Tax Tip Thursday

Cashflow & Taxes Part 2

Got a Big Tax Bill?

You are not alone! People have been coming to me all week with this problem. Unfortunately, once the year is over, there is not very much that can be done to lessen the bill. I do everything I can to minimize it, but there is only so much that I can do.

This goes not only for small businesses, but also for anyone who is making money in any way, shape, or form that is not being taxed at the source or is not being taxed enough. For example, CRB, EI, RRSP withdrawals, and any other types of income.

HST is the Biggest Culprit

If there is one thing I say that you should really listen to, it is to NOT spend the HST money you collect. IT IS NOT YOURS! The CRA takes a very dim view of people spending their HST money. Remember that we are nothing but tax collectors to them! So be sure you put away the HST money or, better yet, remit it monthly! I promise you, if you give them too much they will give it back!

Put Away 25% of All Other Income

As I said in Part 1 last week, you should be putting away 25% (rule of thumb) of all your extra income into a separate bank account. This goes for small business & corporation owners, freelancers, or people who collect any type of extra income.

Having issues with the 25% figure? I can do better for you!

  1. Previous Year — if your current year is similar to your previous year, 25% can be a good benchmark (it’s what the CRA uses)
  2. Your Bank Statements — If you review your business bank/credit card statements at the end of the month, you can come up with a pretty good estimate of your HST and Income Tax payable
  3. You Can Come See Us! — We can do a mid year tax review and provide you with a pretty accurate estimate of your HST and Income Tax for the year.  We did eight of them last year and I am very proud to say every one of them came in extremely close!
  4. You Can Become a Bookkeeping Client — As part of our fixed monthly package, we will provide you with the monthly HST and tax payable for your business! This is something we started this week as a result of my show from last week. I wanted to provide people with an actual amount that is payable instead of just 25%!

Now What?

Now that you know how much you should set aside, what do you do with it? There are too many options to list, but to get you started here are some ideas:

  1. Put it in a separate bank account — This method requires the most self discipline, but works if you can leave the money alone once it’s in there
  2. Give the money to your spouse/a friend — This requires a lot of trust in the person you give the money to, and you also have to resist the urge to ask for the money back!
  3. Just send the money to the CRA — This is the best option if you do not have the discipline to leave the money alone in a savings account/with a friend. They will pay you back if you overpay!
  4. Issue the CRA post-dated cheques — I am still looking into this but you may be able to arrange for pre-authorized debits with the CRA as well.

Do yourself a big favour and pick one of these options. It will help you out a lot when tax time comes!

I gave an example last week where a business owner with $100,000 in sales and a 30% expense base would owe between $25,000 and $30,000 at the end of the year for HST and Income Tax combined.

I would think that it would be next to impossible to come up with that kind of money at the end of the year based on that income! If the owner had put away 25% of their deposits, however they would be in much better shape.

Looking for help?

It can be very difficult to get an accurate estimate on your own, and you might not want to overpay the CRA. I can help you make the right estimate for YOU and help you save it properly! Give me a call or book an appointment today.

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.