The Canadian tax system offers plenty of opportunities for startups to save money. Unfortunately, it’s also very complex, and many startup founders make costly mistakes during tax season as a result. Navigating the tax process effectively is key for small businesses to ensure they maximize their tax refunds.
To help out, here’s an overview of some common mistakes made by startup founders in Canada and how to avoid them.
Failing to File Taxes
The most costly mistake is failing to file taxes in the first place. This can lead to hefty fines, penalties, and back taxes that could have been avoided with timely filing. The most optimal way to avoid this issue is to keep track of important tax deadlines and ensure they are met without fail.
Businesses are given the option to determine their start of the fiscal year and should use this to their advantage. Additionally, entrepreneurs should stay on top of any changes or updates made by the Canada Revenue Agency (CRA) as these will affect their filings.
A tax checklist can help ensure that all requirements are met and enable you to stay on track.
Is startup capital taxable?
A common question among startup founders is whether or not capital received from investors or other funding sources is taxable. Generally, the answer is yes. However, if the funds were obtained through grants, subsidies, and other non-repayable forms of assistance, they may be exempt from taxation in certain circumstances.
It’s best to consult a qualified tax professional to avoid confusion. They can provide guidance on the specifics of each situation and determine if any exemptions may apply.
Not Claiming All Business Expenses
One of the most common mistakes made by startup founders is not claiming all their business expenses. Since startup taxes are based on income, reducing one’s taxable income through deductions for legitimate business-related costs can save money in the long run. This includes things like office supplies, travel costs, and other related items.
To ensure no expense goes unaccounted for, startups must keep detailed records of all purchases throughout the fiscal year. This includes keeping receipts, invoices, and credit card statements, if applicable. Additionally, entrepreneurs should use digital tools such as accounting software to streamline the process.
Not Separating Personal and Business Expenses
Another common mistake is not separating personal and business expenses. This leads to entrepreneurs claiming deductions related to their personal life, which can result in an audit from the CRA. That’s why businesses need to open separate bank accounts for their operations and use only corporate credit cards for purchases.
Moreover, any expense made on behalf of the company should be documented with a receipt or invoice. By keeping careful records of both expenses, startups will have much more accurate information when filing yearly taxes.
Not Taking Advantage of Tax Credits
Tax credits are one of the best ways for a small business in Canada to save money. They directly reduce the amount of taxes you owe and can significantly reduce your tax bill. Unfortunately, many startup founders fail to take advantage of these credits due to a lack of knowledge or time constraints.
Some of the most applicable tax credits for startup businesses include the SR&ED Scientific Research and Experimental Development Tax Credit (SR&ED) and the Investment Tax Credit (ITC). Applying for these credits can be complex and time-consuming, but the savings can be worth it.
While startup founders can study and apply for these tax credits themselves, hiring an accountant or tax specialist is often recommended to help with the process. With the right professional advice, startup founders can ensure they’re taking full advantage of all tax credits.
Not Hiring Professional Accounting Help
Taxes can be complicated and tedious, and not everyone has the accounting knowledge to handle them independently. It’s crucial for entrepreneurs to consider professional help when filing taxes. Professional accountants have the experience and expertise necessary to ensure that all filings are done correctly and efficiently.
Not hiring a professional can mean higher chances of committing costly mistakes. To avoid this, entrepreneurs should research local accountants specializing in startups or small business taxes in Canada and contact them for advice if needed.
Bottom Line
Tax season can be stressful for startup founders, but it doesn’t have to be. By avoiding the common mistakes listed above and taking advantage of any deductions available, entrepreneurs can ensure they are maximizing their refunds while staying compliant with all CRA requirements. A highly recommended step for any entrepreneur is hiring professional accounting services to help guide them through the process.
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 licence. As part of its tax advisory service, Accountero guides its clients’ plans for Investment Tax Credits, R&D credits and similar rebates available to SMBs and startups.