As you file your taxes each year for your small business, it’s always your goal to include all the information you have and ensure its accuracy. You want to pay your fair share but take advantage of all the deductions available to you. There may come a time when you need to make changes to tax forms you’ve already filed with the Canada Revenue Agency (CRA). Don’t panic! It’s not as uncommon as you think.
How to Amend Your Tax Return
If you’re an independent contractor or a small business owner and you made an error on Form T2125 (Statement of Business or Professional Activities), you can amend your return online. The Canada Revenue Agency must accept the return prior to you making changes. You can’t amend a return that’s older than 10 years.
Just log into My Account and select “Change My Return” to initiate changes. If you prefer to request a change via the post, use Form T1-ADJ (T1 Adjustment Request) or send a letter with the details of your request along with documents to support the request.
There aren’t any forms to request changes to a corporate tax return. Instead, you need to write a letter to your local tax centre. Things to include in the letter are:
- Name of your corporation
- Business Number
- Tax year
- Summary of the changes
Also, include financial documents to back up your claims and copies of any schedules that need modification. After processing your request, the CRA either issues a reassessment showing which changes they accepted or a letter explaining why they rejected your changes.
If you forgot to report income, claim a deduction, or include other information on your return, you can start this process as soon as the CRA assesses your original return. In most cases, the process to amend a business tax return is pretty straightforward.
Voluntary Disclosures Program for CRA Tax Amendment
The CRA offers the Voluntary Disclosures Program, giving taxpayers, including small business owners, a chance to make changes to a previously filed tax return or to file a missed tax return without penalties. After submitting your disclosure, the CRA may contact you to request additional information. You must provide the information within the period they specify on the letter.
If the CRA accepts your disclosure, you must pay the tax you owe as soon as possible or receive a charge for interest on the amount you owe. If the CRA refuses your disclosure after you provide all of the required information, you may write to the assistant director of the tax centre that made the decision to request a review of your file.
One reason you might need to amend your return is because you failed to identify a material event or transaction properly when filing. Materiality is a business concept that relates to the importance of your recording an event or transaction. You must enter all financial transactions correctly and on time. When this doesn't occur, your business must ask itself whether it’s worth fixing the error and address the issue of materiality.
Example of Materiality
Suppose you’re entering your wage expenses for the period into your financial system. Some employees took time off, so their pay was split between various expense accounts. Upon posting the charges, you realize an additional $7 was coded to vacation expenses instead of regular wages. With such a low dollar amount, you may decide not to correct the error and let it stand the way you originally recorded it. Because this is a small amount relative to your overall payroll accounting, you may use your judgment to determine that this error is immaterial.
Purpose of Addressing Materiality
The reasoning behind determining materiality is that a few small transactions don’t have an overall impact on your financial statements. In the situation above, the difference between reporting $25,000 of regular wage expense for your employee and $24,993 of wage expense is extremely minimal to a financial statement user. The general information is correct and your financial statements aren’t materially misstated, so the transaction can stand as it is.
Establishing Materiality Thresholds
Materiality is subjective and varies from company to company. There aren’t any industry standards establishing dollar-amount thresholds for materiality for you to follow for your small business. These levels are often up to your professional judgment to determine. Also, you should use calculated rates as benchmarks for your decision.
For example, you may decide that any transaction greater than 0.4% of last year’s sales transactions is material. You can also elect to have all balance sheet account transactions considered material and make changes each time an error occurs.
The overall basis of materiality depends upon your professional judgment. Based on your experience and exposure to your business, you know what makes a difference in reporting. More importantly, you’re familiar with the balances in accounts, the total dollar-level activity on your financial statements, and the importance of misstated figures.
Gauge the position of your company, the strength of your internal controls, and your comfort level in the accuracy of what’s reported. The challenge with professional judgment is maintaining a neutral position for your company. Limit biased activity and address all material mistakes, regardless of whether they’re favourable or unfavourable to your overall financial statements.
Audits and Reviews
The end goal of addressing materiality relates to how external parties see your information. If you plan to use your financial statements for external investing, you need to have a third party look at your records. This auditor addresses materiality just like you do: the financial statements don’t need to be perfect. As long as you avoid material misstatements, your financial statements can receive certification.
Materiality covers the dollar amount as well as the number of your errors. Having dozens of $2 errors eventually adds up. Be prepared for an auditor to test dollar amounts and frequency, too.
Make the Most of Your TFSA
While you’re reviewing your finances and tax filings, consider setting some money aside to reduce your tax liabilities. Launched in 2009, the tax-free savings account (TFSA) is a registered account that allows eligible individuals to put money aside up to the annual TFSA contribution limit. Contributions to a TFSA are taxed, but the earnings in your account are tax-free.
For example, assume you contributed $1,000 to your TFSA and used the money to buy stock at the beginning of the year. The price of the stock increases ten-fold, and you now have $10,000 in your TFSA. If you sell the stock and withdraw the $10,000 from your TFSA, you don’t have to pay tax on it.
Instead of leaving surplus funds in your businesses, as a small business owner, you can put the money in a TFSA and let the money grow until you need it. You can also use a TFSA to build up your retirement savings.
Making changes to your tax records and financial statements isn’t nearly as daunting as you think. Getting everything correct presents a challenge if you don’t have help. QuickBooks Online can help you maximize your tax deductions. Keep more of what you earn today.