As a principal at Cerazy Mitchler Corporation, a Chartered Professional Accountants firm in Langley, BC, I often work with professionals – doctors, lawyers, engineers, and other consultants – who operate through professional corporations. While incorporating offers significant tax advantages and liability protection, it also comes with increased scrutiny from the Canada Revenue Agency (CRA). A CRA review or audit can be a stressful and time-consuming experience if your books aren't in impeccable order.
The key to navigating a CRA review with confidence is proactive preparation. It's not about hiding anything; it's about having clear, verifiable documentation to support every transaction. Here are specific things your professional corporation should do to ensure CRA review readiness:
This might sound obvious, but for professional corporations, "meticulous" means more than just keeping receipts.
Detailed Expense Tracking: Every expense must have a clear business purpose and supporting documentation. For example, if you claim home office expenses, ensure you have a dedicated workspace, calculate a reasonable proportion of household expenses (rent/mortgage, utilities, insurance), and keep all original bills. Meals and entertainment expenses often trigger reviews; ensure you note the "who, what, when, where, and why" for each instance.
Mileage Logs: If you use your personal vehicle for business, a detailed mileage log is essential. This should include dates, destinations, purpose of travel, and kilometers for each trip. Google Maps data can supplement, but a log is primary.
Bank and Credit Card Statements: Reconcile your bank and credit card statements regularly to your accounting software. Discrepancies are a major red flag for CRA.
Contracts and Engagement Letters: For services provided, retain all client contracts, engagement letters, and invoices. These prove the legitimacy of your revenue.
Payroll Records: If your professional corporation pays you or other employees a salary, ensure all payroll records, T4s, remittances (CPP, EI, tax), and pay stubs are accurate and readily available.
One of the most common pitfalls for professional corporations under review is the blurring of lines between personal and corporate finances.
Separate Bank Accounts: This is non-negotiable. Your professional corporation must have its own dedicated bank accounts and credit cards, distinct from your personal ones.
Avoid Personal Expenses from Corporate Accounts: Do not pay for personal groceries, holidays, or private vehicle fuel directly from the corporate account. If you need funds for personal use, take a salary, dividend, or loan (ensuring it's properly documented and repaid according to CRA rules).
Shareholder Loans: If you advance money to or from the corporation as a shareholder loan, ensure these are properly documented with a loan agreement, clear repayment terms, and regular reconciliation. Undocumented or unrepaid shareholder loans can be reclassified as taxable income by the CRA.
The decision of how to remunerate yourself (salary, dividends, or a mix) is a cornerstone of tax planning for professional corporations. Ensure it's executed correctly.
Directors' Resolutions: Document all dividend declarations with formal directors' resolutions.
T4/T4A Slips: If paying a salary, ensure T4s are issued correctly and on time. If paying eligible dividends, T5 slips must be issued.
Reasonableness: While CRA generally allows flexibility, ensure the overall compensation structure is reasonable given the services provided and the corporation's income.
Gone are the days of shoebox accounting. Modern professional corporations need robust accounting software.
Cloud-Based Solutions: Consider cloud-based solutions like QuickBooks Online or Xero. They offer real-time data, automated bank feeds, and easy collaboration with your accountant near me. This means your books are always up-to-date and accessible.
Regular Reconciliation: Beyond bank statements, reconcile all balance sheet accounts (e.g., accounts receivable, accounts payable, shareholder loan) monthly or quarterly.
Organized Digital Files: Even in a paperless environment, digital files need to be organized systematically. Create clear folders for expenses, invoices, payroll, contracts, and other supporting documentation, mirroring your accounting categories.
Your Certified Professional Accountant is your primary defense line against CRA reviews.
Annual Review: Don't just hand over a box of receipts at year-end. Schedule regular check-ins to discuss your financial performance, potential tax planning strategies, and any unusual transactions.
Ask Questions: If you're unsure if an expense is deductible or how to classify a transaction, ask your CPA before you record it. Proactive questions save significant headaches later.
Industry Expertise: Ensure your CPA has specific experience with professional corporations in British Columbia and understands the unique aspects of your profession (e.g., block fees for lawyers, overhead for medical clinics).
By proactively implementing these practices, your professional corporation won't just be ready for a CRA review; you'll be running a more efficient, compliant, and ultimately, more successful business. Don't wait for the CRA to call; get your books in order now.