Tag Archives: taxes

For The Love of Taxes

This morning I went to drop off some tax papers to a client. She had some great questions, so I spent 40 minutes explaining how her tax return worked, and going over some of her previous year’s returns. She was trying to get an idea of how the various pieces of a year of her life could be summed up in a bunch of numbers grouped together on far too much paper.

She’s a very smart person, but was never taught how all this works, and that seems to be the case with most people.

That’s really sad. Partly because it’s a life skill we should all learn as teenagers, and partly because I love it and I want other people to experience the same joy when they do their taxes. Ok, maybe joy is pushing it, but if we strive for joy and land on something a little more positive than dread, that’s a win.

I like to think of taxes as that scary kid in class with the mohawk. The one that most kids were a little afraid of, but once you got to know them they weren’t so bad.

Love of Taxes: The Origin Story

When I was 15 my Dad showed me how to do my taxes. At the time we were doing them by hand, so I had my pencil and my calculator out, and we would go through every line. My return was very simple at that point because I only had one T4, but it was so fun. How could get as much back as possible? How can I play the government’s game and win? (without cheating though, ’cause I’m not in to that).

Then one day I was hanging out with my group of friends and I noticed one of them had “T4” written on his hand. I asked him “hey, are you doing your taxes?” He said I was the only person who knew what that meant. I jumped on the chance. “You want help?!”

By the time I was 16 I was doing all my friend’s taxes… by hand.

I don’t do them by hand anymore, but I’m still doing my friend’s taxes. Every now and again they’ll get a Notice of Assessment from the CRA (Canada Revenue Agency) asking for proof of expenses, like child care receipts for example, and it’s presumed the tax return was filed incorrectly until they see and approve those receipts. (The CRA doesn’t believe in innocent until proven guilty, you’re wrong until you can prove otherwise).

Surprise bills are never fun, but it seems to be so much worse when they come from the CRA. It feels like those bills are written in some kind of code, and you have no idea what they’re asking for. So frustrating.

These stress-inducing letters are exactly why I think we should starting learning about taxes as teenagers. Guess what though, it’s not too late to learn!

As adults we can learn how our taxes work, and remove the uncertainty and stress that comes with them. Even if we never want to actually prepare our own taxes, we can still have a better understanding of how it all works, and be able to have more informed discussions with our tax professionals.

This is especially true for sole proprietors. Our business taxes and our personal taxes are one and the same, so having an understanding of the system is part of doing business. How much should I set aside from every sale? What expenses can I deduct? Do I need to charge sales tax? How does that work?

As your business becomes more complex, so do your taxes.

The first step to reducing tax stress is to be organized with your paperwork, Don’t think of taxes as a once a year event, think of them as something you maintain. It’s like oral hygiene. If you only brush your teeth once a year, things are going to get gross.

The best results come from healthy tax habits like regular receipt management and bookkeeping.

Kaitlin

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Do You Need a Business Bank Account?

You’ve probably heard it before – “you need a separate bank account and credit card for your business.”

It’s true, you do.

But why? It makes everything harder! Money goes into the business account, but all your bills come out of your personal account. How are you supposed to pay for things like groceries if all of your money is in the business account?

I get it, I’m a small business owner too – my business income has to pay my personal expenses.

Whether you’re incorporated or a sole proprietor, you need a separate account.

As a sole proprietor, things are a bit simpler because everything you make goes on your personal taxes, so you can transfer money to your personal account without too much planning (besides some cash flow management, but that’s beyond the scope of what we’re talking about here).

Why does it need to be separate?

Having a clear line between your personal and business expenses, ensures you’re only claiming the business ones against the business income.

The Canada Revenue Agency isn’t going to let you deduct cat food if you’re a coach. Sorry about that.

On the other hand, you definitely want to deduct everything related to the business – if you don’t, you’re paying more in taxes than you need to. Nobody likes that.

Taxes are a huge reason to keep everything separate. Not only for the sake of compliance but also to save time. When the inevitable tax season comes around, you don’t want to be going through every bank statement for every bank account and credit card you have trying to pick out the expenses you think might be business related.

It’s time consuming, tedious, and honestly, it’s pretty unlikely you’ll make it through the whole exercise without making a mistake somewhere.

Trying to remember what you bought at Canadian Tire eight months ago is going to be a tough one, and if you can’t prove it was business related, you can’t deduct it for tax purposes.

Maybe you keep all your receipts and write on them to say what you bought and why. That’s great! That will definitely help to keep things separate. You’ll still have to go through and add up all of those receipts at the end of the year.

Pro tip: you can take a picture of receipts with your phone and toss out the paper. The CRA will accept digital copies as proof of purchase. Yay!

What if the business is incorporated?

Corporations are technically separate legal entities from their owners (a.k.a. shareholders), which means they for sure need their own bank account and credit card.

The corporation will need to pay tax on its income, and you’ll need to pay tax on what you receive from the business. When you have only one bank account, that makes things tricky. Where’s the line between business and personal?

Having a separate credit card makes life SO much easier. The fee on your bank account will be way less if you only have a few transactions every month, and you can use the credit card to pay for everything. I know it’s hard to get credit for the business, especially if you’re just starting out, but it can be as simple as just getting another card issued on your personal account. The important thing is to have another physical card that you only use for business. It will show up on your statement separately from the other card.

Are taxes the only reason?

Nope, it’s just the one with the biggest potential consequences.

Reporting will be difficult too if you only have one account. How much did the business make in net income? Will you have cash in the bank to pay your suppliers on time? If everything is in one account it will be tricky to know the answers to these questions, which makes it tricky to run the business efficiently.

If the business is a side-hustle and you still have a day job, you’ll have no idea if the business is making money if it’s not separate. You might be bankrolling the business and not even know it.

At that point it’s more of a hobby than a business, which is ok, but keeping your finances separate will give you all the facts.

What’s the take-away?

At the very least, the business should have its own bank account, and ideally a credit card too. It will be so much less stressful and time consuming when taxes inevitably roll around. Plus, if/when you start working with a bookkeeper or an accountant, you’ll save money because they’ll spend less time on your taxes. Win!

Kaitlin