With the Canadian tax season just around the corner, many small business owners are beginning to stress about filing mistakes and missed deadlines. By getting your tax return prep work done early, however, you can alleviate concerns around potential Canada Revenue Agency (CRA) fines.
Not sure where to begin?
Follow these 5 steps to prepare your business for tax season in Canada.
Step 1. Determine which type of tax return you need to file
Every Canadian business must file an annual business income tax return. Which return you file, however, depends on the legal structure of your business:
- If you’re self-employed, or your business is a sole proprietorship or partnership, you’ll report your business income on both your T1 personal tax return form and on a Form T2125 (Statement of Business or Professional Activities).
- If your business is incorporated, you’ll report your business income on a T2 corporate income tax return form.
Filing and payment deadlines are also driven by your business’s legal structure.
Self-employed individuals, sole proprietors, and partnerships
The annual deadline for filing your return is June 15. However, you must pay any tax owing from the previous tax year by April 30. Individual partners of partnerships also need to file an annual partnership information return by March 31.
The annual deadline for filing your return is typically 6 months after your fiscal year-end. If yours is a Canadian Controlled Private Corporation (CCPC), however, you must pay any tax owing within 3 months after your year-end. If yours is not a CCPC, you must pay any tax owing within 2 months after your year-end.
Step 2. Decide how you’ll prepare your return
There are several different ways to prepare the return for your business taxes:
- Do-it-yourself on paper. While still an option, printing out tax information and forms from the CRA website - and filing a paper return by mail - is no longer commonly done.
- Do-it-yourself online. According to the CRA, over 90% of corporations file their T2 returns electronically using CRA-certified tax preparation software. The software makes electronic filing of T2 and T1 forms easy, safe, and convenient. While some programs must be purchased, others are available as free downloads. If you choose to use tax software, check that it supports filing in your province.
- Hire a tax professional accountant or tax preparer. This is a great option if you want professional help and advice. Not only can an accountant help maximize deductions and assist with tax planning, you can claim the cost of tax preparation as an expense. Making sure your records are organized will help you avoid filing delays and extra charges for bringing your books up to date.
Step 3. Organize your paperwork
Since your accountant or tax preparer will need an updated trial balance for the fiscal year to prepare and file your return, the sooner you can get your books organized, the better. You’ll find it far easier to prepare your business for tax season in Canada, however, if you stay on top of your bookkeeping throughout the year.
Tools like Receipt Bank or Hubdoc, for example, can keep your year-end paperwork better organized by helping you:
- Keep track of receipts and invoices
- Back up any tax deductions with proper documentation
- Stay prepared in the event of an audit
If you lack the time to manage your books, outsourcing your bookkeeping function is another great way to stay organized. Not only will your books remain up-to-date, your bookkeeper can liaise with your accountant during tax season to ensure that your filing’s done right.
Step 4. Take advantage of tax credits
Taking advantage of tax credits can lower your balance owing come tax time.
A wide range of provincial and federal tax incentives (like the Scientific Research & Experimental Development (SR&ED) tax credit program, for example) are available to Canadian businesses of all sizes in various sectors. So it’s worth checking to see if your organization is eligible for any of these credits.
Step 5. Claim all available tax deductions
Claiming all qualified business expenses as deductions will reduce your total taxable income.
Home-based businesses should consider: Automobile expenses, mortgage interest, internet, maintenance, repairs, and utilities
Business owners who drive to work, meanwhile, may be able to claim: Vehicle gas, insurance, and repairs (just be sure to keep a mileage log)
Discussing your situation with an accountant is the best way to clarify eligible deductions and maximize tax savings.
You may, for example, be able to take advantage of additional deductions through:
- Capital cost allowance. This accounts for the depreciation of business-related assets and equipment like computers, machinery, vehicles, property and furniture.
- Your Registered Retirement Savings Plan. If you run a sole proprietorship or partnership, you can maximize RRSP contributions to reduce your total taxable income.
- Charitable giving and employee gifts. If your company donates to a registered charity or bestows gifts on employees during the year, you can claim these as a deduction.
Tax season can be stressful if you aren’t properly prepared to file your return and pay your taxes on time. That said, the single most important step you can take is to start your catch-up bookkeeping sooner, rather than later.
At Enkel, we’ll not only bring your books up-to-date, we’ll also get your trial balance ready for your accountant or tax preparer. Reach out today and find out how easy we make it to prepare your business for tax season in Canada.