Filing corporate taxes can be a challenging task for Canadian businesses. It requires attention to detail, knowledge in the complexity of tax laws, and thorough financial documentation. Mistakes in tax filing can lead to penalties, interest and even CRA audits. By working with a qualified tax preparation service provider, businesses can avoid these mistakes, reduce their tax liability, and comply with Canada Revenue Agency (CRA) rules. Here are the mistakes to avoid when filing corporate taxes in Canada.
1. Missing Filing Deadlines
One of the biggest mistakes in corporate tax preparation is missing the filing deadlines. All corporations in Canada must file a T2 Corporate Income Tax Return within 6 months after the end of their fiscal year. For example, if your fiscal year ends December 31, the tax return is due by June 30 of the following year. Missing the deadline can result in penalties and interest on the taxes owed, which can be an enormous burden to your business.
In addition to the T2 filing deadline, corporations that owe taxes may also need to make installment payments throughout the year. If a business is required to make these payments and fails to do so, it can face interest on the outstanding amounts.
2. Misclassifying Expenses
One of the most important parts of tax preparation is to deduct allowable expenses to reduce taxable income. However, businesses often misclassify expenses which can cause problems during CRA reviews. Here are some of the common mistakes:
- Personal and business expenses mixed: You must separate personal expenses from business expenses. Personal expenses like personal travel, meals or entertainment are not deductible and claiming them can trigger an audit.
- Capital assets misclassified: Businesses often confuse capital expenses (which must be depreciated over time) with operating expenses (which can be deducted in the year incurred). CRA has specific rules for capital cost allowance (CCA), which allows businesses to claim depreciation on capital assets over several years.
To avoid these mistakes, businesses should consider consulting a certified corporate tax accountant Toronto on how to properly categorize expenses. In addition, businesses must keep clear and accurate records so all business expenses.
3. Not Claiming Available Deductions and Credits
Canadian corporations are entitled to various tax deductions and credits, but many businesses overlook or not claim all available tax benefits. Here are some of the most common missed deductions and credits:
- Scientific Research and Experimental Development (SR&ED) Tax Credit: This credit is designed to encourage innovation and research and development activities. Many businesses don’t claim SR&ED credits because they think their projects don’t qualify. But even non-technical industries can qualify if they are improving processes, products or services.
- Capital Cost Allowance (CCA): Depreciation of capital assets like machinery, equipment and buildings can be claimed as CCA over time. Businesses that don’t track their capital assets properly may miss out on this important deduction.
- Apprenticeship Job Creation Tax Credit: Businesses that hire apprentices in certain trades can claim a credit for wages paid to these workers. Missing out on this opportunity means paying more tax than you should.
Working with a corporate tax accountant can help you claim all the deductions and credits you’re entitled to.
4. Incorrect Reporting of Income
Not reporting all sources of income is a big mistake that can lead to penalties or CRA audit. Businesses must report all income including foreign income, passive income, and investments. Underreporting of income, whether intentional or not, can result in serious consequences including fines and back taxes. Also, you must reconcile sales, revenue and income figures across all reports and returns to ensure consistency.
5. GST/HST Obligations
In addition to corporate income taxes, Canadian businesses must collect and remit Goods and Services Tax (GST) or Harmonized Sales Tax (HST) if they have more than $30,000 in taxable revenue annually. Not registering for GST/HST, underreporting sales, or not remitting the correct amount of tax can result in significant penalties. Corporations must keep track and remit GST/HST on time to avoid CRA issues.
6. Records
Keeping records is key to preparing accurate corporate tax returns. The CRA requires businesses to keep records of income, expenses, receipts, invoices, payroll and other financial documents for at least 6 years. Poor record-keeping can result in missing deductions, errors in reporting and audit difficulties.
To avoid this mistake, businesses should have organized and consistent record-keeping. Using accounting software and keeping digital copies of receipts and invoices can help simplify the process.
Conclusion
Corporate tax is a complicated process and mistakes can result in penalties, increased tax liabilities and CRA audit. By avoiding common mistakes, like missing filing deadlines, misclassifying expenses, not claiming deductions and poor records, businesses can have smoother tax filing and better financial management. For most businesses, working with a corporate tax accountant is the key to navigate these complexities and compliance with CRA rules.