Many small business owners are stressing about missed deadlines and filing mistakes. The Canada Revenue Agency (CRA) can impose fines on entrepreneurs who do not pay their taxes on time.
Fortunately, you can reduce stress by getting some of the crucial work done early. Read on and learn three easy tips to avoid fines when filing taxes.
Know the Taxes You Need to Pay
In Canada, businesses need to file an annual business income tax return. There are different tax returns to file depending on the legal structure of your business.
You must report your business income on Form T2125 or a T1 personal tax return form if you are:
- Self-employed
- Owner of a sole proprietorship business
- Owner of a partnership business
If you own an incorporated business, you must use a T2 corporate income tax return form to report your business income.
If you made a mistake in your tax filing, you must complete a CRA voluntary disclosure form. CRA’s Voluntary Disclosures Program (VDP) allows Canadians to come forward to address errors in their tax filings.
Get Organized
One way to avoid fines from CRA is to get documents organized well before tax season. Remember that the earlier you start preparing, the easier the process will be.
You will need to have a filing system in place for all your relevant tax information. Keep receipts, income statements, and tax slips somewhere safe so you know where to find everything come tax time.
If you want to take your filing system to the next level, use a digital filing system. However, you will need to upload your documents to bookkeeping software.
The organization process might be stressful, but having a filing system can prevent last-minute document hunts.
Take Advantage of Tax Credits and Deductions
Knowing what tax credits, you can claim can help lower your balance owing come tax season. In Canada, several tax incentives are available to businesses of all sizes in various sectors. Check and see if your business is eligible for tax credits.
Aside from claiming these incentives, you should also identify tax deductions that apply to your business. Claiming all qualified company expenses as deductions can help lower your total taxable income.
If you have a home-based business, consider the following when calculating tax deductions:
- Car expenses
- Mortgage interest
- Internet service
- Maintenance, repairs, and utilities
You can deduct your vehicle gas, insurance, and repair expenses from your taxable income if you drive to work. However, you will need to keep a mileage log if you choose to do so.
If you want to maximize your savings, you can hire a tax accountant. With their help, you can take advantage of additional deductions. For example, they can calculate capital cost allowance, which accounts for the depreciation of business-related assets like computers and machinery.
You can also maximize your Registered Retirement Savings Plan (RRSP) contributions. Doing so can help reduce your total taxable income.
Giving to charity and presents to your employee can also help lower your taxes. If your business donates to a registered charity during the year, you can deduct these expenses from your taxable income.
Tax season can be overwhelming if you are not ready to file your return on time. One way to avoid fines is to organize your documents early. You will reap the benefits of reduced taxable income if you have more time on your hands.
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