When you run a small business, the day-to-day challenges and sales and production targets often keep you so occupied that the only time you really think about taxes is when they are due.
That’s an approach that is likely costing you money and ensuring you pay the maximum amount to Canada Revenue Agency.
If you think about tax strategies throughout the year, there are a number of things you can do to minimize this expense.
While not all will be applicable to your unique situation, you can save money now and in the long term by implementing the ideas that could work for you.
Know where your money is going today and every day
For the same reason you avoid thinking about tax strategies until your deadline approaches, many small business owners don’t keep careful accounting records until the end of each month or even the end of each quarter.
The number one rule of successful financial management of your business is to keep a strict eye on your cash flow and budget every single day. You cannot possibly make the best decisions if you do not have accurate, immediate financial data at your fingertips.
If you don’t have a bookkeeper on staff and the time to handle the data yourself every day, you can easily outsource to professionals who can handle this for you using Cloud technology and QuickBooks Online so you can access the information you need when you need it.
Big strategies are all well and good, but more tax deductions for Canadian small businesses go unclaimed because of lost receipts than any other reason. You have to be able to prove your deductions are warranted, and if you have your data up to date at all times, nothing falls through the cracks.
Keeping your financial records up to date also allows you to quickly determine trends and be aware if some aspect of your business is not performing as it should.
Keep sufficient records to access eligible tax credits
We work regularly with small businesses who are doing amazing research and development projects and yet are unaware that their efforts might be eligible for significant tax credits.
It is a good idea to consult regularly with a financial professional who is aware of different Canadian government programs that are specifically designed to encourage certain sectors of the country’s economy. If you don’t know what could impact you, you could be leaving Investment Tax Credits (ITCs) on the table.
Some examples of ITC programs include the Atlantic Investment Tax Credit (where you can claim 10% of the purchase price of new buildings, machinery, and equipment used in farming, fishing, logging, processing and manufacturing), the Scientific Research and Experimental Development ITC (through which you can claim 15% of all qualifying expenses) and the Apprenticeship Job Creation Tax Credit (that gives you up to $2,000 a year and equal to 10% of the salary paid to an eligible apprentice for the first two years). There are many other such programs that may be applicable to your industry.
A little time invested now in visiting government websites for information could end up paying you huge dividends down the road.
Make the most of your GST/HST claims
Inattention to saving all receipts, even for the small items, costs small businesses thousands of dollars each year in unrecovered Goods and Services Tax (GST)/ Harmonized Sales Tax (HST) claims.
If you are claiming GST/HST, you may be able to recover the GST/HST that you paid on purchases and expenses related to your business. These can be refunded when you claim input tax credits.
The number of items that can be claimed that are often just discarded include parking fees paid while you meet with clients, postage paid on mail outs, and even coffee for your office.
We cannot over-stress the importance of collecting all of your receipts and ensuring they are categorized and filed by yourself or your outsourced bookkeeper for maximum tax deductions. Keeping digital files in that way is helpful because if the ink fades on a receipt to the point that it cannot be read, the CRA can and will reject it.
To avoid CRA rejecting receipts for our bookkeeping clients we setup a perfect solution by simply using everyday technology – like your smartphone. Your phone along with one easy to use app allows you to take a picture of all your receipts then have them automatically uploaded into your QuickBooks Online Accounting software and then throw the paper receipt away. You now have a full resolution digital copy of that receipt which will never fade and is instantly searchable in a digital storage filing system. This is a great solution for those coffee and gas receipts that always seem to get lost, or simply fade away. And remember, every time you lose one of those receipts, you lose the ability to claim your Input tax credit from it and will end up paying more taxes than you should.
Here’s another important caveat. Many small business owners think it is sufficient if they just put everything on their business credit card and then submit that one receipt at month’s end. Be aware that CRA does not routinely accept credit card statements as proof of payment. It is vital to keep a system where your original receipts are recorded and filed.
Be aware of what constitutes an eligible expense
Unless small business owners have taken tax preparation training, many are unaware of which corporate expenses can be claimed for tax relief.
You may be aware that you can claim operating expenses such as your rent, heat, electricity, insurance and office supplies, and even your vehicle expenses (including toll charges, maintenance and fuel), but did you know you can also claim your advertising expenses, your fees and dues for professional organization, your professional consulting services, your online marketing fees, and your capital property like new computers and technology, office furniture, and other equipment?
Don’t get caught having to borrow to pay your taxes
Every quarter we have witnessed companies who have had to struggle to make their HST/GST payments and it is not unusual for a fledgling small business to have to take out a loan at year’s end just to pay their taxes.
You can avoid getting yourself into this kind of problem by opening a specific tax account now and making installment payments so you won’t be caught off guard.
Every month deposit money for tax payment, whether it is sales tax or corporate or personal tax. When you are just getting started, one serious tax bill you weren’t expecting can threaten the livelihood of your business.
If you can’t pay when your taxes are due, you are further burdened with penalty payments, and this can become a damaging circle to the financial health of your business.
Study what other strategies can work for you
Depending on your circumstances, there are other options that can save you tax dollars as well. For example, it may benefit you to hire a family member to take advantage of income splitting or to incorporate your business if you have not already done so.
Big decisions like incorporation should only be done with the advice of a tax professional to make sure that the additional costs you will incur from the process will really end up putting more money in your pocket at the end of the year.
Whatever you do, just accepting the idea that tax awareness is something that you need to consider month by month instead of year by year will go a long way to keeping more of your hard-earned money in your pocket.
At AIS Solutions, although we do not provide personal or corporate tax services or give specific advice on tax planning, we are certainly aware of a number of strategies our clients use successfully to avoid over-paying taxes legally.
We have helped many small businesses with new financial data management and reporting solutions allowing them to save money on taxes while also having real time access to their financial numbers to make better business decisions. Please feel free to give us a call anytime to discuss your unique situation. It doesn’t cost anything to have a conversation.
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