File a tax return – even for loss years
Many new businesses experience start-up losses in the first few years. If you personally carry on a business, you should file a return for every year, even in the loss years. That’s because your business’s loss can be used to reduce income from other sources in the current year, or it can be carried back three years and forward 20 years. The loss will reduce income from any source – e.g., the business itself or from employment – even from investment income. But to claim the loss, you must file a tax return for the year.
The year-end of an individual who is a sole proprietor or an active partner in a partnership created since 1995 is December 31. Self-employed taxpayers and their spouses (if not separated) have until June 15 to file a return, although any taxes owing must be paid by April 30.
Lower your tax instalments
If you pay taxes on an instalment basis, you’ve probably received several notices from the Canada Revenue Agency (CRA) informing you of how much your tax instalments should be. If your income has gone down in the last couple of years, think twice before you send in your cheque. The CRA’s instalment calculations are based partly on your income tax position from two years ago and partly on last year’s.
Instead of using the CRA’s method, you are legally entitled to base your instalments on last year’s tax position. You can even base your instalments on the current year’s estimated tax position, if lower; but in this case be careful. Penalties may apply if you underestimate your taxes and your instalments turn out to be lower than the other two options.
If your income has gone down in the last couple of years, using one of the other two options could mean a reduction in your quarterly instalments without suffering interest penalties. But if you under-pay, the CRA will start to charge you interest. currently set at 5%. However, this rate is compounded daily. Worse still, it’s nondeductible, so this is an expensive way to enhance your cash position.
For seriously delinquent instalments, there is a 50% interest surcharge slapped on. If during the year it becomes apparent that you have paid more instalments than you need to, you might consider the possibility of purposely not following the instalment schedule by paying deficient or late instalments. Actually, this is quite “legal.”
If you’ve overpaid instalments or paid early, the CRA gives you a credit (known as offset, or contra-interest) against interest on late or deficient installments for the year. Very basically, the rule works as if you had deposited the instalment in a bank account and earned interest (at CRA’s prescribed rates, currently set at 3% for individuals and 1% for corporations) to the extent that the instalment is early or excessive. These “credits” can then be used to apply against interest penalties on deficient or late instalments. The flip side of this, of course, is that you can reduce interest charges on a late or deficient tax instalment by overpaying other instalments, or paying them before their due date.
Deductions for most normal business expenses are based on whether the expense has been incurred by year-end, rather than whether the item has actually been paid for, e.g., office supplies, auto and other repairs, etc. Exceptions include compound interest charges (regular “simple” business interest can be expensed when payable), site investigation and utility service connection charges, and disability-related equipment and building modifications.
Consider accelerating purchases of equipment, capital, and other expenditures before year-end. Examples include auto and equipment purchases (half of the normal depreciation can be claimed this year; next year, you claim the full depreciation rate), auto repairs, and so on.
Note: even though the depreciation rules restrict the writeoff on capital purchases, you can claim a full GST credit for the year of purchase. So if you buy by the end of the year, the credit will allow you to reduce the GST you owe.
If you “accrue” a salary to family members (this must be reasonable in relation to the business service they perform), you can claim a deduction as long as you actually pay the expense within 179 days of your business’s year-end. This may allow the recipient to defer tax on the amount until next year.