Corporate tax filing is almost never a straightforward, simple task. Small business owners are often trying to be everyone and everything to everyone else – staff, customers, accounts payable, accounts receivable, etc., so it’s very easy to let tax compliance take a back seat until it reaches a critical level. It is usually at that point, when something reaches a critical level, that errors begin to happen. The resulting errors either miss out on opportunities to save, result in a CRA audit or penalty, or in a worse scenario, is simply money that shouldn’t have left the business in the first place.
One of the first steps in preventing a future error is understanding what these errors can and do look like in real life. All to often, there are small corporations in Canada making the exact same mistakes year after year, not intentionally, just because no one has really told them what the repercussions are. Resources such as Webtaxonline can be extremely useful at providing these types of insights into these issues relevant to a small business owners situation.
Mixing Personal and Business Finances
This is probably the most frequent and most disastrous error a small corporation makes. This happens when a business owner makes personal expenditures with the corporation bank account, or makes business expenditures with a personal bank account. At bookkeeping time and tax time, it becomes a guessing game.
From a tax perspective, the personal expenditures expensed through the corporation is not deductible and CRA has a better reason to scrutinize the books if the books have mixed expenditures. On the flip side, it’s likely that genuine business expenditures paid personally will be lost or simply not documented resulting in lost opportunities to claim a deduction. One cannot possibly run a professional business without separate accounts.
Failing to Track All Deductible Expenses
Many small business owners know about the obvious deductions — rent, office supplies, employee wages. But they miss dozens of others that are perfectly legitimate under the Income Tax Act. Vehicle expenses used for business purposes, home office costs when applicable, professional development, membership dues, bank charges, accounting fees, and technology subscriptions are among the commonly overlooked categories.
The problem isn’t that these expenses don’t qualify — it’s that no one tracked them through the year. Receipts get lost, categories get lumped together, and by the time the corporate return is being prepared, there isn’t enough documentation to support the claim. Good bookkeeping throughout the year, not just at year-end, is what makes full deduction possible.
Misclassifying Workers
This is perhaps the most significant tax implications of classifying your staff member as an employee versus a contractor. Employees need source deductions: you must withhold and remit CPP, EI, and income tax. With contractors, you have no withholding.
The CRA monitors this very closely. An employee is someone who is regularly only providing service to your corporation, uses your tools and direction, no matter what their contract says. Incorrectly classifying employees as contractors and not accounting for their payroll is a serious mistake and can lead to costly back-assessments, plus interest and penalties.
Not Taking Advantage of the Small Business Deduction
It is astounding how many small companies don’t take full advantage of the Small Business Deduction (SBD), often because they have unknowingly eliminated themselves from the SBD (or haven’t been properly advised on it). SBD provides a rate that is lower than the rate for most business income and applies to the first $500,000 of active business income of a Canadian-controlled private corporation.
Common pitfalls include having too much passive investment income within the corporation, which can reduce access to the SBD, or not meeting the requirements for a Canadian-controlled private corporation in the first place. Getting a proper review of whether your corporation fully benefits from this deduction is worth doing every single year.
Forgetting Instalment Payments
If a corporation’s year-end tax liability exceeds a defined threshold it is required to remit portions of it in instalments during the tax year instead of just paying a lumpsum at year-end. Small business owners are often taken by surprise by this and, in particular, small business owners that are incorporated for the first time, or if they have a surprisingly good year.
Missing instalment payments results in interest charges. These aren’t huge in isolation, but they add up — and they’re entirely preventable. Working with an accountant who monitors your projected tax liability and reminds you of instalment deadlines removes this headache entirely.
Filing Late
The corporate T2 return is generally due six months after the end of the fiscal year. However, any taxes owing are due within two months (or three months for qualifying CCPCs) after year-end. The distinction matters because many business owners assume they have until the filing deadline to pay — which isn’t accurate.
Late filing generates penalties that start at five percent of the balance owing, plus one percent per month for up to twelve months. For a business carrying a meaningful tax balance, this adds up quickly. And once a corporation has been penalized for late filing, a repeat offense within three years carries even stiffer penalties.
See also: Modern Commercial Installation Solutions for Efficient Business Growth
Overlooking Scientific Research and Experimental Development Credits
If your corporation does any kind of innovation, new product development, or problem-solving work, you may qualify for the SR&ED tax credit program. This federal program offers generous credits for qualifying research and development activities — yet many small businesses either don’t know about it or assume their activities don’t qualify.
The eligibility criteria are broader than most people expect. Companies developing software, engineering new processes, or testing prototypes may all qualify. The SR&ED program can return a meaningful portion of wages, contractor costs, and materials related to qualifying projects. Failing to explore this option is one of the more expensive oversights a small business can make.
Not Planning for Owner Compensation
The way you take money out of your corporation (as a salary or dividends, or both) has an impact on taxes for you, as an individual, and for the corporation itself. So many small business owners just go with whatever is easiest and doesn’t put too much thought into what’s most tax effective given your whole personal picture.
What’s most tax effective shifts depending on how much you make, your family situation and what your company is earning and you should have that discussion annually with your tax accountant. The unifying theme with all of these common errors: they are fixable.
Conclusion
Beyond just the dollar amount, corporate tax errors add unnecessary stress to the day-to-day life of a small business owner. They can attract attention from the CRA and hinder future growth and opportunities. From commingling personal and business accounts to overlooking eligible business expenses, not remembering installment payments, to not adequately compensating owners; it all adds up to easily preventable errors. However, they are also typically easy to rectify in the early stages when the right measures are put in place through ongoing accounting and proactive tax planning, rather than leaving everything until tax time. For more than 10 years, Webtaxonline has been providing comprehensive bookkeeping, corporate tax preparation, payroll, and tax planning services to small businesses in Canada, to minimize costly errors and maximize the tax-saving potential available to their business.
