Tax season is a stressful time of the year for many business owners, especially if they don’t keep their books and records up to date throughout the year.
As a CPA, I witness a similar pattern year after year: many small business owners often have absolutely no idea how much tax they are going to owe the CRA, so they put off gathering the information for their accountant and bookkeeper and bury their head in the sand. This just compounds the problem because not only do they still owe the taxes, they now owe interest and penalties. With the CRA increasing their interest rates each quarter, it’s getting more and more expensive to be late with your taxes.
Even if small business owners keep their books and records up to date, thinking about taxes is often associated with anxiety. Fortunately, there’s an easy way to relieve some of that anxiety – using technology like Xero accounting software can provide insight into where their business stands. Their accountant can then estimate what they owe well before the payment is due and can provide a plan for the balances owing.
In addition to using accounting software like Xero and integrations with various financial apps, there are some ways that small business owners can better prepare for tax season. Here are some answers to frequently asked questions.
What do I need to keep in terms of financial documentation for my business?
At the simplest level, you need to keep anything relating to something you’ve purchased for the business and anything you’ve sold through the business. The better the documentation, the more likely it will be accepted if CRA ever audits you.
What makes a solid piece of documentation in the CRA’s eyes?
If you purchase something for your business, at a minimum you want the receipt to have:
- Name of the company you purchased from
- Date of the purchase
- Total amount paid and the tax amount
- If there is a tax amount (GST/HST/PST), there should also be a 9 digit business number shown on the receipt
- If you paid the bill, you should also have proof of payment – a credit card receipt, a cleared cheque stub or something clearly marked as “paid” from the vendor.
The same details hold true for your sales information, but you will have details on the other side of the transaction – this means the money coming into your bank including how much you charged, any tax amounts, how it was paid and any processing fees you paid from credit/debit card companies.
Do I need all this paper?
In short – no. The CRA will accept digital documentation in the event of an audit, as long as your digital records are complete and consistent. (Just make sure you back up any digital files!)
During COVID-19 , we saw a big increase in the number of small businesses who are leveraging technology to help them prepare for tax season and keep their records up to date. We continue to encourage people to use technology as it allows clients to work with accountants and bookkeepers that are the right fit for them, regardless of location.
The best thing to start with is an app that supports data collection and automation. There are many out there, like Hubdoc, that allow you to capture and store receipts and invoices online (i.e., by simply taking a photo with your phone). This will provide you with a fully searchable archive that doesn’t degrade over time like paper does. These apps also integrate with your accounting system and allow your accountant or bookkeeper to take it from there. Say goodbye to the dreaded shoebox full of receipts!
What happens if I don’t pay myself through payroll?
For those of you with these types of corporations, the biggest thing to understand is how much money you drew out of the company for personal use. This will determine what your dividends for the year will be.
Depending on when your corporate year-end is, there’s the ability to defer this income to the next personal tax year; however, this really only happens in the first year if you continue to draw money out of the company each year. Again, technology can help with this. Keeping your accounting up to date gives you ongoing visibility into where this balance stands and gives you the opportunity to repay funds or plan for the coming tax bill.
How do I employ an accountant or bookkeeper?
All in all, working with a bookkeeper or accountant throughout the year and getting set up with the right technology can turn a stressful tax season into a breeze. If you’re interested in working with an advisor you can check out Xero’s advisor directory, which can help you find an accountant or bookkeeper based on your industry and needs.
Find an accountant or bookkeeper here.
Wishing you all the best this tax season!
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.