Your First Year in Business in Canada: The Tax Checklist Nobody Hands You

The first year is the one where habits form. Almost every messy set of books I see traces to decisions made, or not made, in the first six months.

None of this is difficult. It is just unfamiliar, and most of it is invisible until a deadline arrives.

Month one: bank account, structure, registration, receipts

Separate the money. A dedicated business bank account, opened before the first sale. This single decision removes more future work than everything else on this list combined. Every commingled transaction becomes a decision to make and a decision to defend.

Decide the structure. Sole proprietor or corporation. Do not incorporate reflexively; the annual cost is real and the benefit depends on retaining income. The comparison is in sole proprietorship vs corporation.

Register what needs registering. A business number if you are incorporating, hiring, or will register for GST/HST. The account structure is explained in the business number.

Start keeping receipts now. Startup costs incurred before your first sale are generally deductible if the business had genuinely commenced. People throw these away because “the business was not running yet”.

Month two: bookkeeping, bank feed, vehicle log, tax savings

Set up bookkeeping software and connect the bank feed. Not a spreadsheet. The feed is what makes monthly reconciliation take twenty minutes instead of an afternoon.

Photograph every receipt and attach it to the transaction. A statement proves money moved, not what it was for.

Start the vehicle log if you will drive for work. A partial-year log with a clear start is worth vastly more than a reconstructed one, and reconstructed logs are recognised as such. See vehicle expense deductions.

Open a second bank account for tax. Move money into it as you earn. Nothing protects a new business from a first tax bill like having set the money aside.

Watch this number all year

$30,000 of gross revenue over four consecutive calendar quarters. That is the GST/HST small supplier threshold, and crossing it is not optional or deferrable.

The trap is the timing. Exceed it in a single quarter and you must charge tax on the supply that pushed you over, not the next one. Most people register retroactively and end up paying the tax out of margin because clients will not accept an invoice for HST months later.

Register at around $27,000, or earlier if your clients are businesses that recover the tax anyway. Full mechanics in GST/HST registration.

Every month

A close. It takes one to two hours once the routine exists:

1. Categorise every transaction, leave nothing in suspense
2. Reconcile each account to its statement
3. Match receipts to expenses
4. Update the mileage log
5. Read the profit and loss
6. Move the tax money across

The full list is in the monthly close. Doing this monthly is the difference between a tax return and an excavation.

If you incorporated: choose the year end deliberately

This is the one first-year decision that is genuinely hard to reverse, and most new corporations make it by accident.

A sole proprietor has no choice: the fiscal period ends December 31. A corporation picks its own, and it picks it by filing the first T2 with a date on it. The constraint is that the first tax year cannot be longer than 53 weeks from incorporation. After that, the year end is fixed: changing it generally requires writing to your tax services office with reasons and getting approval, and “we picked badly” is not usually one.

Three things worth weighing before you commit to a date:

• Cash. Corporate tax is due two or three months after the year end. Put the year end where the business is normally liquid, not where it is thin
• The owner’s personal year. A year end early in the calendar year gives you months to decide the salary and dividend mix before the personal deadline
• Your own workload. A December 31 year end puts your books, your T4s and your personal return in the same eight weeks. A spring or autumn year end spreads them out and usually costs less in fees

Note also that the filing deadline tracks the exact date. A year end on the last day of a month is due the last day of the sixth month after; a year end on the 23rd is due the 23rd of the sixth month after.

The first deadlines, in the order they arrive

Note the mismatch for the self-employed. You get until June 15 to file and only until April 30 to pay. Interest runs from May 1 on anything owing. People routinely discover this in June.

For corporations the same split exists and is wider. See corporate tax deadlines.

The year-two surprise

Your first year usually has no instalment obligation, because instalments are calculated by reference to a prior year that does not exist.

Year two therefore carries two things at once: the balance owing for year one, and instalments for year two. Businesses that spent the first year’s profit meet this badly.

If year one was profitable, set money aside on the assumption that year two requires both.

What to claim, and what not to

Deductible: anything incurred to earn business income, at a reasonable amount, with a receipt. Meals and entertainment at 50%. Vehicle and home office at their business percentage.

Not deductible: your own lunch, clothing that is not a uniform, fines and parking tickets, CRA interest, the cost of assets themselves, which go through capital cost allowance.

The full picture is in what the CRA allows.

The five mistakes that cost the most

1. One bank account for everything. Turns every review into an archaeological exercise.
2. Not watching the $30,000 threshold. Ends with you paying HST you never collected.
3. No vehicle log. Reduces a legitimate claim to whatever the CRA considers reasonable.
4. Spending the tax money. It was never yours.
5. Leaving it all to April. Deductions you cannot substantiate are deductions you do not get.

How long to keep records: six years, digital is fine

Six years from the end of the tax year they relate to, longer for property. Digital copies are acceptable provided they are legible and retrievable.

Two accounts, a bank feed, and one hour a month

Two accounts, software with a bank feed, receipts photographed, a monthly hour, and one number watched all year. That is the entire first-year discipline, and it is worth more than any single planning idea.

If you are in your first year and want the setup checked before habits harden, an hour now saves considerably more later.