Ahh, April. The signs of spring are all around us ⁠–⁠ warmer weather, birds chirping, trees budding and, above all (well, for accountants at least), tax season. It’s the most wonderful time of the year!

Maybe that’s a bit of an overstatement, but this time of year can definitely have a big impact on your business’s bottom line. That’s why, in this month’s edition of The Bright Side, I focus on how to make tax season go as smoothly as possible for small business owners.

Let’s spring into it!

Ten tax tips for entrepreneurs

In working with clients over the years, I’ve come up with a list of 10 key tips that can help entrepreneurs avoid tax‑related issues. Essentially, taxes come down to preparation ⁠–⁠ specifically, preventing little errors and oversights from becoming big hassles and headaches. While there are some generally applicable items here, it should be noted these tips apply mainly to non‑incorporated small businesses.

1. Summarize your receipts. Rather than bringing in all your individual receipts (the proverbial shoebox full of receipts comes to mind), provide a summary of income and expenses for your accountant to easily report on your T2125 form. This will save time and reduce the cost of completing your personal tax return.
2. Claiming business expenses. Only expenses incurred for legitimate business purposes may be claimed. Eligible expenses include advertising, meals/entertainment, insurance, office expenses, professional fees, rent/maintenance, property taxes, utilities and travel.
3. Play the home advantage. If you operate your business from home, take advantage of business‑use‑of‑home expenses. If the workspace in your home is the principal place of business, or you use it on a regular and ongoing basis to meet customers, you can claim a percentage of your home expenses. Start by adding up all your home expenses, including mortgage interest, utilities and property taxes. Next, calculate the square footage percentage of your home office. For example, if your home is 1,500 sq. ft. and your home office is 150 sq. ft., the percentage is 10 per cent. You can claim this percentage of your home expenses.
4. Maximize RRSP benefits. RRSP contributions are a great way for entrepreneurs to maximize tax savings, especially in higher income years. Claim all RRSP contributions you made in the first 60 days of 2023 and during the remainder of 2022 on your 2022 tax return.
5. Organization is key. While your accountant can download the slips you’ve received ⁠–⁠ like your T4 and T5 ⁠–⁠ from the Canada Revenue Agency (CRA), remember to bring in any other relevant information, such as your business summary, rental summary, charitable donations, medical expenses and RRSP contribution slips.
6. Offsetting your losses. If your business has a non‑capital loss (expenses exceed business income) in any year, you can use this to decrease your income tax. Non‑capital losses can also be used to offset other income. Losses can be carried back three years or carried forward up to 20 years. Your accountant can determine the most tax‑efficient approach for you.
7. Collecting applicable taxes. Depending on your business, you may be required to collect Goods and Services Tax (GST) from customers and remit it to the CRA. You are not required to register for GST/HST if your business revenue over four consecutive quarters is less than $30,000 CAD. However, if you make taxable sales you can register for GST/HST, even if you don’t meet the minimum threshold.
8. Quarterly schedules. As a small business owner, it’s also important to keep in mind you’ll likely have to start paying taxes in quarterly instalments after your first year. It’s imperative to have the required funds set aside to meet such tax obligations.
9. Write it off. Most of your depreciable property may be written off in one year. This is because the CRA allowed the immediate expensing of capital assets until Dec. 31, 2023 on certain capital additions. That means if you spend $10,000 on equipment and furniture for your small business, you can deduct that amount to reduce your business income.
10. Start early. It might seem like common sense, but it’s worth noting. Procrastination combined with the hectic pace of running a business can often conspire against us. By getting a jump on things and filing your taxes as soon as possible, you’ll be in a better position to avoid and/or manage any unforeseen issues.

Some words about the ‘A’ word

While I’m offering tips, let’s talk about the dreaded ‘A’ word: Audit. Few things in life can conjure up stress and worry like the prospect of an audit.

What’s more, the CRA is typically on the lookout for potential red flags that raise suspicion, increasing the likelihood of an audit. The fewer red flags your return has, the less you’ll have to worry about the ‘A’ word.

Here are five tips that can help you avoid an audit.

1. Be sure to categorize expenses consistently each year to avoid big swings in each expense category, as claiming significantly higher tax deductions than previous years raises red flags with the CRA.
2. Do not claim any personal expenses as business deductions. This is a biggie. Anything you use for both business and personal purposes, such as your phone or vehicle, must be clearly prorated for the portion used for business.
3. Make sure you only claim eligible expenses, which means those specifically incurred to conduct business and earn business income.
4. Declaring business income that differs significantly from normal levels in your industry may draw a red flag, as the CRA compares profit margins and incomes for various industries and will compare your income to what is typical for your business type.
5. If you continually report a loss, the CRA may question the purpose of your business and seek to determine if it’s just a hobby or you plan to make money from it. Most new businesses in the startup phase incur losses, so this would not trigger an audit. But reporting losses several years in a row may trigger a red flag for the CRA.

Ultimately, whether your business gets audited is beyond your control. That’s why the best offence is a great defence. Make sure to keep all your receipts and documentation for six years in case of an audit and report information accurately to avoid one.

Worst case scenario, if you do end up getting audited, being organized with your tax documentation will help support any claims in question. If you have been forthright and honest with the CRA, there should be no issues ⁠–⁠ here, the audit is essentially more of a formality. In any event, your tax advisor will be your ally during this process, as they’ve been through it before with other clients and know what the CRA is looking for.

A forecast for success

Well, that wraps up another edition of The Bright Side. Taxes may be inevitable, but the stress and anxiety they can bring don’t have to be. Careful preparation and thorough organization go a long way. It may not be the most rewarding or enjoyable aspect of running your own business, but a little extra time now can save a lot later.

As always, I hope these tips will help you feel more confident and better prepared as you continue on your entrepreneurial journey to success. You’ve got this!

Manager, Client Advisory at Baker Tilly Catalyst, Shannon McIntosh has overcome anxiety, insecurity and depression to emerge as a voice of empowerment, helping clients and colleagues exceed expectations and break new ground. In The Bright Side, she taps into her specialized experience working with non‑profit businesses and her passion for helping organizations that support the community to offer enlightening tax, financial and business guidance to help replace self‑doubt with self‑belief.

Meet the Author

Shannon McIntosh
Calgary, Alberta
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