Smart Tax Planning: Setting Aside Money for Taxes

Let's delve into the topic of taxes and the importance of setting aside money upfront to avoid financial strain. Depending on your location and income over the past 12 or 24 months, there may or may not be an expectation for you to pay taxes upfront. Let's address this to ensure you are well-prepared.

One of the most common mistakes I see, especially among early-stage businesses, is the failure to set aside money for taxes along the way. As revenue grows and sales tax is collected, some businesses may neglect to pay taxes as they reinvest funds back into the business. When the year ends, they are faced with an unexpected and potentially hefty tax bill, causing cash flow challenges. This is a situation we want to avoid at all costs.

Here are some options to consider:

If you are a Canadian individual or sole proprietor, you may be required to send quarterly tax installments. These installments can be significant and are typically due in June, September, December, and March. To manage these payments more effectively, it's essential to anticipate your expected taxes by creating a budget for your business. This proactive approach can prevent last-minute surprises.

Now, let's focus on businesses and corporations.

For corporations with previous income, the tax authorities may request monthly installments based on historical figures. However, it's more beneficial to estimate your taxes accurately. While some may hesitate to pay the government upfront, setting money aside proactively can be advantageous.

Here's my recommendation:

On a personal level, I make weekly tax installments to avoid a large tax bill at the end of the year. Paying on a weekly basis makes the cash outflow more manageable and helps me ensure I don't overspend based on my account balance. You can apply the same approach to your corporation, setting up weekly or monthly installments based on your estimated income. By doing so, you can ensure you pay your taxes along the way and avoid facing a significant tax bill you weren't prepared for.

By being proactive and setting aside money upfront, you can effectively manage your tax obligations and prevent financial strain. Whether you choose weekly or monthly installments, this approach can be highly beneficial in planning your tax bill.

If you're interested in proactive tax planning or have any questions, feel free to reach out to us. We're here to help you navigate the process and ensure your financial stability.