Planning for tax season is something all business owners get stressed over. It can be challenging to understand what expenses are deductions (insert Schitt’s Creek voice “that’s a write-off”), and how to save for your tax bill.

Enter Joe Collins, CPA, CA, of Avalon Accounting, a remote-based Canadian bookkeeping and accounting firm. He has all the tips to make tax season easier by planning ahead.

How to Prepare to Pay Taxes in the Early Stages of Business (5:40 -11:00)

Keeping track of the money that’s flowing in and out will help you get ready for tax season. As well, Joe recommends having separate business and personal bank accounts and credit cards. Keeping two credit cards in your wallet will help you realize that you are making a business purchase to make business income, an important distinction for new entrepreneurs.

As a sole proprietor filling a T1 tax form, the first $10k-$15k is tax free. Then you pay a certain tax rate on the next portion you make until you hit higher income levels, such as making more than $220k a year. A good rule of thumb is to set aside (as early as you can) 1/3 of your revenue for taxes into a separate account for taxes. For example, if you make $100k a year, you will be paying $30k in taxes. This can be a shock if you are not prepared.

How to Prepare to Pay Taxes as an Incorporated Business (11:22-15:30)

Small businesses pay a much lower tax rate in BC, which is 11% but you can’t take that money out and spend it personally. Don’t go out on a shopping spree just yet! It’s the corporation that’s paying its fair share of tax, so that you can retain more of your money and can hire more people and build your business. (12:05)

When you pay yourself through dividends, which are distributions on profit, you will receive a divided tax credit for that at the individual level. This way you can get credit for what the corporation is paid in tax, and then you pay the remainder.

Having an incorporated business instead of being a sole proprietor will help you pay lower personal tax rates and make it harder to retain any capital for your business to grow. It really depends on your business goals. For instance, you can save money by delaying expenses for a year and enjoy a lower tax rate and then spend it the following year. If you want to remain a sole proprietor, you can save money through RRSPs and pay lower taxes through this system, which is a legal way to tax shelter your money for later in life.

What’s a right off? (17:10 – 20:20)

The practice of being able to right off business expenses is an item of high interest for most entrepreneurs. Often business owners over do this, but there are business deductions that are sometimes forgotten. When you go to file your taxes, make sure you put in the deductions for your home office space and vehicle expenses for travelling to clients. The way to calculate your home office deduction is to take your monthly rent and figure out how much of your space is your home office. For commuting expenses, use an app like mile IQ (linked in show notes) to track your kilometres and apply that percentage to gas, insurance, and maintenance.

What’s very important to understand is that business expenses don’t automatically mean deductions. It must be very client specific. There’s no need to find this out the hard way if you get audited!

Strategies to Plan for Tax Season (22:34 – 24:45)

The easiest way to prepare for tax season is to track your expenses and run a profitable business. As Joe rightly says, you have to spend the money you need to make the maximum amount of income and tax as a result of making good income. Accountants do not have tricks for you to pay less tax; we don’t do illegal tax deductions!

At the same time, accountants won’t always save you time and money. Joe suggests as a sole proprietor to use accounting software such as Wealth Simple (linked in show notes). If you have an incorporated business, you should have an accountant as there is more planning involved, you need to submit more statements such as a balance sheet, and it’s more complicated to pay yourself.

Don’t Hate Paying Taxes! (35:00)

Joe puts it so well: paying taxes is a result of doing good business. There’s no need to plan your business around how much tax you must pay. Focus on growing your revenue. Remember that profitable companies pay taxes!

Show notes: