Common Tax Mistakes Small Business Owners Make (And How to Avoid Them)
Running a small business in Ontario is challenging enough without making costly tax mistakes that trigger CRA audits, result in penalties and interest, or cause you to overpay taxes. Unfortunately, many entrepreneurs make the same preventable errors year after year.
At BBS Accounting in Toronto, we’ve helped hundreds of small business owners correct these mistakes and implement systems to avoid them going forward. Understanding common pitfalls is the first step toward running a tax-compliant, financially optimized business.
Mistake #1: Mixing Personal and Business Finances
This is perhaps the most common and costly mistake Ontario small business owners make. Using the same bank account and credit card for both business and personal expenses creates chaos during tax preparation.
The Problem: When transactions are mixed, separating business from personal becomes a time-consuming nightmare. You’ll waste hours reviewing every transaction, trying to remember whether that $87 charge was personal groceries or business supplies. This increases accounting fees, creates opportunities for errors, and raises red flags with CRA if audited.
The Solution: Open separate business bank accounts and obtain business credit cards from day one. Every business income deposit goes into the business account. Every business expense comes from the business account or card. Your personal finances remain completely separate.
If you’re operating as a sole proprietor, you can still maintain separate accounts even though legally they’re all your funds. The operational separation makes tax time infinitely easier.
At BBS Accounting, we see clients save hundreds of hours annually just by maintaining this separation.
Mistake #2: Poor or No Bookkeeping
Many small business owners neglect bookkeeping throughout the year, then scramble in March and April trying to reconstruct transactions from bank statements and piles of receipts.
The Problem: Inadequate bookkeeping leads to missed deductions, incorrect income reporting, inability to track business performance, and greatly increased accounting fees when professionals must organize your chaos. CRA expects proper books and records. If audited, poor bookkeeping significantly weakens your position.
The Solution: Implement bookkeeping from day one using software like QuickBooks Online, FreshBooks, Sage, or Wave. Connect your bank accounts for automatic transaction import. Categorize transactions at least monthly.
If you don’t have time or inclination for bookkeeping, hire a professional bookkeeper. At BBS Accounting, our bookkeeping services ensure clients have current, accurate financial records year-round. The cost is minimal compared to the benefits of knowing your financial position at all times.
Even a simple spreadsheet tracking income and expenses by category is better than nothing, though proper accounting software is strongly recommended for Ontario businesses.
Mistake #3: Not Tracking Mileage Properly
Vehicle expenses represent significant deductions for many small businesses, but CRA has strict documentation requirements that most business owners don’t follow.
The Problem: CRA requires a detailed log showing date, destination, business purpose, and kilometres for each business trip. Trying to reconstruct this at year-end from memory or calendar entries often fails CRA scrutiny. Without proper documentation, CRA can disallow your entire vehicle deduction during an audit.
The Solution: Use mileage tracking apps like MileIQ, Everlance, or Stride that automatically track trips using your phone’s GPS. Categorize each trip as business or personal with a simple swipe. These apps generate CRA-compliant reports showing all required information.
Alternatively, maintain a written logbook in your vehicle, noting odometer readings, destinations, and purposes for every business trip. While less convenient than apps, this method is equally acceptable to CRA.
For occasional business use, tracking every trip is manageable. For frequent business driving, apps are essential to maintain compliance without consuming your time.
Mistake #4: Missing the HST Registration Requirement
Ontario businesses must register for HST once revenues exceed $30,000 in any single calendar quarter or over the previous four consecutive calendar quarters.
The Problem: Many new businesses cross this threshold without realizing it, continuing to operate unregistered. Once CRA discovers this (and they eventually do), you’ll owe all HST you should have collected, plus penalties and interest. You can’t go back and collect HST from past customers, meaning you pay this out of pocket.
For an Ontario business that earned $100,000 while unregistered, the HST liability is $13,000 plus penalties—a devastating hit for small businesses.
The Solution: Track your revenues monthly. Once you approach $25,000 in a quarter or $30,000 over four quarters, register for HST immediately. It’s better to register early than miss the requirement.
Some businesses benefit from voluntary registration even below the threshold. If you have significant business expenses subject to HST, registration allows you to claim Input Tax Credits, recovering the 13% HST you pay on purchases. This can result in HST refunds from CRA rather than payments.
At BBS Accounting, we help clients determine optimal HST registration timing and manage ongoing compliance once registered.
Mistake #5: Claiming Personal Expenses as Business Deductions
Some business owners push the boundaries of what’s deductible, claiming personal expenses as business costs. This is tax evasion, not tax planning.
The Problem: Claiming personal expenses as business deductions is fraud. If caught during a CRA audit, you’ll face reassessment, penalties, interest, and potentially criminal charges for tax evasion. The tax savings isn’t worth the risk.
Common examples include claiming family vacations as business travel, personal meals as business meals, personal vehicle use as business kilometres, or home expenses far exceeding actual business use.
The Solution: Only claim legitimate business expenses. The CRA test is whether the expense was incurred for the purpose of earning business income. Personal benefit disqualifies an expense even if there’s tangential business connection.
Be conservative with mixed-use expenses. If your vehicle is 60% business use, only claim 60% of costs. If your home office is 10% of your home, only claim 10% of eligible home expenses.
Document the business purpose of every expense. For meals, note who attended and what was discussed. For travel, maintain itineraries and evidence of business meetings. For home office, calculate square footage accurately.
Aggressive deductions aren’t worth the audit risk and potential penalties. At BBS Accounting, we help clients identify every legitimate deduction while steering clear of questionable claims.
Mistake #6: Incorrect Home Office Deduction Calculations
Many self-employed Ontario residents work from home and qualify for home office deductions, but calculating this deduction incorrectly is extremely common.
The Problem: CRA requires your home office to be either your principal place of business or used exclusively for business and for meeting clients regularly. Many people claim home office deductions without meeting these criteria.
Additionally, many miscalculate the deduction. You can only deduct the business-use percentage of eligible expenses. Using 25% when your office is actually 12% of your home inflates your deduction inappropriately.
The Solution: Measure your home office space and total home space accurately. Calculate the percentage precisely. If your office is 150 square feet in a 1,500 square foot home, that’s exactly 10%—not 15% or 20%.
Only claim eligible expenses: rent or mortgage interest (not principal), property taxes, home insurance, utilities, and maintenance. You cannot claim mortgage principal, capital improvements, or expenses unrelated to business use.
Keep documentation of your measurements and calculations. Photos of your home office setup can support your claim if CRA questions it.
If you use a room for both business and personal purposes (like a spare bedroom that’s sometimes an office), you can only claim the hours it’s used exclusively for business divided by total hours, applied to the percentage calculation. This becomes complex and often not worthwhile unless dedicated workspace.
Mistake #7: Not Making Quarterly Tax Installments
Self-employed individuals and corporations often owe taxes at year-end. If your taxes owing exceed certain thresholds, CRA requires quarterly tax installments.
The Problem: Missing installment payments results in interest charges from CRA, even if you pay your full balance by the filing deadline. These interest charges are not deductible and add to your tax cost unnecessarily.
For individuals, if your net tax owing exceeds $3,000 in the current year and either of the two previous years, you must make quarterly installments. The due dates are March 15, June 15, September 15, and December 15.
The Solution: Determine if you’re required to make installments by reviewing your prior year’s Notice of Assessment. CRA will notify you if installments are required and provide payment amounts.
Calculate installments using one of three methods: no-calculation option (pay the amounts CRA specifies), prior-year option (base on prior year’s tax), or current-year option (estimate current year’s tax).
Set up automatic payments through your bank or CRA My Account to ensure installments are never missed.
At BBS Accounting, we help clients calculate appropriate installment amounts based on expected current-year income, often reducing installment payments while avoiding penalties.
Mistake #8: Misclassifying Workers as Contractors
Many Ontario businesses hire workers and classify them as independent contractors, issuing T4As, when CRA would consider them employees requiring T4s and payroll deductions.
The Problem: Misclassifying employees as contractors means not withholding CPP, EI, and income tax. If CRA reclassifies these workers as employees during an audit, your business becomes liable for all employee and employer portions of CPP and EI, plus penalties and interest. These amounts can devastate small businesses.
The Solution: Understand CRA’s criteria for employee versus contractor status. The key factors are degree of control (do you direct how work is done?), ownership of tools and equipment, chance of profit or risk of loss, and integration into your business.
If you direct when, where, and how someone works, provide all tools and equipment, pay a fixed wage regardless of profitability, and they work exclusively for you, they’re likely an employee regardless of what your contract states.
When genuinely hiring contractors, ensure they invoice you, work for multiple clients, provide their own tools, and control how they complete work. Document the relationship clearly.
If you’re unsure, BBS Accounting can review your worker relationships and provide guidance on proper classification. It’s better to classify correctly from the start than deal with CRA reassessment later.
Mistake #9: Not Keeping Receipts and Documentation
CRA places the burden of proof on taxpayers. If you claim a deduction, you must be able to prove it with receipts, invoices, bank statements, or other documentation.
The Problem: Without proper documentation, CRA can disallow deductions during an audit. We’ve seen businesses lose tens of thousands in legitimate deductions simply because receipts were lost or never obtained.
The Solution: Keep every business receipt and invoice. Implement a system for capturing and storing receipts immediately—photograph them with your phone, scan them, or file paper receipts in organized folders.
For expenses over $30, CRA generally requires receipts showing the vendor, date, and amount. For expenses under $30, simplified documentation may suffice.
Keep records for at least six years from the end of the tax year they relate to. For perpetual records like incorporation documents or capital asset purchases, keep them indefinitely.
Use cloud storage for digital copies so records aren’t lost if your computer crashes or papers are destroyed.
Mistake #10: Missing Filing Deadlines
Different business structures have different filing deadlines, and missing them results in penalties and interest.
The Problem: Sole proprietors and partners must file by April 30 (or June 15 if self-employed), but taxes owing must be paid by April 30 regardless. Corporations must file within six months of their fiscal year-end.
Late-filing penalties start at 5% of taxes owing plus 1% per month for up to 12 months. If you’ve been charged late-filing penalties before, these double.
The Solution: Mark filing deadlines on your calendar with reminders several weeks in advance. Don’t wait until the last minute to gather documents and prepare returns.
If you won’t make the deadline, file anyway even if your return isn’t perfect. You can file an adjustment later. Filing something is better than filing nothing and incurring late-filing penalties.
For corporations, consider changing your fiscal year-end to a less busy time. Many corporations use December 31 or the calendar year-end, creating April/May filing crunch. Choosing a different fiscal year-end spreads accounting work throughout the year.
At BBS Accounting, we contact clients well before deadlines to ensure returns are filed on time. Our organized approach means no last-minute surprises.
Mistake #11: Not Separating Capital Expenses from Current Expenses
Buying business assets like computers, vehicles, or equipment requires different tax treatment than regular expenses like office supplies or advertising.
The Problem: Many business owners treat all expenses the same, deducting capital purchases fully in the year of purchase when they should be depreciated over time using Capital Cost Allowance.
Conversely, some capitalize expenses that should be fully deducted immediately, reducing their current-year deductions unnecessarily.
The Solution: Understand the difference between capital and current expenses. Capital expenses are purchases of assets that provide benefits over multiple years—vehicles, equipment, computers, furniture, buildings. These are added to CCA classes and depreciated over time.
Current expenses are costs of running your business day-to-day—rent, utilities, supplies, advertising, professional fees. These are fully deductible in the year incurred.
The line sometimes blurs. Repairs and maintenance are usually current expenses. Major renovations or improvements are usually capital expenses.
For certain assets, immediate expensing rules may allow full deduction even though they’re technically capital property. BBS Accounting helps clients navigate these rules to maximize current-year deductions where possible.
Mistake #12: Failing to Plan for Taxes Throughout the Year
Many small business owners don’t think about taxes until tax season, missing opportunities for strategic planning.
The Problem: Year-end tax planning in December is reactive. Many tax-saving strategies require action throughout the year. Without planning, you overpay taxes or face unpleasant surprises.
The Solution: Meet with your BBS Accounting advisor quarterly or semi-annually to review financial results and discuss tax-planning strategies. Determine if you should make RRSP contributions, pay salaries or bonuses to family members, make capital purchases before year-end to claim CCA, defer income to next year, or accelerate expenses into current year.
Track your income and expenses monthly so you know your approximate tax position. Don’t wait until year-end to discover you owe $30,000 in taxes with no plan to pay it.
Consider whether your business structure (sole proprietor, partnership, corporation) is still optimal. As your business grows, incorporation might provide tax advantages. BBS Accounting can model different scenarios to determine the most tax-efficient structure.
Mistake #13: Not Understanding the Difference Between Salary and Dividends
Incorporated business owners must decide how to compensate themselves: salary, dividends, or a combination.
The Problem: This decision has significant tax implications. Salaries create RRSP contribution room, provide CPP benefits, and are deductible to the corporation. Dividends don’t create RRSP room, don’t require CPP, and aren’t deductible, but may result in lower overall taxes due to dividend tax credits and integration.
Many business owners choose without analyzing their specific situation, potentially costing thousands in unnecessary taxes.
The Solution: Work with BBS Accounting to model different compensation scenarios based on your personal income needs, RRSP goals, CPP considerations, and overall tax minimization.
Generally, salary makes sense for building RRSP contribution room, maximizing CPP benefits, or reducing corporate taxable income from high tax rates. Dividends make sense when you’re already maximizing RRSP room, want to minimize CPP costs, or benefit from dividend tax credits.
Often a combination is optimal. This analysis should be revisited annually as your situation changes.
Avoiding These Mistakes With Professional Help
Many of these mistakes stem from lack of knowledge, not intentional wrongdoing. The Canadian tax system is complex and constantly changing. What was correct five years ago may not be correct today.
At BBS Accounting in Toronto, we help Ontario small business owners avoid these costly mistakes through:
- Year-round tax planning and advice, not just annual preparation
- Bookkeeping services to maintain accurate records
- Strategic guidance on business structure, compensation, and tax optimization
- CRA audit support if issues arise
- Proactive communication about upcoming deadlines and required actions
The cost of professional accounting services is typically a fraction of the tax savings, penalty avoidance, and peace of mind provided.
The Bottom Line
Small business owners wear many hats, and becoming a tax expert isn’t necessary—but understanding common mistakes and how to avoid them is essential.
Don’t learn these lessons the expensive way through CRA reassessments, penalties, and audits. Implement proper systems now, maintain accurate records, and work with qualified professionals to ensure tax compliance while minimizing your tax burden.
Contact BBS Accounting today to review your current practices and identify areas where you might be making these common mistakes. We’ll help you implement corrections and establish systems to ensure you’re running a tax-compliant, financially optimized Ontario business.
Your business success depends on many factors. Don’t let preventable tax mistakes be the obstacle that holds you back.