March 8, 2022
Many new business founders make the mistake of ignoring taxes until they start earning revenue. After all, the CRA doesn’t care until you have funding and capital. However, doing tax planning now will reduce tax problems later—and help you to save money in deductions.
Avoid the following 8 tax pitfalls when starting a business.
You can choose various forms of legal entity for your business (e.g., sole proprietor, partnership, incorporation). Each type of entity has advantages and disadvantages, including tax structure. Depending on revenues, you might end up paying too much tax or missing out on deductions. Know the tax laws for each type of entity.
When you start earning revenue, you will have to regularly track, report, and submit different tax payments. This can include federal and provincial taxes, sales taxes, payroll taxes, licensing fees, and more. You don’t want to be fined or penalized for abusive tax avoidance or tax evasion. Know WHAT taxes to pay and WHEN you have to pay them (i.e., tax deadlines). Otherwise, you might have to catch up on your taxes.
Many business owners fail to separate their business finances from their personal finances (as well as their respective accounts). This can cause confusion and more work than necessary during tax time. The CRA could also fine you and require you to pay additional taxes. Your company could also lose its corporate status.
As soon as you launch your business, start tracking and deducting all eligible business expenses. This includes pro-rated rent and utilities, office supplies, business vehicles and travel, organizational fees, and more. Stay up to date with tracking and recording receipts to properly report your business expenses.
In addition to claiming eligible business expenses, you can take advantage of other deductions to reduce your tax load. For example, you might be able to delay or defer some income, or the disposal of depreciable assets, to the next tax year. You could also invest in RRSPs and TFSAs or use income splitting to reduce your tax burden (where applicable).
The CRA considers it a failure to report income when you claim expenses that are not deductible. This can result in the CRA reassessing your tax return and then charging interest and penalties on the unreported income. Ensure that expenses relate directly to your work, pro-rate the percentage of time that relates to personal use (e.g., home office, vehicle).
Some new businesses will try to save costs when setting up their payroll. This can lead to errors in deductions and contributions (e.g., EI, CPP, payroll tax) and problems with the submission of business taxes. Other factors (e.g., remote workers, temporary and contract employees) can further complicate payroll matters. Make sure to work with payroll professionals to ensure that it’s set up properly from the start.
Once you incorporate or reach a certain level of business success, partner with a tax advisor to ensure you follow all tax regulations. This will enable you to focus on developing products and services, finding new markets, and growing the business. Hiring a tax advisor (such as Accountero) will help you to avoid tax liabilities and reduce your tax burden.
Accountero is a “built for founders” financial hub for growth-focused startups. We simplify the accounting process for business owners. Get timely, one-click access to advisors to help you save on taxes, as well as high-level reports to identify areas of growth potential. Talk to us today about your accounting needs.
Accountero is a tech-powered service provider offering bookkeeping, tax advisory and fractional CFO. Accountero is not a public accounting firm and does not offer services that require a public accounting practice license.