Starting a new business? Avoid making these 6 mistakes
that will cause you problems with the CRA
Legacy Advantage is a Small Business Bookkeeper, and we often see horrible situations that could have totally been avoided had you planned ahead. Let me tell you…. Some the horror stories you hear about the Canada Revenue Agency, some are inconveniently true: Bank accounts frozen, forcing bankruptcy.
We have a client, who got very busy running his business. He also wasn’t very comfortable with the numbers, so he turned a blind eye to his bookkeeping. As a result, his business now owes $100K to the CRA, and he (personally) owes over $200K to the CRA. Please please please.. avoid these 5 mistakes to keep yourself out of a situation like this.
Don’t mix personal with business:
Keep it strictly one or the other. If you create a separate business bank account and a separate business credit card, then don’t run personal expenses through it. Similarly, don’t run business expenses through your personal accounts.
I remember one client who had 1 business account and 1 business visa (so far, so good), but he charged so much of his personal expenses on his business visa that it made his bookkeeping one big headache. And when it came down to it and the CRA did an audit, he was denied a lot of these expenses, putting him into trouble with the government.
Don’t forget to pay your Source Deductions:
If you have employees, even part-time ones, it’s a good idea to seek some help in setting up your payroll properly.
Each month, it’s your responsibility to pay your employees a wage, but it’s also your responsibility to deduct CPP, EI and the proper taxes. Then you need to pay these to the government. In effect, you’re acting as a tax collector and you need to remit these payments to the government.
This money isn’t yours! Don’t use it. Our biggest tip would be to pay it monthly so you’re not tempted to dip into it.
Don’t use the GST you collect:
Similar to payroll Source Deductions, when you charge GST, you are actually collecting money on behalf of the CRA. GST isn’t yours, you’re holding onto it for the government, in trust. And trust us, they’ll come a-knocking on collection day. It’s best to create a savings account and set that money aside every month.
For example, say you sell a product for $1000, and GST is 5%, the total invoice is $1050. The $50 is GST, and is payable to the government.
You only earned $1000, because that’s the cost of your product or service. You need to remit the $50 to the government while filing your GST return.
Here’s how you can register and file for GST.
Don’t lose your paperwork:
I’ve had another client who didn’t keep his records for seven years. When the CRA audit came, a lot of his expenses were denied because he didn’t have proof. He ended up with a big tax bill as a result.
To avoid a similar situation, implement a simple system to keep all of your records. Create a box with four folders, one for each calendar quarter. Then just shove all of the paper receipts in the appropriate folder. If you ever need to pull them out, at least you can narrow down the date range.
Don’t use Excel:
I know that smaller companies think they can get away with bookkeeping in Excel. Quite frankly, you can’t. It’s not sustainable and it’s super old-school. Go with a Cloud bookkeeping software like Quickbooks Online. It’s cheap, simple and it’s easy to get started.
I’ve had a client who came to us with Excel records. We couldn’t do anything with them, leaving us having to start from scratch. Guess what, they had to pay us a lot to get it all cleaned up.
Don’t turn a blind eye:
I know finances can be scary. You might not understand your numbers. That’s why it’s even more important to have a good bookkeeper to help you understand. Here are five ways a bookkeeper can support you and your business. If you are a small business, you are the CEO and the CFO of your business. If you don’t understand your finances, make sure to put in the time and sit down with your bookkeeper or accountant. Understanding your financial statements is like understanding the scoreboard. Would you play hockey if no one kept score? So, why would you run a business without looking at the scoreboard?