Five Common Mistakes Of Business Owners Make

Business owners face a multitude of challenges and decisions when starting and running a business. While many of these decisions are beneficial, there are some that can lead to costly mistakes.

In this blog, ACT Services has discussed some of the common mistakes business owners make and how to avoid them. With the right strategies and planning, business owners can avoid costly mistakes and run a successful business!

1. Not taking advantage of valuable tax credits

There are several credits you can take advantage of as a small business owner, but you have to know what they are and if you qualify for them. Below are some of the top tax credits for business owners in Canada:

Investment credit (ITC) - If you purchased machinery, equipment, or a building for your small business, you could claim the ITC.
Apprenticeship job creation tax credit (AJTC) - The AJTC is a non-refundable investment tax credit equal to 10% of the eligible salaries and wages paid to employed apprentices. A business can claim up to $2,000 per eligible apprentice each year as a tax credit.
Input tax credit - GST/HST paid or payable on purchases and expenses associated with your business may be recovered by claiming input tax credits. However, you must have a registered GST/HST number in order to claim credits. So you can claim GST/HST paid on eligible business expenses and keep track of GST/HST paid on eligible business expenses. Keep your receipts in case you need to support your claim.

Scientific Research and Experimental Development Program (SR&ED) -Under this program, you are able to deduct scientific research and development expenses from your taxable income. A Canadian business of any size can claim SR&ED tax credits of at least 15% and up to 35% of qualified expenditures.

2. Mixing personal and business finances

It’s crucial to keep your business and home finances separate for several reasons:

a. If you’re at a shop picking up supplies for your home and business, and you don’t put them on separate accounts, you could overlook a legitimate business expense.

b. Come tax time, it’s a time-consuming process to go through your expenses and identify which are personal expenses and which are business expenses.

c. You might accidentally claim a personal expense as a business deduction, and if your business is audited, the burden of proof is on you to prove your business expenses.

d. It makes it easier for your tax professional if you keep them separate, and you’ll save a lot of time if you’re filing your own return.

So, what’s the best way to keep those personal and business finances separate? Have a separate business account!

What if there was an easy way to track every single one of your business expenses, identifying thousands of dollars in tax deductions each year? Well, luckily, you can do just that if you get a separate bank account that you only use for your business! This is one of the easiest tools to keep track of business expenses and organize your finances.

Have an organizational system in place for your business receipts - Set aside time each month to review and categorize your receipts in a way that makes sense for you. This keeps things manageable as the year progresses and keeps you on top of your spending so you don’t miss out on any tax deductions.

Have a separate credit card for your business

We mentioned the benefits of having a separate business account. But we also recommend having a separate credit card for a few reasons:

You’ll build up a credit history for your business that isn’t tied to your personal credit history.
You’ll be able to cross-check your credit card statements with your receipts.
If all the transactions are business related, you can claim any associated expenses with that card or account. For example, the annual fee on a points card, or the interest from a balance carried from one month to the next, can be claimed if the transactions are business related.
Keep a calendar and logbook.

These records are key for claiming tax deductions. We recommend making notes in your calendar about business expenses and events so you can cross-check them later in the event of an audit.

If you use your car for business trips, it’s important to keep track of mileage through a logbook or app since you can only deduct a portion of your vehicle expenses.

3. Neglecting to make tax-savvy investments

Save on your tax bill by taking advantage of the following investments:

Registered Retirement Savings Plan (RRSP) - We’re big fans of the RRSP. And you should be, too; it could have a big impact on your tax bill. If you’re a high-income earner, the RRSP is a powerful tax deferral strategy.

Let’s look at an example:

Let’s say you made $120,000 in 2020 and decide to contribute $15,000 to your RRSP before the March 1st deadline.

The CRA will tax you on $105,000 of income instead of $120,000 since the contribution is tax deductible.

Your contribution could significantly lower your taxable income.

How it works

You only pay tax on your RRSP contributions and any gains in the account when you make a withdrawal. So if you plan on withdrawing from your RRSP in retirement, you’ll have deferred your tax liability to a time when your marginal tax rate will be much lower.

Don’t worry if you can’t contribute to your RRSP this year!

Your RRSP contribution room accumulates and can be carried forward to future years when your marginal tax rate is higher.

When to fund your TFSA first?

If you think you’ll withdraw from your RRSP before retirement or that your income will be larger in the future, you may want to top up your TFSA first. It might not give you a tax refund, but you can withdraw from it anytime, tax-free.

Read more on the differences between RRSPs and TFSAs - Registered Education Savings Plans (RESP). If you have children and grandchildren, the RESP is a great way to put away money for their education.

For every contribution to the RESP of a child up to 18, the federal government will contribute at least 20% to an annual limit of $500 through the Canada Education Savings Grant (CESG). The maximum lifetime CESG is $7,200 per child.

While contributions to an RESP are not tax-deductible, the income it generates accumulates tax-free. And when your child uses the funds, the income is considered your child’s income and is taxed at his or her low tax rate.

4. Failing to let family “lend a hand”

Running a small business requires the support and understanding of your family. But did you know that your family can also lend a hand by helping lower your tax burden?

You may have heard that the Income Tax Act has attribution rules that prevent Canadians from income splitting. If you gift your spouse part of your income, the CRA will still attribute it back to you, and you’ll be taxed at a higher rate.

However, there are exceptions to the attribution rules where you can use income splitting to your advantage and grow your family wealth.

Below we outline four strategies you can use to make income splitting work for you.

Lend money to your spouse - If your spouse earns less money than you and you lend them an interest-bearing loan, any return is taxed at your spouse’s lower marginal rate.
Split pension income - If you’re 65 years or older, you can split up to 50% of eligible pension income with your spouse.
Make contributions to a spousal RRSP - If your spouse is earning less money than you are, and there’s a good chance they’ll have less income in retirement, the spousal RRSP will help even out retirement savings for the both of you.
Max out your TFSAs - If you max out your own contribution, you can also max out your spouse’s TFSA; it’s tax-free, so attribution doesn’t matter in this case.

5. Not hiring a tax specialist

A tax specialist does so much more than prepare your tax return. If you find a tax specialist that works with small business owners, they will:

Keep your books and records in order
Track your progress and compare past and present financial positions
Plan and forecast future financial positions
Provide information to make sound business decisions
Help you choose your ideal business structure and when or if you should incorporate your business

Not only will they keep on top of your tax preparation and filing, so you avoid penalties and interest, but they will also stay up-to-date with tax rules and regulations, so you receive all the credits you’re entitled to.

They can give you an overview of your financial situation and provide long-term tax planning that will reduce your yearly tax bill. They can also provide professional financial statements if you need financing.

If you’re audited by the CRA, a tax specialist can represent you so that you don’t have to take time away from your business to deal with the audit process.

They will also help you prepare for major life changes like marriage, divorce, having children, retirement, and death, and make sure your taxes and investments are optimized for the change.

Finally, a specialist that offers tax filing, as well as additional services like payroll and bookkeeping, can help you find balance and handle time-consuming tasks that free up your time to build your business.

Bottomline

Most Business owners opted not to hire a tax planner/specialist. Remember, the consequences are huge under this option; don’t be penny-wise, pound foolish.

To avoid these and other mistakes, reach out to the experts at ACT Services. We have twenty-five years of experience in accounting, tax planning, management consulting, business advisory, financial statements, bookkeeping, personal tax, payroll services & more. We serve clients across Toronto, Brampton, Mississauga, Vaughan, Markham, York, Pembroke, Petawawa, Eganville, Cobourg, Arnprior, Mississippi Mills, Braeside, Ottawa, Kinburn, Kemptville, Carleton Place, Rockland, Ontario, Gatineau, Québec, and the surrounding areas.

Get in touch with us today!

For a complete list of our services, please click here. If you have any questions about the accounting and consulting firms, we’d love to hear from you. For more information, please call us at (613) 738-7712 or email us at support@actservice.ca.