Personal Investor: New tax rules raise red flags for small business
Most working Canadians only have to deal with income tax once a year, but for small businesses, it’s a year-round concern.
That’s why Investment Planning Counsel (IPC) has a late summer warning for small business owners about potential fallout from new tax rules for private corporations that came into effect in 2018.
The investment dealer says small businesses could unknowingly be raising red flags that could trigger an audit from the Canada Revenue Agency (CRA) when they file corporate taxes at the end of their fiscal year.
The new rules relate to passive income received on a periodic basis such as rental income, royalties, dividends or pensions. According to IPC, the CRA has been increasingly cracking down on passive income and accurate record keeping is vital. From 2014 to 2015 alone, the CRA reviewed 37,472 files from small and medium enterprises and identified $1.3 billion from audits of small and medium-sized businesses.
IPC singles out two specific red flags that could trigger an audit: dividends payable to relatives, and income distributions from trusts.
Many small businesses are especially vulnerable because they often lack the resources to deal with complex tax changes. The IPC says they can avoid tax disclosure mishaps by hiring the right tax professional to assist them with proper bookkeeping and tax preparation.