Small and growing businesses in Canada have a lot of questions when it comes to managing their tax affairs, including how decisions made can impact their day-to-day cash flow and influence their long-term success.
Simon Francis from Fuller Landau LLP is a tax accountant who consults with business owners on tax issues and other start up challenges. Francis shared his insights and strategies to help Canadians efficiently manage the tax side of their business.
Q: What should new business owners know about taxes as they get started?
Francis: As a business owner, the first thing you should understand is that all income, regardless of its source, is taxable by the CRA. The greater uncertainty for most businesses is, what expenses can be deducted from your business income. In my experience, business owners are in one or two camps. They either think everything is deductible, or they are extra conservative and and claim very little in fear of attracting attention from the CRA. The reality is that deductible expenses fall somewhere in between.
Reasonable car expenses, certain home office expenses, cell phone, legitimate business travel and entertainment expenses are examples of eligible deductions. It’s important to understand what documentation is necessary to keep should the government choose to review your expenses. For instance, a credit card statement isn’t enough — you need to have the slips with details of the expenditure. As an example, if you have a credit card charge from a gas station and it’s $50, it will not be assumed the bill is entirely for gas — it could be food, drinks, and other expenses that may not be deductible. Keep your receipts in case the CRA asks for them later. Note that electronic receipts are acceptable as evidence to support the deduction, but they must be clear and contain all details of the original paper copy.
Q: What are some of the business expenses that CRA targets?
Francis: There are certain expenses that are on the radar of CRA because they are often abused, most notably car expenses. For instance, people think that when they drive to office they can deduct that, but that is not business driving – those are personal kilometres.
Other examples of expenses that the CRA scrutinizes includes personal health and life insurance plans, personal entertainment, travel and professional fees. There are significant penalties should CRA determine excessive personal expenses are claimed by your company. This will include paying tax personally.
Q: When it comes to sales tax, what do business owners need to know?
Francis: In my opinion, sales tax is the second most important thing to consider when setting up your business. Owners need to know that they are required to start charging GST/HST if their business earns $30,000 or more in a year.
The worse case scenario is a business owner who doesn’t realize they have to register for sales tax, and therefore doesn’t collect from their customers. They either have to go back to their customers to collect tax retroactively (which likely won’t go well), or they have to pay sales tax out of their own pocket. Sometimes I have to tell my clients: “You should keep track of your sales as a small business and once you are getting close to $30,000 of annual revenue you need to register for sales tax filing. If you forget or don’t pay attention to this rule you will owe sales tax to the government whether or not you’ve collected from your customers.”
Q: How do you demonstrate contribution by a family member?
Francis: Basically, you need create a job description for that family member, including a salary for their position. Then you need to prove that there are business activities going on. Have the spouse receive and send emails, make sure they are engaged in the process, and not just collecting a paycheque. They need to prove they have a role in the business – there needs to be some demonstration of effort
Tax efficiency and your business plan.
Whether you’ve owned your business for years or you’re a new entrepreneur, a well-written business plan which addresses your tax requirements may help you to achieve your goals. In addition to a consistent check-in with your business plan, regular visits to an accountant may be a critical step towards your ongoing success.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.