While filing and paying taxes in June gives business owners six more weeks to gather documents and get their affairs in order, delaying is more costly with higher interest rates on overdue taxes.monkeybusinessimages/iStockPhoto / Getty Images
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Sole proprietors and their spouses may have until June 17 to file their 2023 income taxes, but many advisors encouraged these clients to file by April 30, when tax payments are due.
Clients who filed by April 30 avoided accruing interest, says Nadege Koskamp, certified financial planner (CFP) and senior financial consultant at IG Wealth Management in Toronto. “Completing the taxes promptly is necessary to determine any outstanding amounts.”
She also found that sole proprietors with spouses who were expecting tax refunds often preferred to file without delay to expedite the refund process.
While filing and paying taxes in June gives business owners six more weeks to gather documents and get their affairs in order, delaying is more costly these days, says Wendy Brookhouse, chief executive officer and CFP at Black Star Wealth in Halifax.
In the past, a sole proprietor may have chosen to file in mid-June and pay the interest accrued on unpaid taxes after the April 30 deadline. But last fall the Canada Revenue Agency (CRA) bumped its interest rate charged on overdue taxes and Canada Pension Plan contributions to 10 per cent from 9 per cent, with interest compounding daily, says tax expert Evelyn Jacks, president of Knowledge Bureau Inc. in Winnipeg.
According to data from the CRA, the average taxpayer who had a balance owing on their 2023 income tax returns owed $7,164. The results were tabulated for returns processed up to May 27.
“It’s very expensive to owe the CRA money, especially now that balances due have risen to such high numbers,” Ms. Jacks says.
Interest on taxes owed aren’t the only CRA penalties. If a sole proprietor fails to file by June 17, an additional 5-per-cent late-filing fee on the 2023 balance owing is applied, plus an additional 1 per cent every month after that, up to 12 months.
Many unincorporated business owners pay their taxes via quarterly instalments, but there’s still a chance they will owe more taxes than anticipated when they file their returns. Ms. Brookhouse gives the example of a business earning more revenue than originally projected and neglecting to increase the amount it pays in taxes in advance.
If the owner files by April 30, they can pay the difference in taxes at that time and avoid interest. But if the sole proprietor finds out they owe more taxes when they file in June, that can “come around to hurt them” as they will face interest charges on unpaid taxes, she says.
Ms. Brookhouse advises unincorporated business owners to work with a tax professional who will provide a detailed plan with projections on taxes owing if revenue increased last year.
“The goal is to put aside enough every month to put toward your taxes,” she says. “Part of that is making sure you can write the cheque.”
June can already be a financially stressful month for sole proprietors, who also have a June 17 deadline for the second quarterly tax instalment of the year, Ms. Jacks says.
And as the halfway point of the year, June is a good time to take stock of how the business is doing for 2024, she adds. If the proprietor’s income has decreased, they could look into reducing the amount owed on the quarterly tax instalment plans. If new assets such as a vehicle purchase are planned, she advises discussing the advantages of a capital cost allowance write-off.
Ms. Jacks isn’t sure why there’s a discrepancy between when taxes are owed and the filing deadline for sole proprietors six weeks later, which can attract those interest costs. Advisors often need to educate newer unincorporated business owners about these rules.
“It becomes even more important for you to get a handle on what you’re going to have to pay,” she says “You need to save for your taxes.”
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