Last updated: Feb. 25, 2022
Many business owners don’t know what deductions they can claim, or how important it is to keep their personal and business finances separate.
They don’t have time to keep track of all the rules and CRA regulations, so sometimes they end up making mistakes that cost them precious time, and money, once tax season rolls around.
Sound familiar? There are 5 common mistakes we see business owners make at this time of year. Below we’ll tell you what they are and how to avoid them, so you can take the right steps to keep your hard-earned money in your pocket.
Mistake #1: Not taking advantage of valuable tax credits
There are several credits you can take advantage of as a small business owner, but you have to know what they are and if you qualify for them. Below are some of the top tax credits for business owners in Canada.
Investment credit (ITC)
If you purchased machinery, equipment, or a building for your small business, you can claim the ITC.
Apprenticeship job creation tax credit (AJTC)
The AJTC is a non-refundable investment tax credit equal to 10% of the eligible salaries and wages paid to employed apprentices. A business can claim up to $2,000 per eligible apprentice each year as a tax credit.
Input tax credit
GST/HST paid or payable on purchases and expenses associated with your business may be recovered by claiming input tax credits. However, you must have a registered GST/HST number in order to claim credits.
So you can claim GST/HST paid on eligible business expenses, keep track of GST/HST paid on eligible business expenses. Keep your receipts in case you need to support your claim.
Scientific Research and Experimental Development Program (SR&ED)
Under this program, you are able to deduct scientific research and development expenses from your taxable income.
A Canadian business of any size can claim SR&ED tax credits of at least 15% and up to 35% of qualified expenditures.
Mistake #2: Mixing personal and business finances
It’s crucial to keep your business and home finances separate for several reasons:
- If you’re at a shop picking up supplies for your home and business, and you don’t put them on separate accounts, you could overlook a legitimate business expense.
- Come tax time, it’s a time-consuming process to go through your expenses and identify which are personal expenses and which are business expenses.
- You might accidentally claim a personal expense as a business deduction, and if your business is audited, the burden of proof is on you to prove your business expenses.
- It makes it easier for your tax professional if you keep them separate, and you’ll save a lot of time if you’re filing your own return.
So, what’s the best way to keep those personal and business finances separate?
Have a separate business account
What if there was an easy way to track every single one of your business expenses, identifying thousands of dollars in tax deductions each year?
Well, luckily, you can do just that if you get a separate bank account that you only use for your business! This is one of the easiest tools to keep track of business expenses and organize your finances.
Have an organizational system in place for your business receipts
Set aside time each month to review and categorize your receipts in a way that makes sense for you. This keeps things manageable as the year progresses and keeps you on top of your spending, so you don’t miss out on any tax deductions.
Have a separate credit card for your business
- We mentioned the benefits of having a separate business account. But we also recommend having a separate credit card for a few reasons:
- You’ll build up a credit history for your business that isn’t tied to your personal credit history.
- You’ll be able to cross-check your credit card statements with your receipts.
- If all the transactions are business related, you can claim any associated expenses with that card or account. For example, the annual fee on a points card, or the interest from a balance carried from one month to the next, can be claimed if the transactions are business related.
Keep a calendar and logbook
These records are key for claiming tax deductions. We recommend making notes in your calendar about business expenses and events so you can cross-check them later in the event of an audit.
If you use your car for business trips, it’s important to keep track of mileage through a logbook or app, since you can only deduct a portion of your vehicle expenses.
Mistake #3: Neglecting to make tax-savvy investments
Save on your tax bill by taking advantage of the following investments:
Registered Retirement Savings Plan (RRSP)
We’re big fans of the RRSP. And you should be too – it could have a big impact on your tax bill. If you’re a high-income earner, the RRSP is a powerful tax deferral strategy.
Let’s look at an example:
Let’s say you made $120,000 in 2020 and decide to contribute $15,000 to your RRSP before the March 1st deadline
The CRA will tax you on $105,000 of income instead of $120,000, since the contribution is tax deductible
Your contribution could significantly lower your taxable income.
How it works
You only pay tax on your RRSP contributions – and any gains in the account – when you make a withdrawal. So if you plan on withdrawing from your RRSP in retirement, you’ll have deferred your tax liability to a time when your marginal tax rate will be much lower.
Don’t worry if you can’t contribute to your RRSP this year.
Your RRSP contribution room accumulates and can be carried forward to future years when your marginal tax rate is higher.
When to fund your TFSA first
If you think you’ll withdraw from your RRSP before retirement, or that your income will be larger in the future, you may want to top up your TFSA first. It might not give you a tax refund, but you can withdraw from it anytime, tax-free.
Registered Education Savings Plan (RESP)
If you have children and grandchildren, the RESP is a great way to put away money for their education.
For every contribution to the RESP of a child up to 18, the federal government will contribute at least 20% to an annual limit of $500 through the Canada Education Savings Grant (CESG). The maximum lifetime CESG is $7,200 per child.
While contributions to a RESP are not tax-deductible, the income it generates accumulates tax-free. And when your child uses the funds, the income is considered your child’s income and is taxed at his or her low tax rate.
Mistake #4: Failing to let family “lend a hand”
Running a small business requires the support and understanding of your family. But did you know that your family can also lend a hand by helping lower your tax burden?
You may have heard that the Income Tax Act has attribution rules that prevent Canadians from income splitting. If you gift your spouse part of your income, the CRA will still attribute it back to you and you’ll be taxed at the higher rate.
However, there are exceptions to the attribution rules where you can use income splitting to your advantage and grow your family wealth.
Below we outline four strategies you can use to make income splitting work for you.
- Lend money to your spouse – If your spouse earns less money than you, and you lend them an interest-bearing loan, any return is taxed at your spouse’s lower marginal rate.
- Split pension income – If you’re 65 years or older, you can split up to 50% of eligible pension income with your spouse.
- Make contributions to a spousal RRSP – If your spouse is earning less money than you are, and there’s a good chance they’ll have less income in retirement, the spousal RRSP will help even out retirement savings for the both of you.
- Max out your TFSAs – If you max out your own contribution, you can also max out your spouse’s TFSA – it’s tax-free so attribution doesn’t matter in this case.
Mistake #5: Not hiring a tax specialist
A tax specialist does so much more than prepare your tax return. If you find a tax specialist that works with small business owners, they will:
- Keep your books and records in order
- Track your progress and compare past and present financial positions
- Plan and forecast future financial positions
- Provide information to make sound business decisions
- Help you choose your ideal business structure and when, or if you should incorporate your business
Not only will they keep on top of your tax preparation and filing so you avoid penalties and interest, they will also stay up-to-date with tax rules and regulations so you receive all the credits you’re entitled to.
They can give you an overview of your financial situation and provide long-term tax planning that will reduce your yearly tax bill.
They can also provide professional financial statements if you need financing.
If you’re audited by the CRA, a tax specialist can represent you so that you don’t have to take time away from your business to deal with the audit process.
They will also help you prepare for major life changes like marriage, divorce, having children, retirement and death and make sure your taxes and investments are optimized for the change.
Finally, a specialist that offers tax filing as well as additional services like payroll and bookkeeping can help you find balance and handle time-consuming tasks that free up your time to build your business.
Free Guide: Tax Preparation Toolkit for Small Business Owners
We know you’re dreading it, but it’s got to be done – and with a little preparation, you can fulfill your tax obligations without any stress. Our comprehensive tax preparation toolkit will help you get organized for tax time.
Learn what information and key documents you need to prepare so you’re ready for the tax filing deadline. There’s even a printable checklist that lists all the documents you’ll need as a business owner, and tax write offs you shouldn’t miss out on. Get the prep out of the way so you can get back to running your business.
FBC was founded on the belief that Canadians should receive every benefit of filing their taxes. Three-generations later, our family-owned business continues to support farmers, truckers, trades and other small businesses minimize their taxes, simplify their books, and pay their employees.
Take 15-minutes to connect with us. Let’s see if we’re a good fit for you and your business.