Spring is in the air and the tax filing deadline for most Canadian small businesses is right around the corner. Yes, it’s that time of year again. Because of the turmoil created last year by the coronavirus pandemic, this year’s tax season will be a little more complex than previous years. The pandemic brought about big changes to Canada Revenue Agency (CRA), including new reporting requirements. As an example, if you were one of the many small businesses that benefited from either the Canada Emergency Wage Subsidy (CEWS) or the Canada Emergency Business Account (CEBA) for interest-free loans, the income received is taxable.
Tax season can be a challenging time of year for Canada’s small business owners, as they scramble to get everything together, organized and filed on time. Preparing and filing your small business tax return on your own can be a daunting task. Not only do you need to understand your fiscal obligations and their implications, but you also need to understand and comply with new reporting requirements. Although many small business owners prefer to work with an accountant or other tax professional if you are completing your tax returns on your own, here is a tax preparation checklist to help you feel more confident about filing your return:
Gather ALL income/earnings information. It’s important to gather all relevant financial information before beginning to fill out any paperwork. This includes the income you’ve earned from a trade, profession, other undertaking or activity carried on for profit. All income earned must be included when calculating your taxes. Remember, if you received government funds through either CEWS or CEBA or other government COVID relief programs, it must be reported as income and it is taxable. When reporting income, it must be accompanied by supporting documentation such as original sales invoices, receipts, fee statements or contracts.
Collect ALL business expenses & operating costs – operating costs such as rent, utilities, equipment purchases, office supplies, business software and applications, professional fees (legal, accounting, etc.) incurred on behalf of your business, inventory costs, wages or other business expenses may be deductible.
Keep records (original documents) of your transactions to support income and expense claims. The CRA won’t accept your bank or credit card statements to justify deductible business expenses. Have itemized receipts that correspond with your transactions. Keeping original records is important – especially if you are audited or otherwise asked to provide receipts in support of your claims.
Collect ALL investment information & receipts for charitable donations or educational expenses - if you have invested in a trust or mutual fund, ensure you have your T3 slip: Statement of Trust Income Allocations and Designations, which indicates the income you received from these investments. A T5: Statement of Investment Income will also be required, which indicates how much interest income you earned from a corporation either through the interest paid to you by your bank or dividends received from a corporation. You might be eligible for a tax credit if you donated to a registered Canadian charity and obtained a receipt. You may also claim tuition, textbook fees, interest paid on student loans for yourself or dependants providing you have receipts.
Claim ALL applicable small business deductions. There are several tax deductions that small business owners can claim to lower your tax bill. The CRA defines deductible business expenses as any reasonable current expense you paid or will pay to earn business income. However, to deduct the expense, your business must have a reasonable expectation of profit. Common deductions for small business owners include:
Bad debt deductions – if you’ve invoiced a client and are unable to collect payment within a year, you can claim it as a bad debt or write-off on your tax return.
Rent & business maintenance – if you rent space for your business, it counts as a business expense for a tax deduction. You can also deduct minor repairs and maintenance that is performed on your business property. Don’t forget to deduct expenses incurred for telephone service and other utilities at your place of business.
Interest on loans – interest on business loans or on property acquired counts as a tax deduction.
Office expenses – you can claim office expenses and supplies, such as pens, paper, stationery, etc., as deductions, providing you have kept accurate records of these purchases.
Payroll – you can deduct gross salaries, wages and employer contributions to pension plans and insurance policies. Salaries have to be reported on a T4 slip and pension plan contributions on a T4A slip when submitting your tax return.
Advertising – you can deduct up to 50% of advertising costs for your business. If your print media advertisements are directed towards the Canadian market and the content is 80% editorial, you can deduct all this expense.
Business-use-of-home expenses – you can deduct the workspace in your home used for business, including part of your maintenance costs (utilities, home insurance), along with part of your property taxes, mortgage interest and capital cost allowance.
Vehicle expense – if you are self-employed and regularly use your vehicle for business-related activities, you can deduct a portion of your license and registration fees, fuel costs, insurance, maintenance and repairs, as well as leasing costs.
Talk with your financial advisor, accountant or tax professional to uncover other business deductions that you can claim. As an example, the CRA lowers your tax rate if your business meets certain criteria for the overall Small Business Deduction (SBD). To qualify for SBD, your business must be a Canadian-based company, be a private corporation and have less than $10 million in taxable capital employed in Canada. Rules associated with Canada’s Small Business Deduction program are available online.
Comply with new T4 reporting requirements. For the tax year 2020, the CRA introduced additional reporting on T4 slips, Statement of Remuneration Paid. These additional reporting requirements apply to all employers and will help the CRA validate payments under the Canada Emergency Wage Subsidy, the Canada Emergency Response Benefit (CERB) and the Canada Emergency Student Benefit (CESB). In addition to reporting all taxable employment income for the year in Box 14, employment income also needs to be reported in four separate pay periods in four separate boxes on the T4. These new reporting requirements apply to all employers, even if your business didn’t make a CEWS claim. The CRA provides information on How to report employment income during COVID-19 pay periods on their website.
Determine if you qualify for tax credits – There are tax credits available for self-employed individuals and small business owners that can help reduce your taxes. Examples of tax credits that you could qualify for include:
Investment tax credits – for investing in your small business by purchasing machinery and equipment.
Apprenticeship job creation tax credits – if you hired an apprentice, you can claim 10% of their wages up to $2,000 per individual.
Input tax credit – if your small business claims goods and services tax/harmonized sales tax (GST/HST), you might be able to recover the GST/HST paid or payable on purchases and expenses related to your business.
Scientific research and experimental development program (SR&ED) – Canada encourages businesses to conduct research and development by providing cash refunds and/or tax credits for these expenditures. If your business has engaged in research and development these credits may apply.
Top up your RRSP contributions – review your RRSP contribution limit and your last Notice of Assessment (NOA) to determine your total contribution room. Contributing to your RRSP can significantly lower your taxable income, providing immediate tax relief and tax-sheltered growth.
File your return on time – if you file your tax return late and owe taxes, the CRA will charge penalties and interest. The current penalty is 5% of the balance owing plus 1% of the balance owing for each month your return is late, up to a maximum of 12 months. The CRA will also charge daily interest on any outstanding tax owing. If you owe more than you can afford to pay – don’t panic. File your return and communicate with the CRA to review payment options.
Even if you are confident that you completed your tax return correctly, it’s a good idea to have it reviewed by a trusted accountant or certified tax professional before submitting it. When it comes to the ins and outs of taxes, accounting and finance, these experienced professionals can set your mind at ease. The obvious benefit of seeking guidance from one of these professionals is that – they know Canada’s tax system better, including the new reporting requirements. Plus, when you have a tax professional’s seal on your small business income tax return, you’re assured of its accuracy. If you are in the market for a financial advisor, accountant or tax professional, Vexxit can help you find your perfect match for free.