Filing taxes for your small business in Canada can feel like a maze, especially if you’re doing it for the first time. But don’t sweat it! Understanding the basics of small business taxes and avoiding common mistakes can save you time, money, and stress.
Let’s walk through the ins and outs of small business taxes in Canada and highlight some of the most common tax mistakes to avoid.
How to File Your Small Business Tax? (Common Tax Mistakes to Avoid)
Here, we have curated easy and effective steps to avoid tax filing mistakes and how certain mistakes can trigger CRA red flags.
1. Not Separating Personal and Business Expenses
One of small business owners’ biggest mistakes is mixing personal and business expenses. Keeping these separate is crucial to avoid confusion and mistakes when filing your small business taxes.
Why This Matters
When personal and business finances are mixed, figuring out which expenses are tax-deductible becomes challenging. You might also end up overstating your deductions, which could lead to an audit from the Canada Revenue Agency (CRA).
Solution:
- Open a separate business bank account to track all business-related transactions.
- Use accounting software or a professional accountant to manage your finances effectively.
2. Forgetting to Track All Income
Missing out on tracking your income properly is a common rookie mistake, especially for those filing small business taxes for the first time. If you forget to declare all your earnings, it could result in penalties from the CRA.
Why This Matters
All income earned, whether it’s from product sales, services, or even freelance work, must be reported. If the CRA discovers unreported income, you might face fines or interest charges.
Solution:
- Keep detailed records of every sale or service provided, whether it’s large or small.
- Consider using an invoicing system or simple spreadsheets to log all income.
3. Not Claiming All Possible Deductions
Did you know there are a bunch of deductions available to help reduce your small business taxes in Canada? Many small business owners miss out on these simply because they don’t know about them or don’t track them properly.
Common Deductions Include:
- Home office expenses (if you run your business from home).
- Vehicle expenses if you use your car for business purposes.
- Advertising costs (including online ads).
- Employee wages and contractor payments.
Why This Matters
Not taking advantage of all the deductions you’re eligible for can lead to paying more taxes than you should.
Solution:
- Consult a tax professional to help you identify which deductions apply to your business.
- Keep receipts and documentation for all expenses that you plan to claim.
4. Filing Late or Missing Deadlines
Procrastination can cost you big time when it comes to filing small business taxes in Canada. Missing the CRA’s deadlines results in late fees and penalties, which can easily pile up.
Why This Matters
The CRA charges penalties for late filings, and interest can accumulate quickly on any unpaid taxes.
Key Dates to Remember:
- For Sole Propreitorship businesses, the tax filing deadline is June 15, but any taxes owing is due by April 30.
- If you’re a sole prop, you still need to pay any taxes by April 30, even though your return isn’t due until June 15.
- A corporations tax deadlines will depend upon their fiscal year end – typically you need to pay within 3 months of year end and file within 6 months.
Solution:
- Set reminders for yourself or your accountant well in advance of tax deadlines.
- File early, if possible, especially if you expect to owe taxes.
5. Ignoring Sales Tax (GST/HST)
When starting, many small business owners forget to register for and charge GST/HST (Goods and Services Tax / Harmonized Sales Tax) on their sales. If your total revenues exceed $30,000 over four consecutive quarters, you must register for a GST/HST number with the CRA. This threshold is the same regardless of sole prop or incorporation
Why This Matters
If you don’t register for and collect GST/HST when required, you may still be liable for the tax, plus penalties and interest, which can hit your finances hard.
Solution:
- Register for a GST/HST number as soon as your revenue approaches $30,000.
- Keep accurate records of all GST/HST collected and paid, as you’ll need this information to file your GST/HST returns.
6. Overlooking Payroll Taxes
If your small business has employees, don’t forget about payroll taxes. As an employer, you’re responsible for deducting Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and income tax from your employee’s paychecks.
Why This Matters
Failing to deduct and remit payroll taxes can result in hefty fines and penalties. Plus, you may still owe these taxes even if you didn’t collect them from your employees.
Solution:
- Use payroll software to handle deductions automatically or hire a payroll service to help manage this for you.
7. Not Keeping Accurate Records
Accurate record-keeping is essential for filing small business taxes. The CRA requires you to keep all records, including receipts, invoices, and bank statements, for at least six years.
Why This Matters
If you don’t have proper documentation to back up your claims, the CRA could deny your deductions and even audit your business. This could result in additional taxes, interest, or penalties.
Solution:
- Keep your receipts organized and stored safely (either digitally or physically).
- Use accounting software to manage your records efficiently throughout the year, so you’re not scrambling at tax time.
8. Misunderstanding Business Structure
Your business structure (sole proprietorship, partnership, or corporation) affects how you file your small business taxes in Canada. Filing taxes as a sole proprietor is different from filing as a corporation, and each has its tax obligations.
Why This Matters
Failing to understand the tax implications of your business structure can lead to errors in your filing and potential tax liabilities.
Solution:
- Speak with a tax advisor or accountant to ensure you’re aware of your tax obligations based on your business structure.
9. Not Seeking Professional Help
One of the biggest mistakes many small business owners make is trying to do everything themselves. While DIY might save you money upfront, it can cost you in the long run, especially when it comes to taxes.
Why This Matters
Tax laws are complex, and making a mistake can result in penalties, audits, or missed opportunities for deductions.
Solution:
- Hire a tax professional who understands the nuances of small business taxes in Canada and can help you maximize deductions while ensuring compliance with the CRA.
10. Not Planning for Taxes
Lastly, one of the most common mistakes is simply not planning for taxes. There is a difference in tax planning for a sole prop vs a corp. Taxes can be a large expense, and if you’re not prepared, you may find yourself scrambling to come up with the money when it’s time to file.
Why This Matters
Without proper tax planning, you could face a financial crunch at tax time, leading to stress and possibly even borrowing money to cover the amount owed.
Solution:
- Set aside a portion of your income throughout the year to cover taxes. A good rule of thumb is to put away 25-30% of your income for taxes if you’re a paying yourself dividends or operating as a sole prop (again depends on your average tax rate) and 12% for corporate taxes if you’re incorporated.
Conclusion
Filing small business taxes in Canada doesn’t have to be daunting. By avoiding common mistakes, you can stay on the CRA’s good side.
So, whether you’re filing small business taxes for the first time or looking to avoid common pitfalls, have a look at our “Accounting and Tax Fundamental Program” curated for business owners to help you sail smoothly through tax season.
Frequently Asked Questions (FAQs)
How can small businesses pay less taxes in Canada?
Small businesses can reduce their tax burden by claiming all eligible deductions, taking advantage of tax credits, and using tax planning strategies such as incorporating and income splitting.
What qualifies as a small business in Canada for tax purposes?
In Canada, a sole prop does not get any preferential tax rate. However, for corporations, small business for tax purposes is typically defined as a Canadian-controlled private corporation (CCPC) with an active business income under $500,000.
How much can a small business make before paying taxes in Canada?
There is no threshold. Every dollar is taxed. However, A small business will get a preferential “small business rate” if its taxable income is below the $500,000 small business deduction limit. Note this rate is shared amongst all connected corporations.
