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E-Myth – “Why most small businesses don’t work & what to do about it”

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Virtual Accountant | Why It Is Important To Source Deductions Properly

If entrepreneurs are great at the work that their business does, virtual accountant says that it does not necessarily make them good at actually running that business. In fact, half of all Canadian entrepreneurs that open their business will end up failing within five years. 29% of those failed entrepreneurs will go on to say that the reason why their business failed was that they ran out of money. If business owners do not learn early how to file their taxes efficiently, they may trigger additional problems for themselves that could end up costing them significant amounts of additional money, that can contribute to their financial problems.

Many entrepreneurs understand that they have to withhold certain payroll taxes from all employment income. Whether it is their own salary or wages for their staff. However, while they understand that they have to, they may not understand what will happen if they either do not withhold the right taxes or if they do not submit those remittances to Canada’s revenue agency on time.

If an entrepreneur pays themselves or a staff salary or wages, the entrepreneur needs to withhold an employer and an employee portion of CPP as well as EI and income tax from those payroll checks. They also need to submit those withheld amounts to the Canada revenue agency by the fifteenth day of the following month that the payroll was issued. Virtual accountant recommends that entrepreneurs do not wait for this fifteenth-day deadline to submit payroll remittances, but that they do it on the same day as payroll to either avoid forgetting or to ensure they do not run into problems that could cause them not to file.

Entrepreneurs should understand that as soon as they have filed their T4 slips, CRA will be able to tell how much source deductions an entrepreneur should have paid. If they have not paid enough, an entrepreneur does have until 15 January the following year to catch of all additional source deductions they should have paid in the first place. If an entrepreneur is unable to pay the proper source deductions by January 15, they may get their virtual accountant to help them reclassify their own income as a shareholder loan or a dividend so that the payroll remittances that they have claimed for themselves can be reclassified as source deductions for employees. This may be enough to ensure they have paid enough source deductions.

However, if an entrepreneur is not able to pay that full amount, or they are not able to reclassify enough source deductions, they either will get a letter from Canada revenue agency requesting payment in full, however, the worst-case scenario is that it will trigger a payroll audit. A payroll audit will have every single transaction in the business scrutinized, in order to assess whether taxes should be paid on these amounts or not. Any grey area transactions are put at risk for being considered taxable income.

Virtual Accountant | Why It Is Important To Source Deductions Properly

When the most important things that an entrepreneur can ensure that they do says virtual accountant is to ensure that they are filing their T4 and T5 slips properly and on time. T4 and T5 slips refer to all of the amounts that has come out of the business to pay business owners and staff. These need to be filed by the last day in February every single year, along with the appropriate source deductions being sent to CRA for all employment income. If an entrepreneur either files these slips late, or not at all, or if they have not paid enough source deductions, they are at risk for a payroll audit.

If an entrepreneur has been targeted for a payroll audits, the auditor is going to ask the entrepreneur for two things: their general ledger and all of their bank statements for the past year. The entrepreneur is going to be looking to ensure all of the amounts that were dispersed in the business for personal expenses either employees or the entrepreneur will have the appropriate taxes paid on them. If there are any amounts that were for business purposes, but could potentially look to an auditor like they were payments to an employee, or the business owner themselves, the auditor is able to assess those amounts as income, and therefore be taxable.

They will look at the bank statement and see if there are any amounts of money that went directly to individuals and not businesses. if a business owner paid a staff member via check and did not claim that as income on the T4 slips, the business owner will be assessed having to pay source deductions on that amount plus penalties plus interest. The reason why this is potentially a problem says virtual accountant, is if an entrepreneur has paid any unincorporated business for services. For example, if an entrepreneur has hired a courier company that is unincorporated, and sends them a monthly check in the business owners personal name for all the services rendered, the auditor may consider that courier staff, and all amounts need to have source deductions taken from the amounts they were paid.

The second thing that an auditor is going to be looking for according to virtual accountant is all instances where an entrepreneur has paid themselves cash, as well as non-cash benefits, says virtual accountant. If there are additional transactions that are not accounted for in their T4 or T5 or in their shareholder loan account, they will have an entrepreneur pay taxes and interests on those amounts as well. The more transactions an entrepreneur has not claimed, the more an auditor is likely going to consider grey area transactions as a personal expense, potentially costing an entrepreneur far more in taxes.

Rather than putting several grey area transactions at risk, an entrepreneur can simply avoid a payroll audit by filing their T4 and T5 slips on time as well as ensuring all of their source deductions are remitted to CRA on time. Doing these two things will completely prevent payroll audits from happening, so entrepreneurs can ensure that their transactions will not be called the question.