Major accounting errors our team often sees corporations make, and how to avoid them

When a business first starts out, taking care of your own accounting and corporate taxes may seem easy enough. But as your company grows, it can become increasingly difficult to manage the financial requirements of running a business.

From day-to-day bookkeeping to annual compliance and filings, there is a lot of complexity that you need to stay on top of as a business owner. Especially if you want to avoid making costly mistakes.

Knowing what to look out for and when to seek professional guidance can make all the difference. Read on to learn some of the most common errors we often see business owners make and what you can do to avoid them.

Common corporate tax and accounting mistakes

1) Failing to keep an auto log for your business

If you use a vehicle for your company, it’s extremely important to keep an auto log for a minimum of one quarter.

When possible, try noting down your use in real-time, so that you don’t forget any entries. Although you can likely recreate your log entries from your calendar, it's a lot easier to track as you go. This way, if the CRA selects your records for review or you are audited, you’ll have your details ready to send, which should help reduce panic and errors.

If you’ve been audited and aren’t sure what steps you need to take, check out our article: What to Do If Your Business Is Audited.

2) Using credit card statements as proof of purchases

When you make purchases for your business, you should keep records of your receipts. Credit card statements are technically not good enough for the CRA.

Take a $100 charge at a gas station, for example. You may think it’s obvious that you purchased fuel for your vehicle. But it's entirely possible that you bought snacks and lotto tickets with that amount. The CRA will not know what you actually purchased unless there is a receipt.

3) Not researching tax rules for your regulated profession

For those of you who are in a regulated profession, you should always make sure you understand any rules associated with your professional body that come with being incorporated.

For example, in British Columbia, if you are a doctor with a licensed medical corporation, you can own real estate that is directly involved in your practice with no issues. However, if you start investing in speculative or resident rental real estate as a passive investment, this may cause issues with the College of Physicians and Surgeons of BC. In this case, you would need to create a holding company for your investment.

4) Assuming your colleague’s financial circumstances are the same as yours

Just because your colleague, friend, or family member did something that created a tax advantage, does not mean that the same thing will work for you. Each business and person’s financial situation is unique. There is not a one-size-fits-all approach for most cases, and your tax planning should be personalized to fit your needs.

Seek professional advice before making any major financial decisions about your business to avoid unnecessary fees and potential complications.

5) Making personal purchases through your corporation

If you’re incorporated, you won’t want to make personal, non-business-related purchases from your corporate accounts. Doing so can create a domino effect that may throw off your payroll plan and increase a number of tax-related costs, including your personal taxes owing and your accounting fees.

You should also avoid purchasing any personal-use assets through your corporation, especially real estate. Otherwise, the taxable benefit associated with the property will affect your T4 and, therefore, your taxes owing.

For example, if you purchase a cabin for personal use through your corporation with an annual rental fair market value of $60,000, you will be required to add that amount to your T4 every year. So, even if the property sits empty and you do not earn rental income from it, you will owe taxes on this amount.

6) Skipping tax instalment payments

By missing corporate or personal tax instalments, you may attract penalties and interest from the CRA. That said, paying payroll instalments late will absolutely trigger a penalty, which can be a significant amount.

If you are over seven days late with an instalment payment, you can owe up to 10% interest. For repeat offenders, this penalty can jump to as high as 20%. Let’s say you have $5,000 owing in payroll. You’ll owe an additional $500 in penalties if you’re over seven days late with your payment. And if that happens three times a year, you’ll pay a total of at least $1,500 in penalties.

Most of the time, it’s possible to set up payments in advance through your online banking. For more information about tax instalments, read our article: 7 Things You Should Know About CRA Instalments.

7) Delaying communication with your accountant

When you’re considering making a major purchase, it’s important that you communicate that information to your accountant right away. This can help you understand the impact of the purchase ahead of time, so that you can make an informed decision before you buy.

You’ll want to connect with your accountant beforehand for things like:

• Selling or buying a property
• Withdrawing funds from your corporation to purchase a personal item
• Acquiring assets that may throw off your payroll plans

At Loren Nancke, we connect with our clients annually for our Goal, Advisory, and Planning (GAP) meetings to ensure planning is at the forefront of our clients’ business decisions. Learn more about our approach to our business tax services.

8) Taking on too much to lower your professional fees

It can be tempting to handle things like GST returns, WorkSafeBC filings, and bookkeeping on your own to lower your operational costs, particularly when you’re just starting out. However, trying to run your business while ensuring that your company stays compliant and in good standing with the CRA can be an overwhelming task.

With everything on your plate, it can be easy to miss important deadlines and make costly mistakes, which could result in you paying more in professional fees than you otherwise would have.

When matters become too complex or they take away from running your business, it’s time to reach out to a professional.

9) Creating a tax bomb cycle

A “tax bomb cycle” is a term we use for business owners who overdraw from their corporation, resulting in unplanned personal taxes owing. They then pay their personal taxes by drawing again from their corporation, leading to yet another year of unplanned personal taxes owing.

In practice, a tax bomb cycle could look like an incorporated professional who does not consider their payroll plan when evaluating the funds in their corporate bank account. Instead, they spend or pay out the “available” money to themselves for personal use like the amount is post-tax—even though it's not.

By overdrawing from their corporation, they increase their personal income and, therefore, personal taxes. If the only place they have the funds to pay this unplanned tax bill is from their corporation, they will need to draw more money out of their company to pay the taxes in April of the following year. Once again, this will increase their personal income and taxes owing.

As you can see, it’s a vicious cycle.

The key to avoid getting into a tax bomb cycle is communication and staying on top of what you’re spending. It’s incredibly important to only spend within the payroll plan you’ve created and, if you need access to more income, speak with your accountant right away to sort out a new one.

10) Delaying your response to CRA requests

When the CRA sends you a letter, no matter what it is about, you should make contact a priority—even if you do not have the answers.

If your relationship allows for it, reach out to your accountant for assistance with contacting the CRA. As your representative, your accountant will be able to handle the communication on your behalf and better advise you on the steps you need to take to address the request from the CRA. This can help mitigate your stress and the possibility of making mistakes.

Depending on what the request is for, you may be able to get an extension to respond. The worst thing you can do is leave it. A week can easily turn into a month, and then you’re left scrambling to gather the information.

The more time you and your accountant have to respond, the better. The CRA will not simply go away if you ignore them. And they have the power to wipe out your bank and investment accounts without your permission if you do not respond to their requests or enquiries.

Find out how Loren Nancke can support your finances

We’re known for our smart, straightforward corporate tax and accounting services, as well as our expertise in wealth, legacy and estate planning. Our ultimate goal is to support you on your journey to what we like to call financial serenity by bringing all aspects of your financial life together.

Get in touch with our CPA firm to learn more about how we can support you and your financial goals.

 

By Alex Young

Alex Young, CPA, CGA, is a partner with Loren Nancke. He is good with numbers and great with people … and has a legendary memory for Simpson trivia. You can reach him at 604-904-3807 in New Westminster or North Vancouver, British Columbia.

Learn more about Alex and the rest of our team.