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Top 4 Accounting/Bookkeeping Mistakes Businesses Make and How to Correct Them

An accountant making a correction for a common accounting or bookkeeping business mistake.

Managing company finances is crucial to running a successful business. However, many owners/managers make costly bookkeeping and accounting mistakes, leading to financial issues (legal troubles, financial instability, poor decisions, etc.). The following are the most common errors businesses make and actionable tips for improvement. 

Common Accounting/Bookkeeping Mistakes

  • Mixing personal and business finances: When owners/managers blur the lines between business and personal finance (use personal credit cards, bank accounts, and cash flow for business expenses), problems occur. These errors create a confusing financial picture. Separating personal and business finances simplifies tracking expenses, filing corporate taxes, and creating financial reports. Best practices include applying for a business credit card, opening a dedicated bank account, and keeping accurate records of business transactions.   
  • Inadequate recordkeeping: Inferior recordkeeping leads to incomplete records, lost receipts, tax compliance issues, missed deductions, and reduced cost savings. Accurate recordkeeping makes it easier to retrieve financial information. To improve your records and create a clear picture of financial health, utilize accounting software (Xero, QuickBooks, Kashoo, FreshBooks, etc.), establish a clear recording system, and ensure receipts are correctly entered. 
  • Making reconciliation errors: It’s important to regularly compare bank/credit card statements with a company’s accounting records to ensure they match. A lack of reconciling accounts may result in unauthorized transactions, missed discrepancies, accounting errors, and financial problems. To avoid these difficulties, reconcile credit card statements and bank accounts regularly (monthly, weekly), implement controls to flag/address discrepancies, and consider hiring an accountant for your corporate accounting needs. Accountants have the expertise and tools to assist. 
  • Misunderstanding tax obligations: Payroll, sales, and self-employment taxes are complex! Misunderstanding a company’s tax obligations leads to interest charges and penalties. Hire professional accountants to walk you through your business’s tax responsibilities. Make note of deadlines and learn deductions specific to your business/industry. 

How Cook and Company Chartered Accountants Can Help

Efficient accounting practices are critical for all companies, maximizing financial health. Recording, communicating, and measuring financial transactions can be time-consuming and challenging. Cook & Company can help simplify the task. We offer corporate accounting solutions tailored for your business, providing what is necessary to ensure stability, prosperity, and efficiency. Our experience, technical savvy, knack for numbers, and grounding in the current financial landscape help us deliver accounting solutions that work and invaluable tax planning and advisory services. We offer integrity, honesty, and a personal touch. Put our diverse and detailed expertise to work for your company. Contact us today.

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How Does Passive Income Affect Corporate Taxes?

Passive Income Affects Corporate Taxes

Passive income can have a financial impact on a corporation’s tax burden. Strategic planning can reduce the impact of passive income on your corporation’s bottom line.

What is passive income?

Your business may generate income from many sources. Passive income is derived from the ownership of capital property/assets. It’s generally earned through rental, interest income and/or royalties and is achieved without excessive effort on the part of the stakeholder(s). Passive income is taxable in Canada.

What is considered passive income in Canada?

  • Investments: Guaranteed Investment Certificates (GICs) and personal savings accounts are low-yield sources of passive income. Moderate-risk investments like dividends from shares of a corporation are also considered passive income. Passive income can be earned through investments that are part of a non-registered investment plan or portfolio. 
  • Rental properties: Income earned through the leasing of a rental property is considered passive income. 
  • Online platforms are an increasingly popular method of earning passive income. Earning money online can be done independently through one’s own website or through partnerships with affiliates.
  • Corporations: Many corporations own shares in other corporations as a means to generate passive income.

How does passive income affect corporate tax in Canada?

Passive income in any amount is ineligible for the small business deduction (SBD). As such, corporations receiving any passive income will pay a high-rate corporate tax (upwards of 50%) on that portion of their pre-tax income.

Strategies to reduce the impact of passive income on corporate tax:

There are a number of ways that your corporation can reduce the impact of passive income on your corporate taxes. 

  • Withdrawals to permit RRSP or TFSA contributions: Consider withdrawing sufficient corporate funds to maximize your RRSP and TFSA contributions, rather than leaving the funds inside the corporation for investment. Given sufficient time, RRSP and TFSA investing will outperform corporate investing when earnings come from interest, eligible dividends, annual capital gains or a balanced portfolio. 
  • Tax-free withdrawals: If a shareholder previously made a loan to the corporation, and those funds are no longer required by the corporation, consider repaying the shareholder loan. Capital dividends can be paid without being included in a shareholder’s income. 
  • Investment strategies: Consider investments that lean towards growth rather than annual interest or dividend income, as you may better be able to time the recognition of a capital gain. Consider a “buy and hold” strategy to defer capital gains. It may also be possible to stagger dispositions of investments between calendar years.
  • Individual pension plans: An Individual Pension Plan (IPP) is a pension plan created for one person, rather than a large group of employees. 
  • Life insurance: Invest the after-tax income of the corporation into a corporately-owned life insurance policy that insures the life of the business owner or some other individual. There is generally a lower after-tax cost of the insurance premiums, which can be paid with funds that are taxed at a lower tax rate inside the corporation than funds that are earned personally. 
  • Donations: Your corporation will receive a deduction for the amount of the donation and making a donation will reduce the funds that may be invested in your corporation to produce passive income.

Be sure to discuss all tax strategies with your chartered professional accountant to make sure they are appropriate for your corporation. Your accountant can advise you regarding the best tactics to reduce the impact of passive income on your corporation’s tax burden. 

Need help with your passive income taxation strategies? Contact Cook and Company Chartered Professional Accountants. We are based out of Calgary, Alberta, serving clients across Canada and the United States. We provide high-quality tax, assurance, financial and succession planning services for a wide variety of privately-owned and managed companies. Contact us for a complimentary consultation.