With your capricious behavior toward taxation, you may not file your tax on time, but at the same time, you want to avoid tax penalties. Doesn’t it sound silly and childish? It does, and the worst funny case is that most small business owners, with their long-term planning to prolong their businesses, tend to do it on a frequent basis. But lately, they realized that they made a terrible mistake which brings no loophole to avoid tax penalties.
Understanding the Tax Penalties and Double Taxation
Tax Penalties
Do you know the ramification of tax evasion in Canada and that too deliberately?
For your late filing, you will be subject to a penalty of 5% of the total amount owing, with an additional 1% will apply to each month’s late return, up to a maximum of 12 months.
It’s just about late filing; the late reporting of your total owed amount will hold you accountable for a penalty of 10% for the income that you haven’t reported yet. Plus, 20% will be added if the reason is deliberate.
Let’s give you an example –
As a typical lazy business owner, you forget to file your T2 corporate tax return by 30th June this year. And unfortunately, this was the deadline for tax filing. However, If you can file your return by the 15th of October, 3.5 months late from the original date, what will your penalty likely be given that your owed tax amount has risen to $70,000?
As mentioned earlier regarding late tax filing – you will be incurred a 5% penalty on your original amount, which is 5% of $70,000 or $3,500. But you are already 3.5 months late, and for each late month, it will add an extra 1% meaning that 3.5% of $70,000 or $2,450. Altogether, you need to levy $3,500 + $2,450 = $5,950 worth of tax for your late penance.
Double Taxation
Even if you could avoid tax penalties, double taxation is another hurdle that takes a fair proportion of your company’s assets.
Double taxation refers to a situation when the government taxes twice on your corporate’s profit or assets. When your company brings a lumpsum profit, how do you celebrate it? Throwing a party off the hook with a grand celebration brimmed with grandeur and an opulent serving of dinner. But that doesn’t last too long, right?
It’s because you already paid taxes on your corporation’s behalf on the profit you made. Still, the remaining profit you distributed among your shareholders will also be levied on taxes. This doesn’t give you goosebumps; it gives you a whirlwind and a shocking revelation of a bombshell. We call it a kangaroo bump, the opposite of goosebumps.
It also happens when you own a property in one country but is a citizen in another; you will be taxed twice – one in the country where the property is located and another in where you reside or belong.
Let us make these two statements of double taxation easier with two examples –
In the first case – your company has grossed a whooping amount worth $1,000,000 and remitted $210,000 as a tax on that gross margin. The remaining $790,000 will be shared as dividends among the shareholders. However, the double taxation won’t spare you easily as it will sneak into your shareholders’ profit margin and may charge at its highest bracket of 37%. Therefore, the previous amount of $210,000, accompanied by another $292,300, will result in a total tax of $502,300.
In the second case, if you are a US citizen owning a property in Canada, you are bound to pay your tax to the Canadian government on your property. By the same token, you will need to pay tax to the US government for that, too, due to double taxation. If you want to save yourself from this double whammy, you could use the tax treaty system that allows you to pay the tax only to the Canadian government but spare your taxation from the US.
How Hiring a Bookkeeper Can Help You Avoid Tax Penalties and Double Taxation?
Canada loses more than 5 billion a year as a result of tax abuse and offshore evasion. Therefore, there is no viable option than finding a professional bookkeeper to engage with your payroll management and tax deductions. The bookkeepers tend to comply with the best practice of taxation by alerting you to the consequence of missing it and informing you of the proper documentation to be put in place.
When you can accurately record all your invoices, receipts, and various financial transactions, including all incomes and expenses, you are less likely to suffer from the rude awakening from tax evasion. A professional bookkeeper can save you from any penalties incurred due to income tax, sales tax, or corporate tax by keeping all your files organized and set.
Bookkeepers can help you by doing the following –
Accurate Recordkeeping
Accurate recordkeeping of essential documents, such as receipts, invoices, tax filing paperwork, and other financial statements, consolidates a perfectly organized tax filing system. When you hire a bookkeeper, their primary job is to keep them in one centralized system and lay them bare when required.
Understanding and Complying with Tax Laws and Regulations
Bookkeepers, particularly those who have been in this field for over a decade, latch onto every in and out of the taxation system. They try to keep themselves up to date with any ongoing laws or recently promulgated tax codes that you, as a small business owner, must know from the start.
Their expertise is evident in all sectors of taxes, be it federal, provincial, or municipal. They sift through all the latest updates of the CRA to ensure that they can protect your business during tax audits.
With their expert knowledge integrated with continuous professional development, they can guide you on how to invest further for your business, how to reduce tax liabilities, and how to do tax planning while keeping your budget aside to pay the taxes so that it doesn’t get missed out amidst other expenditures.
Claiming All the Eligible Deductions
Since the bookkeeper keeps track of all your transactions, including your income and expenses, they know all about your investment. The professional bookkeeper will then claim any wrong deduction when they see that you, as a small business owner in Canada, are eligible for a lower tax rate.
Upon hiring them, they can analyze your past financial year and bring out all your expenses that year, such as office rent, equipment purchases, and professional fees. Suppose you run a consultancy firm and work with a bookkeeper who’s found that you paid $13,000 in office rent, $6,400 on an equipment purchase, and $2,500 in professional fees.
In that case, they sum up the total figure, which comes to $21,900, but remember, your total gross income for that year was $100,000. There comes your bookkeeper’s suggestion in handy as their information will help you understand that your tax will not be imposed on $100,000 but rather on $78,100. Now, you can see how substantially your tax amount can plummet, saving your income from collapse.
Treaty Exchange
For double taxation, one of the major obstructions occurring to purchasing a property in a foreign land is that you need to remit taxes in both countries in equal amounts. Canada maintains treaties with many countries, and with the right bookkeeper specializing in applying and implementing these treaties based on the country you bought your property, your tax will apply to only one country.
Filing Tax Returns and Making Tax Payments on Time
Bookkeepers take the responsibility of managing your overall finances, including the book cleanup, the moment you appoint them while they let you be at the helm of your other managerial work. Their constant update and observation of your ongoing transaction will help your business get all the files and documentation ready. This saves time and keeps you ahead of the main deadline to avoid tax penalties.
Communication with CRA
The way an accused person deals with a police force is through a lawyer because they know how to save your back with proper legal advice and documentation. Likewise, the bookkeeper can communicate with the CRA officers during the tax audit and raid. They can supply all the relevant documents to give a transparent overview of your business, minimize any risks associated with any previously fouled tax or evasion, or help you recover from double taxation.
What’s Next?
Bookkeepers are not like underground rappers that you find anywhere around the corner. This profession is not about a degree or level of difficulty; it’s about expertise and the number of years of experience. From small business accounting to financial reporting, bookkeepers from Oshawa Bookkeeping can assist you in your cash flow management and audit assistance to documentation recordkeeping and accurate time management in tax filing to help you secure your assets and avoid tax penalties or double taxation.