Canada | Tax

4 tips for preparing your incorporated business tax return

For many corporations, the tax filing deadline is June 30. Tax expert shares a few ways to make the process painless.

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Restaurant owner doing paperwork at laptop at table after hoursAs an incorporated business, paying your taxes on a monthly basis can help you manage your cash flow and stick to a budget, says tax expert. (Photograph by Getty Images/Hero Images)

As opposed to a sole proprietorship—which is when you are the business—an incorporated business is a separate legal entity all to its own. As corporations can use a non-calendar taxation year, the filing deadline is six months after year-end. However, as many corporations choose to use a calendar tax year, June 30 is a very common filing deadline. 

Incorporated business come with their own unique obstacles. John Oakey, national tax director for Baker Tilly Canada, offers four tips for preparing your incorporated business taxes—whether you’ve made the jump from being a sole proprietor or you’re new to the business world:

1. KNOW WHEN TO PAY

If you’re a self-employed individual, you’re required to pay tax to the Canada Revenue Agency (CRA) in quarterly instalments. Your incorporated business, unless it meets certain criteria, is actually required to pay instalments on a monthly basis. But Oakey suggests that paying monthly may be helpful for your corporation even if the corporation qualifies for quarterly instalments.

“I advise people to pay on a monthly basis because it’s a consistent cash outflow and it’s easier to budget,” he says. “If you do things on a monthly basis, you can keep the cash flow more consistent.” It may also help in terms of not missing a payment. 

2. KEEP GOOD RECORDS

Another important tip Oakey offers is to hire a good bookkeeper. “A number of clients I’ve seen over the years think they can do it [themselves],” he says. “I told a doctor that’s been trying to do his own accounting that I don’t stick myself with needles, [so] he shouldn’t be doing accounting.”

It’s important to recognize that good accounting records are extremely important for anybody that’s in business, as well as having a good filing system where you can find things easily. 

“When CRA comes in to take a look at something, the burden of proof is not on CRA; the burden of proof is on the taxpayer to prove their position,” says Oakey. “You need to be able to find all your receipts, logbooks and documents.”

3. DISCOVER ACCOUNTING SOFTWARE

Ready to embrace change? For tech-friendly business owners, new accounting apps and software are becoming even more user-friendly. Many have a cloud-based option now, so you can put your work in the cloud and access it from anywhere. 

“We’re seeing that becoming extremely useful and it’s revolutionizing the accounting industry,” Oakey says. “Some of these mainstream programs like Quickbooks have apps, which will not only streamline some of your accounting processes, they will help you with various business activities, like tracking your inventory, doing invoices for customers, having contracts signed and uploading receipts. It can all be stored online.”

4. DON’T FALL FOR TAX-DEDUCTION TRAPS

Oakey calls it a myth that if you’re a corporate entity, you can deduct much more than as a sole proprietor. Most tax rules around computing business income are the same for a corporation. He recommends watching out for a few common traps, such as home office and vehicle deductions. 

“People assume working on a kitchen table means they get to deduct a whole bunch of house expenses,” he says. “There’s actual legislation and here’s the criteria: it has to be a self-contained room that’s dedicated to being a home office…and you have to be using your home office more than 50 per cent of your time.”

The second trap, Oakey says, is individuals putting their vehicle inside the company so they can deduct it as a business expense. The problem is if you use that vehicle for any personal use—the percentage of time used for personal reasons becomes a taxable benefit. The result can be especially adverse if the company owns the car rather than leasing.

He explains: “CRA comes in and says, ‘Is it parked in your driveway? It’s available for your use.’ The tip to get around that would be not to put your personal vehicle inside the corporation. What you should do is reimburse yourself the amount CRA says you’re allowed for business purposes.” 

MORE 2019 TAX TIPS

Have your own business, but run it as a sole proprietorship? CPA Canada has you covered with these unincorporated business tax tips. If you filed your tax return but forgot to claim a deduction or report income, no need to worry, here’s what to do.