Ah, tax season… the annual event that strikes fear into the hearts of entrepreneurs everywhere and has accountants on a two-month Red Bull and snack bar diet.
In the 80s (my teen and young adult years), the villain of one of my favourite movies (The Princess Bride) was Prince Humperdinck (aided by the treacherous and not immune to iocaine powder, Vizzini). My one and only sidebar: A-listers put together a hilarious re-creation of the movie during COVID-19 lockdowns—it’s worth a watch.
For entrepreneurs, their villain in April is the CRA Taxman.
To give you an example of what not to do, I’d like to share a short story about my good friend. She is a fantastic business entrepreneur, an expert at her craft, and has built a reputation for being the go-to girl. In short, she has nimbly grown her business in leaps and bounds. A professional of unusual size, if you will.
Still, no one is perfect. Even as time goes on, she remains flat-footed when facing the mountain of tax documents every year.
Today’s story is part cautionary tale, part be-your-own-hero. It also offers some valuable takeaways on how to look forward to April instead of dreading it. So, let’s get started with how you can be an expert at taxes without having to step foot in a cramped tax clinic.
This story starts where most of these tax stories start (and where this one should have ended): she hired a professional bookkeeper.
The Small Business Tax Picture
My friend lives in a world of joy. She makes a product people love in an industry that’s hard to hate—food!
As mentioned, however, she is terrible at accounting. Like any humble professional, she relies on subject matter experts to get her back on the good side of the ledger. In the fast-paced world of food production, a good ledger means never missing payments (or ingredient expiry dates).
However, like most entrepreneurs, she doesn’t have much spare time to double-check the work of the subject matter experts. Simply put, she trusts others to do what they are good at like they trust her to deliver her delicious cookies without cross-contamination.
Everything was going along fine until the CRA called with a GST audit. Her bookkeeper and all her documents were suddenly nowhere to be found.
Canadian Small Business Audit Advice
When she realized the accountant was MIA, she called, did drive-bys (he worked from home), left notes on the door, and tried bombarding his social media. Sadly, it was all in vain, and both the accountant and the documents remained out of reach. With the dual pressures of running her business and chasing documents, she alternated effort with a bit of procrastination.
Like her with the accountant, the CRA kept calling. Three months later, she found herself in a proverbial rock and a worse place.
- A deadline to answer challenging CRA questions.
- No original documents (and no copies) to use to reconstruct it.
- No copies of the original work he had done.
- A suite of legitimate deductions with no way to prove them.
Week after week, with the deadline looming, she went through credit card records and bank statements, trying to recreate her records. She called suppliers, rifled through old invoices to customers, and backwards-engineered product deliveries, and spent a monumental amount of effort proving that she had made legitimate deductions.
In the end, she lost the war—she ran out of time.
The CRA and Your Small Business Audit
Sadly, the CRA is not responsible for a business’ lack of records. They closed the file, denied her claims, and sent her a bill for the disputed amount.
The principle of it bothered her. She could find a way to pay the bill, but she shouldn’t be forced to do it on account of someone else’s apathy. She knew she had done nothing wrong, except maybe trust someone who willfully disappeared from existence (and from their professional accountability).
Don’t despair! There’s a silver lining to this story.
Like most artistic people, once she got mad, my friend also got creative. She resorted to paying the accountant’s neighbour to call her once they saw him near his home. Once the alarm rang, she drove down there Formula 1 style to confront him and demand her records back.
Here, we start to see a better resolution. With her records now in hand, she appealed the tax decision and received a second chance to fight it.
The bad news is that there is still a chance she won’t get out of this clean. Worse, she is now on the hook for work she never did, but as the business owner, she has to take responsibility for it. This has also consumed a lot of her time, and like the hero of The Princess Bride, Wesley, fighting for life on the torture machine, has had a bit of joy squeezed out of her.
To avoid her fate, here are a few plans of action you can avoid to improve your chances of sailing through an audit, if not avoiding one altogether.
How to Avoid a CRA Audit?
Below are some of the pitfalls she encountered on this path and a few that other clients of ours have similarly traipsed across.
Pitfall #1: Procrastination Nation
We’ve all been there—the siren call of procrastination. When it comes to taxes, however, procrastination is your mortal enemy. Waiting until the eleventh hour to pay the piper is a recipe for disaster. The solution? Put down that Netflix remote, summon your inner productivity guru, and tackle your taxes with gusto (or at least the knowledge it will make you feel way better when it’s done).
Pitfall #2: Is it business, or is it pleasure? (Or Worse, Ignorance)
It’s only natural once you see how much you can reduce your owing while improving your quality of life—writing off things for your ‘business’ that find their way into your pantry. Be warned, it’s like trying to climb the Cliffs of Insanity. While it might seem exhilarating at first, there’s a giant with a club waiting at the top. Keep your business and personal finances separate, and for the love of all that’s deductible, educate yourself on tax laws. Ignorance is not bliss regarding taxes—it’s more like a one-way ticket to Audit Town. And that, my friend says, is no fun at all.
Pitfall #3: Ignorance is Bliss… Right?
Not knowing how the expert does what they do is different from not knowing what they are doing. At a minimum, a good expert will take the time to explain their work in layperson’s terms and help you get the context so you are literally not a mushroom in the dark. It’s similar to the time that a friendly officer ticketed me for doing a U-turn in a city I didn’t know. When I said, “We do that at home,” he kindly offered me the sage advice that “ignorance is not an excuse.” He was right, but I was still mad (not to mention out $50). The lesson? Save money by getting comfortable with the basics.
Conclusion
The moral of the story is to never go against a Sicilian when death is on the line.
Wait, sorry, that’s the Princess Bride again.
The moral is to take control of your situation, even if you’re nervous. Limbo, or the fear of doing something, is far worse than mustering the courage to try. Limbo is the dark friend that crawls into bed with you at 3 a.m. and won’t go away. That downward exhaustion spiral is debilitating and, as we’ve seen in this story, expensive.
Our leasing strategies are tied to many of the challenges you’re familiar with or nervous about examining for fear of bugs under the rock: intricacies like taxes, cash flow, and growth opportunities. It’s all a big puzzle I’m happy to piece together with you, corner by corner, edge by edge.
Contact us today for a tax-proof strategy to lease your new heavy equipment without the worry that comes with the unknown.
