Small Business and the CRA
March 13th, 2018
Ensure your books are always in order for the CRA.
Owner-managers work hard in their businesses but are often overwhelmed by the reporting requirements for the Canada Revenue Agency. Few owner-managers enjoy the time spent and cost required to meet the CRA requirements, let alone the actual taxes that have to be paid; nevertheless, owner-managers must establish good business habits to ensure they stay on the right side of the tax authorities.
So, here are a few suggestions on how to make your relationship with the CRA much easier for yourself over the long run.
Establish the Correct Legal Structure
First of all, it is important to understand the tax and legal consequences of your form of business: sole proprietorship, partnership, or corporation. Each category brings with it different legal, tax and reporting issues.
Ensure Proper Bookkeeping
Recording transactions on a regular basis not only keeps your records up to date so you know where you stand at all times with respect to your receivables, payables and bank balances as well as any profit or loss, it also has your books in constant readiness for the tax authorities. Failure to routinely record all business transactions may mean missing out on taxable deductions or payment requirements. Maintaining up-to-date records also ensures that all documents required for the CRA are regularly matched and filed to the bookkeeping records.
Segregate Business from Personal
Regardless of the legal structure of your business, ensure that business transactions, bank accounts, lease agreements, and loans are maintained separately from any personal accounts. For record keeping and tax audit purposes, a clear division between personal and business finances makes for easier bookkeeping and a cleaner tax audit.
Contractors versus Employees
Make sure you distinguish the people who work for you as employees and those who work for you as contractors. Far too often, employers have persons who work for them whom they consider to be contractors. The CRA and The Workplace Safety and Insurance Board (WSIB) rules make a sharp distinction between contractors and employees; inappropriate classification by your payroll department will mean reassessment for Canada Pension Plan and Employment Insurance deductions as well as problems with the WSIB if premiums have not been paid for the employee incorrectly accounted for as a “contractor”. To correct any potential inaccuracy, you will have to go through the expensive process of making adjustments, and this may not be a simple process if the person is dismissed or resigns.
Legitimate business expenses are those expenses incurred to earn income. Far too often, expenditures are run through the business that have little to do with earning income. The most common areas subject to CRA review are vehicle expenses, meals, entertainment and promotion of a product or service.
Failure to file is a big mistake.
Failing to File
When cash resources are not available, whether to remit payroll deductions, income tax or HST, owner-managers may decide not to file the required return. BIG MISTAKE. Better to file on time, even if the business does not have the cash flow to make the required payment. Late filing incurs penalties and interest. Filing on time without payment will probably not incur penalties but will incur interest. Additionally, the CRA is open to establishing a payment schedule as long as you contact them with a proposal before the payment deadline.
Payroll is a business’s biggest expense and involves more than just writing a cheque or depositing money in the employee’s bank account. Payroll requires calculation of source deductions, the employer’s share, vacation pay, WSIB calculations, a monthly remittance for withholding taxes for each employee, data for year-end T4s as well as records of employment in the event of layoffs or dismissals. Understanding payroll will assist in determining cash flow needs as well as job costing and ultimately the bottom line. Failure to remit payroll withholding taxes will definitely invite an audit along with penalties and interest.
Far too many entrepreneurs use inefficient and ineffective accounting software. As a result, the information created is inadequate for a company’s own purposes and creates additional issues not only for regular government remittances but also for the accountant preparing year-end statements and tax returns. Poor accounting systems cost money in the long run.
Bookkeeping is more than entering data. A qualified and experienced bookkeeper not only understands the accounting system but will understand payroll, HST, WSIB, account allocation, reconciliation, online banking and a host of other business requirements. A good bookkeeper managing an accounting system suited to your business will provide information to management that is critical to making effective business decisions and also generates information critical for proper reporting to external sources such as the bank or the CRA. An inept bookkeeper is a recipe for disaster as the errors or omissions will result in mistakes in financial and tax reporting as well as the consequent cost of repairing the damage.
Measure Twice, Cut Once
This old carpenter’s maxim is just a pithy way of saying that errors are unnecessary and correcting them is costly. Before making decisions on major purchases, financing, staffing, accounting systems or tax strategies, do your homework. Getting and using expert knowledge ensures that decisions will not run afoul of tax authorities or other regulatory bodies.
Let Others Attend to the Details
Dealing with the CRA and other regulatory bodies is not always what entrepreneurs do best. Nevertheless, establishing procedures that will allow other staff to attend to the details will make life easier for you while making sure your business meets all regulatory requirements.