11 Accounting Tips that Will Help You Avoid Tax Time Traumas
By Merrilyn F. Reid, CGA, MBA | November 30, -0001
Did you know that your business can save money at income tax time, even if you or your staff don't understand all the nuances of the Income Tax Act?
I speak from experience when I say that an accountant's worst nightmare is the client who presents a shoe box of receipts on the eve of the filing deadline. Vying for a close second in the nightmare department is the set of unbalanced books and incomplete records such as missing bank statements, invoices and receipts. The accountant is obligated to sort out these "tangles" under time pressure and, in all probability, passes on the cost of doing so to your business. The purpose of this article is to assist you in understanding what your accountant requires and why, so that you may have a smoother year-end and income tax filing.
- DO hire an accountant before you start your business. There are several decisions to be made that require an accounting perspective e.g. type of business structure, choice of corporate year-end, share class structure for bonus and dividend purposes, physical workspace, equipment and computer software required to perform the accounting function.
- DO determine who will perform the daily bookkeeping service and articulate your expectations. Monitor the situation to ensure that the job is getting done in a timely and correct manner and make personnel/procedural changes as required. Assign a realistic deadline for all processing to be complete every month - many companies are comfortable with the 12th or 15th of the following month. If the accounting function is constantly late, it cannot assist you in making management decisions, securing/maintaining additional financing or filing the company's GST returns.
- DO maintain your deposit books in daily sequence and put notations on unusual items to assist the bookkeeper in classifying them.
- DO reference the cheque number on each invoice, stamp each page of the invoice "Paid" to avoid duplicate payment and file the invoices in file folders by vendor name. If you keep accounts payable vendor files organized alphabetically in a filing cabinet or shelf, they can then be easily referred to on a moment's notice.
- DO set up new accounts payable vendor files each fiscal year. Ditto for accounts receivable files, if this appropriate to your business. Use "banker's boxes" to store the previous year's records and clearly mark the dates and type of information contained in each box. The contents of these boxes will then be available for transmittal to your accountant, if required.
Admittedly, storage of files is costly and, at some point, your business will wish to destroy its older records. (Revenue Canada suggests a six year retention of records but it could request to view records that date back further, in the case of fraud investigation.) By organizing and storing your records by fiscal year, you have made the future task of destroying older records easier.
- DO set up "permanent files" for all banking agreements, leases and equipment purchases and disposals. These are always significant review items at year-end and your accountant will appreciate your separate files and backup documentation. As long as these agreements and assets exist, the files pertaining to them should never be scheduled for destruction.
- DO consult your accountant before the purchase or disposal of a major asset or change in financing agreements. The timing and terms of these items are critical and can often be structured to become more tax effective - but only if the transaction has not yet transpired.
- DO make all your statutory remittances such as payroll deductions, GST and provincial sales tax on time, every time. If not, your business will be subject to late filing penalties, arrears interest, and collection and audit stress as well as additional accounting fees for intervention and verification.
- DO keep a daily vehicle log of the kilometers driven for personal use, in the case of a company-owned vehicle; the kilometers driven for business use, in the case of a personally-owned vehicle required by an employer for performance of employment. This log, which is often requested by Revenue Canada, provides the basis for a ratio of personal to business use that is then applied in the computation of vehicle benefits/costs.
- DO ask your accountant what you could do to further improve your books in order to cut accounting fees e.g. prepare summary sheets of the major asset and liability categories, prepare bank reconciliations, analyze certain accounts, etc.
- DON'T delay in getting organized. Do it now.