There's plenty of pressure on those of us who run our own show. Whether you are working from a desk in the basement next to the freezer or have a storefront and employees, being proactive about tax will keep you off the Canada Revenue Agency’s (CRA) radar.
Here are some tips:
- Don’t wait until the last minute. It’s impossible to get yourself properly organized under eleventh-hour time pressure and it’s difficult to make good decisions to minimize your taxes.
- Make an estimate of your expected tax bill. If your revenue is going to be high, you might consider making that machinery or computer purchase before year’s end. You’ll defray some of the expense through capital cost depreciation, says Cleo Hamel, senior tax analyst with H & R Block Canada.
- Unless you are incorporated you are required to complete a Statement of Business and Professional Activities (T2125) at the same time as you file your personal taxes.
- You should set aside 30 to 40 per cent of your gross income to cover income tax and CPP. Even if you are the only employee of your business, you are responsible for paying the employee and the employer CPP contributions.
- Keep proper records differentiating business from personal. If you can’t prove it, the CRA will likely assume the expense is personal. Hamel recommends that you slot your expenses into the categories provided by CRA on the T2125. “Whatever you do, don’t have a large miscellaneous category,” she advises.
- Don’t exaggerate your home office expenses. This is a red flag for the CRA. There are always exceptions, but a good rule of thumb is a maximum of 25 per cent as the business share of heat, hydro, property taxes and so on.
- Keep a careful log of car expenses. This is another red flag for CRA.
- If you run into trouble or make a mistake, call the CRA. Most times they will be very helpful, especially if you call before the crunch.
- Whatever you do, don’t ignore communications from the CRA, respond promptly and make notes of your conversation right on the letter for future reference.
Being a little proactive before year end will make your business life so much easier come tax filing time in 2011.