Blog

Ensure your books are always in order for the Canada Revenue Agency (CRA)

​Reporting requirements of the CRA ofter overwhelm owner-managers who work hard in their businesses and have limited time. The time and cost of meeting CRA requirements, and the associated taxes, is not something most people look forward to. Regardless, it is in the best interest of owner-managers to maintain good business habits and stay on the right side of the CRA.

Suggestions to make your relationship with the CRA easier over the long run:

• Establish the correct legal structure for your business.  Understand the tax, legal, and reporting consequences of your form of business: sole proprietorship, partnership, or corporation.

• Maintain proper bookkeeping.  Whether owner-managers maintain their own books or hire a bookkeeper, transactions should be recorded on a regular basis.  When records are up-to-date, the performance of your business can be analyzed and adjustments can be made to ensure you follow your business plan and your budget.  Current transaction records also allow you to keep track of receivables, payables, and bank balances, as well as profit and loss. Failure to routinely record transactions could result in missing taxable deductions or payment deadlines.  Maintaining transaction records and all supporting documents is essential for creating a smooth relationship with the CRA.

• Segregate business from personal.  A clear division between business and personal finances should exist.  This makes bookkeeping more straight-forward and allows the CRA to conduct a clean tax audit.  Regardless of the legal structure of the business, ensure business transactions, bank accounts, lease agreements, and loans are maintained separately from personal accounts.

• ‍Employees versus contractors.  Distinguish those people who work for you as employees and those who work as contractors. Often, employers have people working for them as contractors who the CRA consider to be employees. The rules of the CRA and Workplace Safety and Insurance Board (WSIB) make a sharp distinction between contractors and employees.  Inappropriate classification of an employee as a contractor  will result in reassessment of CPP and EI deductions, and can result in issues with WSIB from unpaid premiums during the period the employee was misclassified. Correcting inaccuracies can be time consuming, expensive, and may not be simple if the person is no longer with the company (dismissed or resigns).

• Non-deductible expenditures.  Legitimate business expenses are those expenses incurred to earn income. Far too often, expenditures are recorded in the business that have little to do with earning income. The CRA will commonly review vehicle expenses, meals, entertainment and promotion of a product or service.

• Failure to file is a BIG mistake.  Late filing of taxes, payroll deductions, or HST incurs penalties and interest.  Even when the business does not have sufficient cash flow to make the necessary payment, it is better to file on time than not file at all.  Filing on time without payment is unlikely to incur penalties, but will still incur interest. The CRA can often establish a payment schedule as long as they are contacted with a proposal prior to the payment deadline.

• Understand Payroll.  Payroll is usually a business’ largest expense.  It involves much more than simply writing a cheque or depositing money to a bank account.  Understanding payroll is essential for a business to determine cash flow needs and profitability.  Payroll includes calculations, such as source deductions, the employer’s share, vacation pay, WSIB premiums, and monthly withholding taxes for each employee.  Payroll is also responsible for compiling data for T4s, and records of employment (layoffs or dismissals).  Failure to remit payroll withholding taxes will invite an audit along with penalties and interest.

• Accounting system. Efficient and effective accounting software, is essential to provide a company with insights and avoid unnecessary costs.  Without good accounting software, information is not stored in a manner that generates value for the business, and can create issues with financial reporting, government remittences, and taxes.

• Quality bookkeeping.  Obtain a qualified and experienced bookkeeper who understands your accounting system, including payroll, HST, WSIB, account allocation, reconciliations, and online banking. An effective bookkeeper can provide your business with  timely information to support business decisions and external sources when needed, such as the bank or CRA.  An inept bookkeeper will create errors or omissions that will result in costly mistakes in financial and tax reporting.

• Measure twice, cut once.  Do your homework; errors can be avoided and are costly when they occur.  Before making decisions on major purchases, financing, staffing, accounting systems or tax strategies, do your homework. Getting and using expert knowledge ensures that decisions will not run afoul of tax authorities or other regulatory bodies.

• Leave the details to others.  When possible, establish business procedures that allow others in your company to deal with the CRA if you are too busy or simply don't like dealing with the CRA.  This will allow your business to meet all regulatory requirements, while freeing up owner-manager time for more pressing business needs.

‍