Tax season is mid-way and I thought about sharing some great tips that are important to know. I keep touching on the same areas that I know are not taken care properly.
Everyone is more interested in tax deductions and what can they claim.Most forget or are not aware of the other crucial factor that is compliance.
If your books are not compliant, your claims will be disallowed resulting in financial distress.
I am going to share with you how to keep compliant and organized books to prevent potential problems with CRA. Here are some steps you can follow right away and have peace of mind.
1) Keep separate account (personal vs. business).
• Clean bank account makes it easier to understand what is going on.
• It is easier to reconcile.
• You save money when outsourcing your books.
• Time is saved with unnecessary questions.
You may be asking – How can I do it?
Let me give you an example. When you use your personal line of credit for investment purposes, you can write off the interest incurred personally. In order for your claim to be acceptable by CRA, you need to trace the money that was used for investment. If you co-mingled that line of credit with personal transactions, you cannot write off 100% of the interest paid, if any at all.
If you are experiencing cash flow problems or want to invest in your business, check with your bank if you can have your line of credit split into two accounts. This way you will be compliant in case you use your line of credit for investment purposes.
2) Keep proof of purchase – have all receipts handy and organized.
• Ability to claim ITCs input tax claim (all HST paid on legit business purchases can be written off against all HST collected).
• Ability to claim legit business expenses. If you want to claim the expenses or amortize the capital expenses, you will need source documents to back up your claim.
Since I am talking about investment purposes, let’s say you are investing in your financial education or consulting to help you take your business to the next level.
You hire a consultant that will help you come up with a plan to grow your business in the next 5 years. This consultant will work with you to reach those goals. There will be a contract and an invoice or a few of them depending on your agreement. Keep all these source documents.
3) Keep proof of payment – saves time when reconciling accounts.
• You need to keep a paper trail.
• You can easily match receipts to the money in this case it could be the business bank statement or credit card statement.
Remember that line of credit I was talking about? Let’s pretend you withdrew some money to invest in your business. You got an invoice for the purchase of goods or services. What do you do next? You can transfer the funds from your line of credit to your business bank account and pay the invoice. Remember to keep the line of credit clean of personal transactions to be compliant with CRA.
4) Keep good track of money coming in.
• It is crucial to know the source of the income.
• Document what happened. E.g. Cash flow is low due to the cost of a large project.
• Where the funds came from? E.g. Personal line of credit from bank XYZ on March 31, 2016.
• What was the purpose? E.g. To keep business operations going until project “xyz” is accomplished and client releases more funds.
If your business is bleeding, you will eventually inject money to help with the business operations. If you don’t track it, you may be subject to taxes when audited. Again, just look at example above. Make sure to document what happened where the money came from and for what purpose.
5) Keep an organized set of books.
• To avoid that your receipts are scattered all over your office.
• Remember without source documents, no claim.
• To prevent your bottom line from being healthy due to lack of organization.
How do you organize your documents? Alphabetically, by vendor, or do you attach the source documents according to the form of payment? Whichever way works for you, do it. Have a system to collect and manage your papers and stick to it.
6) Document the transaction. I already provided an example about it on item #4.
• It will save you time and a few thousand dollars.
• If you want to have peace of mind, make the extra effort to document everything.
It sounds like a lot of work and it is worth the time invested keeping compliant books. Keep a log book to document unusual or crucial transactions. Better to be prepared than sorry. Three years from now it will be much more difficult to remember what happened.
7) Keep evidences.
• Agendas, calendars, emails, correspondences.
• Flyers, business cards, pictures.
• Contracts, invoices, receipts, logbooks, cancelled cheques, etc.
Why? The more evidences to prove your claim, the better. By the way, don’t throw your receipts thinking you can claim the expenses by having a credit card statement. You need the source document with a description of what was purchased, with a date, the vendor’s information, etc.
8) Reconcile accounts.
• It does not hurt to verify if the transactions match what you have on your records.
• Discrepancies are easily found if you use an Accounting software to input your receipts/ invoices and your bank and credit card statements.
We are human and mistakes happen. If you do not reconcile, it may take a year if ever to catch fraudulent transactions. Be on top of your numbers.
The case above is for illustration purposes only. If you want to hire a consultant to help you in any area of your business, consult an Accountant to find out how this expense will be classified. The situations are very unique to each circumstance.
Bear in mind that the compliance is also applicable for someone who does not own a business and uses the line of credit to purchase a rental property. The proper way to do this transaction is to open a separate bank account and transfer the funds from the line of credit to the new account. Then, proceed with the purchase transaction from there. Again keep the line of credit clean of personal transactions so you can claim interest paid on your personal taxes.
By following the 8 steps I shared with you, you will save time, money and have peace of mind.
“Reduce risks, pay on time, be efficient and save money and time.” Renata Magalhaes