Five Things to Know Before Tax Season
We’re going to level with you – there are more than five things to know before tax season. This list covers what people most often overlook and should save you some bother. So here it goes – pay attention!
#1: You may need to file multiple returns
If you’re one of the many new business owners who started their firm as a side project during the pandemic or left their full-time job to pursue a full-time dream, you will need to file two returns. One will be for the income from your incorporated business, and the other will be for your individual income.
Other income could be from a former job or another source like a rental property or an investment portfolio. Don’t try to cram it all into one return!
#2: Decide on how to pay yourself
Although it may sound like a minor point, whether you take money from your business in salary form or as a dividend has material implications for reporting tax.
If you are less adept at administrative tasks at a high level, dividends may be the way to go as they require fewer calculations and remittances. However, paying yourself a salary has the advantages of a regular income, such as qualifying for certain tax benefits and providing more comfort to some lenders such as mortgage providers.
Which is suitable for you depends very much on your situation and deserves a separate post (or more likely a conversation with a professional tax advisor). Be sure to give it the attention it deserves.
#3: Disorganized expenses can be your undoing
Particularly if you’re a new business owner, it can be tempting to focus on income and leave expenses to the last minute. This can work out badly in one of two ways.
One is that you fail to claim a deduction to which you’re entitled (and there are more potential deductible expenses than you think).
The other slip-up is overestimating your expenses and claiming more deductions than you are entitled to. Even if this is an honest mistake, the CRA has analytics that will identify expenses that are out of whack with the averages for a similar company, which could lead to a penalty or audit. Ditch the shoebox, my friend. It’s 2022.
#4: Don’t get tripped up by deadlines!
For most people, the tax filing deadline is April 30th. Unincorporated businesses and the self-employed can leave it until June 15th. That said, whoever you are, you must still pay your taxes by end-April.
Even if you cannot pay your balance owing, you should still consider filing on time to avoid being slammed with the late-filing penalty. You’ll be liable for a 5% penalty on taxes owing straight out of the gate and 1% in addition for every whole month your return is late, up to 12 months. Yes, that is 17% in total.
#5: Use it as a chance to take stock
Going through business financials with a fine-toothed comb is no one’s idea of fun. (Well, almost no one, we kind of have to plead guilty here). But since you have to do it, turn it into an opportunity to think through whether you are running your business optimally.
Beyond tactical moves, you could consider structural changes to your business that support a more efficient long-term tax strategy. At Areti, we are here not only to help make sure you file your returns correctly and on time but also to support the broader issues. Take advantage of this next time you are in, and we’ll be pleased to help you.
After all, we know your business as well as anyone, don’t we? That’s our Areti.