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For small business owners, surviving tax season can mean a lot of sweat, worry, and undue stress as your cash flow gets squeezed by the added pressure of a pending tax bill.
Whether you only recently launched your venture or are actively growing your business, the upcoming income tax bill can throw a serious wrench in the works.
You have orders that need to be filled, regular expenses that need to be paid, and now the Canadian Revenue Agency (CRA) is about to come knocking, and all the while, you can only wait for those unpaid invoices to get remitted. It can be tough.
You Aren’t Alone
It’s a scenario that plays out with many entrepreneurs according to the Canadian Federation of Independent Business (CFIB).
“We see some common mistakes through our business counseling services to our members that get business owners into trouble, especially for new entrepreneurs,” says Monique Moreau, VP of National Affairs for the CFIB. “Essentially what they need to do is manage their cash flow as best they can and do that with as much cooperation from CRA as they can get.”
Toronto-based entrepreneur Marcus Anderson can relate to the issue. His mobile marketing and software development company, Broadplay, saw enormous growth but that expansion required financing. Despite good revenues and an increasing client base, the burden of his tax remittance caused some extra stress.
For Anderson, it came down to a choice between having to pay his remittances or put the money into his company. “The reason I had a big bill with CRA, and I wouldn’t recommend it, but sometimes I wouldn’t pay my CRA bill on time and I would incur the penalty,” he says. “I kind of used the CRA as a financing source.”
It was a plan the experts would likely advise against but it worked at the time for Anderson because he understood the risks, he understood the rules, and he was completely upfront with the CRA.
In this post, we will discuss what problems to look out for and what opportunities are available to help you and your business grow without losing sleep over the CRA.
Related: An 8-Step Guide to Drama-Free Sole Proprietorship Taxes
Common Small Business Tax Mistakes
The CFIB identifies three typical pitfalls that can trap small business owners when tax season rolls around, which are:
1. Failing to understand your responsibilities.
Knowing what is due when it is due is the most important item small business owners need to take stock in. “Generally not being aware of what their obligations are when it comes to when they should be paying their taxes,” says Moreau. “Another key mistake is not paying attention to the threshold for GST/HST. Some business owners trip over that limit without noticing.”
For those unsure of what is expected, The Canadian Revenue Agency provides a tax information checklist for new business owners to help them sort out what the responsibilities are for business owners and what the implications are if those obligations are not met.
2. Being disorganized or unprepared.
The second big mistake comes from not being organized. Business owners have specific knowledge about their product or about the vision they want to see realised from their company, but often the day-to-day number crunching is not a part of their skill set and the finances fall through the cracks.
“Entrepreneurs are kind of fly-by-the-seat of your pants type of a personality,” says Anderson. However, he says getting organized gives you the foundation for growth. “Instead of getting behind and stuffing paper in a shoebox, it gives you credibility. It gives everyone from lenders, suppliers, and clients, a sense of assurance and a sense of ease.”
Both Anderson and Moreau suggest hiring a bookkeeper or accountant to make sure everything is up to date and current. “It’s worthwhile having those people to keep you organized,” says Anderson. “It’s not going to kill you. What’s going to kill you is not having that support.”
3. Trying to avoid/mislead the CRA.
Thirdly, and what might be the most dangerous mistake, is not being up front with the CRA. Both Anderson and Moreau say the CRA is not the scary beast it can be made out to be.
“Just be upfront with CRA and explain your situation and see if there are options for other kinds of payment schedules,” says Moreau. “This is not something CRA is unaccustomed to seeing, especially with new business owners. If you are showing your best efforts to comply, then usually there tends to be some leeway.”
Anderson agrees. “I had no problem dealing with the CRA because I was being treated as a person. If you explain to them ‘I know I owe X amount in taxes but I don’t have the cash; I’m growing and employing people.’ They are not necessarily going to put you out of business because that wouldn’t do them any good either.”
That’s why Anderson was able to carry over some of his debt with the CRA so that he could finance his company’s growth. He didn’t shirk from his obligations. Instead, he collaborated with the agency to make it work for all involved.
Building that relationship takes time and the CFIB has counseling advice to help small business owners do that. There is also the CRA’s My Business Account which makes it easier to do business with the government and ensure the proper paperwork is completed on time.
Related: The Comprehensive List of Small Business Tax Deductions
Weighing Your Small Business Financing Options
You know your responsibilities, you are organized and you have clarified your obligations with the CRA. What’s next? Even the best-laid plans won’t guarantee a stress-free tax season, so you begin to analyze your options. Here’s our list of options (with their advantages and disadvantages) that you can consider for financing the tax season.
1. Take out a loan
There are a number of ways small business owners can secure a loan. Through either a bank or private lending, business loans will give you that quick infusion of cash that can be used to cover that tax payment when the bill comes due. However, finding institutions willing to lend money to entrepreneurs is becoming more difficult and alternative lenders can demand high-interest rates. Consider the rate you are willing to accept before negotiating for a business loan.
2. Seek outside investors
Finding angel investors or private lenders to inject cash into a business means selling equity. Entrepreneurs need to realize they are giving up a slice of the profits and a slice of control. Investors expect a return on their money and that means they will demand a say on business decisions. It can be a tough pill to swallow for some.
“Private lenders are so risk-averse in Canada,” says Anderson who had looked into that line of financing without success. “They act more like banks. You do months and months of paperwork and then they don’t pull the trigger in the end.”
3. Take advantage of federal and provincial tax credit programs
The Scientific Research and Experimental Development Tax Credit (SR&ED) is an example of an incentive program that targets Canadian businesses conducting research and development. SR&ED financing lets you deduct expenditures from your income and use the investment tax credit to lower your income tax payable.
To qualify you must be doing research and experiments in a field of science and technology, whether it be basic research, applied research or experimental development of new products and technology. There are other research and development incentive programs that may also apply to your specific line of research both provincially and federally. Check with an accountant or with CRA to find out if you qualify.
4. Look into the Small Business Financing Program
In addition to tax credits, the federal government also offers entrepreneurs a chance to get financing through the Canada Small Business Financing Program, a program that makes it easier for small businesses to secure financing because the government shares the risk with the lenders.
If you’re a business with gross annual revenues of $10 million or less you can apply for loans up to $1 million. There are restrictions and the money can only be used for specific purposes, such as purchasing land or buying or upgrading equipment. It can’t be used as working capital, but using this money will free up cash flow that otherwise would have been spent on those items.
5. Consider invoice funding
One of the fastest-growing lending vehicles for small- and medium-sized businesses is with financial technology (fintech) companies that use alternative ways to assess risk and provide credit.
“Customers often use our service to avoid a cash crunch when taxes are due,” says Steven Uster, CEO of FundThrough. “Having to wait two or three months for an invoice payment can stretch a business trying to grow. We allow business owners to access that cash the instant the invoice is issued so the funds can be put to good use right away.”
This was the solution Marcus Anderson used to help pay off his tax debt when he signed on with FundThrough. “That’s where a company like FundThrough can step up and stabilize your monthly inflows. Then you have the money when you need it.”
Whichever option a business owner decides to use, the CFIB says entrepreneurs need to make the decision that is right for them. “Be careful, is our advice with whichever route the business owner takes,” says Moreau. “Make sure you don’t get into more hot water than you already are in.”
For Anderson, it was about understanding his business’ strengths and using that knowledge to find a solution that worked for him and allowed his company to grow. “My company was getting good clients, good revenues and great invoices on a consistent basis. FundThrough helped us release these funds right away,” he says. “They funded us that day without waiting 30, 60 or 90 days for those receivables.”
We’d like to thank FundThrough, Canada’s leading invoice funding service, for this informative and timely guest post. Learn more about managing your cash flow by advancing funds sitting in unpaid invoices.
Disclaimer: The advice we share on our blog is intended to be informational. It does not replace the expertise of accredited business professionals.
