Welcome to the FreshBooks Tax Thursdays series! We know a lot of small businesses struggle with taxes, so we’re hoping to help make it a little easier by featuring advice from leading accounting professionals. Today, Gary Porter gives you some essential rules to test whether the tax advice you’re getting is actually helping or hindering you at tax-time.
Tax is a complicated subject. In some ways, it’s something like medicine. I once had a client who put $10,000 in her RRSP (the equivalent of a 401K). Problem was, she was a member of the teachers’ pension plan so her limit was about $2000. When I told her she would have to withdraw the excess funds and pay a penalty, she was shocked. “I thought I was doing the right thing,” she explained, “I got advice from a teacher whose husband is an accountant.” I refrained from asking “if you ever need surgical advice, why not ask a teacher whose spouse is a surgeon?”
When you’re seeking out sound financial answers, be wary of the source. Keep these 6 rules in the back of your mind to know when to agree and when to run:
Rule number one: anecdotal tax advice is dangerous at best.
It can result in missed tax planning opportunities, errors and omissions, penalties and interest.
Rule number two: tax advice that you don’t understand is bad advice.
The subject of tax is complicated. But each little tax topic can be understood, if properly explained, by the average taxpayer. Don’t do it unless you understand what you are doing.
Rule number three: Tax advice that sounds too good to be true, IS too good to be true.
When your friend tells you he writes off all of his home expenses or all his car expenses, or all of his entertainment expenses, he is telling you he is violating tax rules. Definitely don’t follow such advice.
Rule number four: Beware of tax shelters.
There are bona fide tax shelters such as those related to oil and gas exploration and development. In my experience, however, most are at least bad deals from a business viewpoint, and at worst they violate tax law. Any business deal that needs to be structured as a tax shelter to be profitable is not a sound business deal. Good business deals show profit BEFORE tax considerations. Then there are the tax shelters where you invest $100 and get $400 in deductions. The government is constantly investigating such tax shelters and charging you the tax, plus interest and penalties. Such deals do, however, generate large commissions to those who sell them to taxpayers.
Rule number five: Seeking out no advice is an equally dangerous path.
Even if you normally do your own tax return, if you run into new situations, you may well need advice. If you sell the family cottage, start looking after an older disabled parent, take trips mixing work and vacation, lease a car for both business and personal use, you should get advice
Rule number six: If you have questions about taxes go to a respected accountant or tax preparer.
Accountants such as Certified General Accountants, CPAs and CAs are well trained, subject to rules of professional ethics and required to maintain up-to-date knowledge. They are more expensive than getting advice from your skateboard buddy but think of it as insurance. You pay a small premium today to avoid an expensive disaster tomorrow.
Gary Porter is a Chartered Accountant and a Certified General Accountant. He was a tax practitioner for 28 years until 2009. He now describes himself as an avid boater, chorister and storyteller living on the banks of the mighty St Lawrence River.