The Ultimate Guide to Preventing Unexpected Tax Bills for Small Business Owners

As a small business owner in Canada, few things can be as alarming as unexpected tax bills. Whether it is for GST/HST, PST, Personal or Corporate Taxes. These unwelcome surprises can disrupt your cash flow, strain your financial resources, and create unnecessary stress. However, with careful planning and the right tools, preventing unexpected tax bills and keep your business finances on track can be easy. At Virtual Heights Accounting, we specialize in using Xero accounting software to help our clients manage their financials effectively. We also provide bi-annual tax check-ins for clients to ensure our plan from the last year is still on track. But there are many ways you can also do this yourself without the help of a friendly accountant.

Here’s our ultimate guide to preventing unexpected tax bills.

  1. Maintain Accurate and Up-to-Date Records

One of the most effective ways to prevent unexpected tax bills is to maintain accurate and up-to-date financial records. This means keeping your Xero or QuickBooks Online up-to-date. This will then give you an accurate sales tax owing figure so you can ensure you have adequate cash to pay those amounts. It will also let you know your running net income for the year so that corporate taxes can be estimated. For a small business in Canada that has a net income under $500,000, you can generally estimate your corporate tax owing as between 11-12% depending on the province your business is in. In order to calculate your potential taxes though your books need to be accurate and up to date.

  1. Understand Your Tax Obligations

Every business has different tax obligations based on its structure, industry, and revenue. It’s crucial to understand what taxes you need to pay and when they are due. In Canada, common taxes include income tax, GST/HST, payroll taxes, and provincial taxes. Set up reminders for tax returns and payments. Alternatively set up instalments in your online banking system. You can then just monitor if these need to be adjusted based on actuals.

  1. Keep Track of Deductible Expenses

Knowing what expenses are deductible can significantly reduce your taxable income and, consequently, your tax bill. Common deductible expenses for small businesses include office supplies, utilities, rent, and travel expenses. If you are wondering if something is deductible, ask your accountant as they will be aware of areas that are commonly denied and also identify missed expenses (cell phone bills paid personally for example).

  1. Estimate Your Tax Liability Regularly

Waiting until the end of the year to calculate your tax liability can lead to unpleasant surprises. If you are growing quickly you should be reviewing this quarterly if not monthly. If you are established and you are making all required instalments, then monitoring bi-annually is just fine as this allows you to check in to see if things should be adjusted from the instalments. The instalments are based on the prior year so any changes is only based on increases or decreases compared to the prior year.

  1. Utilize Tax Credits and Incentives 

Canada offers various tax credits and incentives for small businesses, such as the Small Business Deduction and the Scientific Research and Experimental Development (SR&ED) tax credit. Familiarize yourself with these credits and use them to your advantage. These can be used to offset potential tax liabilities. For example, there is an interactive digital media credit in BC and Alberta.

  1. Work with a Professional Accountant (CPA)

Navigating the complexities of the Canadian tax system can be challenging. Working with a charted professional accountant (CPA) who understands the intricacies of small business taxation can provide invaluable peace of mind. We also recommend seeking an accountant that will match your business. If you are an online business, then it makes sense to find an accountant that understands that world. If you are using QuickBooks Online and believe you will need a lot of help with the bookkeeping clean-up. Look for a CPA on the ProAdvisor Listing for QuickBooks. If your on Xero accounting software, you can do the same with the Xero Advisor Listing to find the right accountant for you.

  1. Plan for Tax Payments

Instead of scrambling for funds when your tax bill is due, plan for your tax payments throughout the year. CRA will require these once payments are over certain thresholds so do be aware of these thresholds.

As of 2024, the GST/HST and corporate taxes threshold is $3,000 annually. If you owe over $3,000 for your GST or corporate taxes then you will be required to make installments the following year for that program account. If you are a quarterly GST/HST filer then this is irrelevant and you will just file and pay per filing.

We suggest automating payments for those installments by setting them up in your online banking or payable software.

You can also check against your actuals as you go to see if they are still in an appropriate range for the current year or if they should be increased. You can also compare against your sales tax accounts for GST/HST. Finally, consider your net income and use your estimated corporate tax rate to ensure you are keeping your instalments at an appropriate level.

  1. Review Your Financials Regularly

Regularly reviewing your financials allows you to stay on top of your business’s financial health and catch any discrepancies early. Schedule bi-annual or quarterly reviews of your financial statements, and make adjustments as necessary.

Conclusion

Preventing unexpected tax bills requires diligent planning, accurate record-keeping, and a proactive approach to financial management. Leverage the power of your accounting software (like Xero or QuickBooks Online) and follow the steps in this guide to ensure your small business is well-prepared for tax time.

This blog is intended for general use and understanding. Your requirements may be different than the use cases presented. Please confirm directly with your accountant or to CRA as to your requirements for installments. Virtual Heights Accounting is a virtual CPA firm providing bookkeeping, payroll and tax to Canadian small business corporations. Check us out at www.vhaccounting.ca.