CRA will come for the money, and can go after your personal assets if necessary.
Do remember to report cash payments.An easy way to attract the CRA’s attention is to forget or omit revenue. Tax authorities expect your business to garner a certain amount of earnings, so report all income, including cash. Losing track of cash revenue is a common mistake, but it’s also one that will bring you headaches down the road.
Don’t make your accountant’s life hell. Be prepared when you meet with your tax accountant. That means receipts and invoices should be in order – not piled in a heap in a shoebox. Organize your paperwork and record income and expenses on a spreadsheet – it will save you money in preparation time, and save your accountant’s sanity.
If a professional accountant will be preparing your business’s income taxes – and for many, that’s the most sensible avenue – make the effort to organize your tax records so your accountant has everything he or she needs…on time.
Make a checklist. A list of common documents your accountant will need include:
- Financial statements: income statements, balance sheets, cash flow statements
- Payroll information
- Business expenses: travel, advertising, rent, utilities, office supplies, internet costs, etc.
- Motor vehicle expense information
- Last year’s Notice of Assessment
- Records of amounts paid by instalments
- A copy of your income tax return filed last year
- All relevant tax-related documents. What you need will depend on whether you’re a sole proprietorship or partnership (T1 income tax return) or an incorporated company (T2 income tax return).
Summarize and tally your records. Save your accountant time and yourself some money (accountants are usually paid by the hour) by organizing your records beforehand.
- Categorize and tally all cheques, invoices and business records.
- Sort all of your information slips and organize by type.
- Clip groups of receipts together and identify categories for each group.
Invest in accounting software. Accounting software can keep track of expenses and revenue, do payroll, time and billing, and generate income statements, cash flow statements and balance sheets. Cloud-based accounting packages can help further reduce your accounting fees by allowing you to prepare your information and keep it in one place, and give your account direct access to it at tax time.
Filing your annual business income taxes will never be a straightforward, simple or one-size-fits-all process, but with some preparation and a little (or a lot of) advice from experts, you can come out on the other side of tax time relatively unscathed. For more information and a wealth of tax tips, check out these frequently asked questions about Canadian income tax for small businesses.