Tax season is upon us, and while it's not exactly the most thrilling time of year, getting your taxes right is crucial for your small or medium-sized business (SMB). For many SMBs, the thought of taxes brings a mix of dread, confusion, and maybe a little bit of stress. You’re juggling day-to-day operations, managing your team, and keeping customers happy, so taxes might feel like the last thing you want to deal with. But here’s the good news: with a little preparation and a solid understanding of common tax mistakes, you can breeze through tax season with confidence. In this guide, we’ll break down the most common tax mistakes SMBs make and show you how to fix them, so you can focus on what really matters – growing your business.
1. Mixing personal and business expenses
It's tempting to use the same bank account or credit card for both personal and business expenses, especially when you're just starting out. However, failing to separate them can create a bookkeeping nightmare and make it challenging to track deductible expenses accurately. Not only can this lead to missed tax deductions, but it can also raise red flags with the Canada Revenue Agency (CRA).
How to avoid it:
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Open a dedicated business bank account and credit card.
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Use accounting software to categorize expenses correctly.
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Keep detailed records and receipts.
2. Not keeping accurate records
Record-keeping can be labourious, but it iscritical for tax compliance. Poor or incomplete records can lead to missed deductions, inaccurate filings, and potential audits. The CRA requires businesses to keep records for at least six years, and inadequate documentation can result in penalties.
How to avoid it:
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Use cloud-based accounting software to track your income and expenses.
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Check your accounts regularly to spot any mistakes early.
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Keep both digital and physical copies of important documents.
3. Missing out on eligible deductions
Many SMBs fail to take advantage of all the tax deductions available to them, leaving money on the table. Deductions such as home office expenses, advertising costs, and professional fees can significantly reduce taxable income if properly claimed.
How to avoid it:
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Familiarize yourself with common deductions for your industry.
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Keep a detailed log of business-related expenses throughout the year.
4. Filing taxes late
No one likes a last-minute scramble, especially when it comes to taxes. Missing the filing deadline can result in late fees or interest charges. Filing your taxes late can result in hefty penalties and interest charges, which can quickly add up and hurt your cash flow. It also reflects poorly on your business's financial responsibility. The Canadian tax deadline for most businesses is June 15, but if you owe money, it's due by April 30. Mark your calendars!
How to avoid it:
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Set calendar reminders well in advance of tax deadlines.
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File early to avoid last-minute stress.
5. Misclassifying employees as contractors
Misclassifying workers can result in significant tax liabilities and penalties. Employees and contractors have different tax obligations, and failing to correctly classify them can result in unpaid payroll taxes and potential legal trouble.
How to avoid it:
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Understand the CRA’s criteria for determining employment status.
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Regularly review your worker classifications to ensure compliance.
6. Forgetting about HST/GST
If your business earns over $30,000 in a calendar quarter or over four consecutive quarters, you're required to register for a GST/HST account.1 Many small businesses unknowingly exceed this threshold and face penalties for failing to collect and remit taxes.
How to avoid it:
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Monitor your revenue regularly to ensure compliance.
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Register for a GST/HST number as soon as you approach the threshold.
7. Not reporting all income
Whether it's cash transactions, side gigs, or online sales, failing to report all income can result in serious consequences. The CRA has tools to track income, and undeclared earnings can result in audits and fines.
How to avoid it:
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Report all sources of income, no matter how small.
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Use accounting software to track all earnings accurately.
8. Overlooking payroll taxes
If you have employees, you're required to withhold taxes from their paychecks and send that money to the government. These taxes include things like Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and income tax. This process is called payroll withholding. It's your job as the employer to deduct the correct amounts from each employee’s wages, send it to the Canada Revenue Agency (CRA), and report it on time.
Here’s an example to help you understand better:
Imagine you have an employee named Carol who earns $3,000 a month. Based on her salary and tax bracket, you need to deduct a certain amount from her pay for things like CPP, EI, and income tax. Let’s say the total amount to withhold is $500. You then take this $500 from Sarah’s paycheck and send it to the CRA.
If you forget or don’t send the $500 to the CRA on time, the CRA could charge you a penalty, and you might also have to pay interest on the amount you owe. The longer you wait to pay, the more it could cost you.
How to avoid it:
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Use reliable software to automate payroll.
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Stay up to date with CRA payroll requirements.
9. Not keeping up with tax law changes
Tax laws change frequently. This means that what you could claim or the way you should file taxes this year might be different from last year. Staying informed is essential to ensure compliance and take advantage of new deductions. If you don’t keep up with these changes, you could miss out on important deductions or even accidentally break the rules, which could lead to penalties or extra taxes to pay.
How to avoid it:
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Subscribe to tax-related newsletters.
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Regularly check the CRA website for updates.
10. Incorrectly calculating home office deductions
As more people work from home, the ability to claim home office deductions on your taxes has become more common. This allows you to deduct certain expenses related to your home office, like a portion of your rent, utilities, or internet bill. However, many business owners make mistakes when calculating these deductions, which can lead to incorrect tax filings.
How to avoid it:
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Use CRA guidelines to calculate correctly.
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Keep detailed records of your home office expenses, including rent, utilities, and internet bills.
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Use the right percentage of your home that’s used for work. Don’t round up or estimate – measure the space accurately.
11. Forgetting to review tax returns before filing
Before you file your tax return, it's really important to review everything carefully. Even simple mistakes—like a typo in your income or forgetting to include a deduction—can cause big problems later.
How to avoid it:
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Take your time. Don’t rush through your tax return. Set aside some time to go over everything carefully.
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Always double-check your numbers. Make sure the income, deductions, and credits you’ve listed are accurate. Compare your tax forms (like T4s or receipts) with the information on your return.
12. Failing to plan for taxes
Taxes can sometimes feel like something you deal with only once a year when it’s time to file your return. But if you don’t plan ahead, tax season can catch you by surprise—especially when it comes to having enough money to cover what you owe. This is why it’s important to think about your taxes throughout the year.
How to avoid it:
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Use your earnings to estimate how much you should be saving for taxes. Ideally, set aside a percentage of your revenue for taxes.
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Keep your tax savings in a separate account so you don’t accidentally spend it on other business expenses.
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If possible, set up automatic transfers from your main business account to your tax savings account each month. This helps ensure you’re consistently putting money aside without having to think about it
How to Fix Errors on Your Tax Returns
Made a mistake? Don't panic! CRA allows you to amend your tax returns. Here's how:
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Wait for your notice of assessment: Before making any changes, ensure you've received your initial assessment from the CRA.
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Use the "Change my return" feature: Log into your CRA My Account and use the "Change my return" option to make adjustments.
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Submit a T1 adjustment request: If you prefer paper, complete Form T1-ADJ and mail it to your tax centre.
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Provide supporting documents: Include any relevant documents to support the changes you're requesting.
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Be patient: Processing times can vary. Online requests are typically faster, but it may take several weeks to see the changes reflected.
Tax season doesn’t have to be stressful. By avoiding these common mistakes, you’ll not only save time and money but also set your business up for success in the coming year. Remember, keep your records in order, claim all deductions, and don’t hesitate to seek professional help when needed.
Happy filing!
The information provided in this post is for general informational purposes only and does not constitute legal, tax, or financial advice. Tax laws are complex and subject to change. This content should not be relied upon as a substitute for professional advice from a qualified attorney, tax professional, or financial advisor. Moneris does not guarantee the accuracy, completeness, or usefulness of any information presented and shall not be held liable for any errors, omissions, or damages arising from the use of this content. Readers are advised to consult with a professional advisor before making any decisions based on the information provided herein.
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