Millions of Canadians are considered self-employed at tax time. And most people start their business receipt filings with the best intentions, and think keeping everything in one place is enough. Or they are not sure how their business is going to perform, so they decide to figure out their accounting system later. This plan can work but, if you are busier than expected, dealing with receipts tends to fall by the wayside.
If you are self-employed or an unincorporated business owner, any income you earn is reported on your personal tax return on a T2125 Form. You are allowed to claim reasonable business expenses against your income to help lower your tax payable. If it was your first year in business, you did not have any taxes deducted at source so you will probably owe taxes when you file.
Every legitimate business expense receipt helps lower the amount of tax you pay. If you do not have a readable receipt, you cannot claim the deduction; if the receipt has faded entirely then you can’t use it. Rather than wait until the end of the year to piece together your receipts, write down some information on your expenses and the amounts. Then, if you continue to use the shoebox method, you can at least check the receipt and know at the end of the year why you spent the money.
The shoebox method will also cost you more at tax time. Whether you do your return yourself or pay a third-party preparer, it will take more time to work through the paperwork, classify the expenses and total everything. But keeping track of your receipts is about more than just making your tax return easier. Tracking expenses is also a vital part of understanding how your business is running. If all the receipts are in a bag, you probably have no idea where you are spending your money.
And the Canada Revenue Agency is not the only one interested in your receipts. If you are trying to arrange financing, your financial institution will want to examine your accounts. The shoebox method means you have no clear idea about the state of your business.
Paperwork and receipts are no one’s favourite tasks, but staying current makes life easier in the end. Capturing every expense will lower tax payable. And knowing where you are spending money means you have a better understanding of your business.
All of which means your accounting and receipt system should not be an afterthought when you start your business. It is in your own best interest to build a smart filing system.