Should you do your own bookkeeping? When DIY works, and when it starts costing you

Summary

Bookkeeping means recording what your business did, transaction by transaction: money in, money out, who it came from and what it was for. You’re allowed to do it yourself, and Canadian tax law sets no format and makes no software mandatory. The Canada Revenue Agency (the CRA) says that as a rule it doesn’t hand out blank ledgers or tell you which system to use, so long as your records let your tax be worked out.¹

In our view at Cadence (we’re an independent tax and accounting practice for incorporated owners, not a licensed CPA firm), most owners should keep doing the day-to-day recording themselves in accounting software. Reconcile the records you’ve entered against the bank statement every month, i.e. prove line by line that the two agree. Then pay a professional to check that work and do the year-end job of adjusting the figures, producing the annual financial statements and filing the corporation’s tax return. Recording transactions grows with your business, but the expensive part is deciding which tax category each transaction belongs in: a cost you deduct in full this year, equipment you write off over several years, or a personal expense you can’t claim at all.

We’d only recommend running the whole thing yourself, through to the corporate tax return, when four things are true at the same time:

1. Your corporation hasn’t begun paying salaries, yourself included, so you haven’t taken on the payroll calculations and remittance schedule.
2. You file a GST/HST return once a year rather than quarterly or monthly. GST/HST is the federal Goods and Services Tax or Harmonized Sales Tax, which you charge customers and pay suppliers.
3. Every business dollar moves through one business bank account and one business credit card, and money moving between you and the corporation gets recorded for what it actually is.
4. You’ve reconciled every month for the last six months, rather than intending to.

Fail any one of those and the money you thought you were saving usually isn’t real. Records nobody reconciled get repaired at an accountant’s hourly rate at your year-end, meaning the annual cut-off date your corporation uses for its accounts, which needn’t be December 31. The one change that settles it, whatever the other three say, is opening a payroll account. At that point we’d take the monthly bookkeeping on ourselves rather than check your work after the year is over.

What the law asks you to keep

The Income Tax Act asks you to keep your records at your place of business or your home in Canada. Records here means the running record of every transaction, plus the paperwork sitting behind it. No layout is prescribed, so a spreadsheet is perfectly legal, though your annual inventory count has to be detailed enough for the property to be valued.¹

Electronic records have to show an audit trail, meaning someone can start at a total on your annual financial statements and follow it back to the receipt behind it.² Those statements are the summary of the year’s income and expenses that goes with your tax return. Reconciling every month is the work that builds that trail. Business income also has to be reported on the accrual method, which changes when things count.³ A sale counts in the month you did the work, even if the customer pays you three months later. A cost counts in the month you received the goods, even if you settle the bill in January. A bank feed, the automatic link that pulls your bank transactions into the software, only knows about money that has actually moved. A file built purely from bank transactions therefore sits on the cash basis the law doesn’t allow for business income. Someone has to enter the invoices you’ve sent but haven’t been paid for, and the bills you’ve received but haven’t paid.

The four conditions, in detail

1. Payroll. Paying anyone a salary, yourself included, means withholding income tax and Canada Pension Plan contributions from every pay. Employment Insurance premiums come out too, unless you control more than 40% of your corporation’s voting shares. Above that mark your own salary sits outside insurable employment, while your employees’ pay stays inside it.⁴ The withheld amounts, called source deductions, reach the CRA by the 15th of the month after the month you paid the wages. Pay staff in March and the CRA wants those amounts by April 15. A small employer whose withholdings average under $3,000 a month can remit quarterly instead, provided the payroll account has a clean 12-month record of remitting and filing on time.⁵ Miss the date and the penalty runs from 3% of the amount you should have sent, at one to three days late, up to 10% beyond a week, charged only on the part of that remittance above $500. On a $2,000 remittance three days late, that’s 3% of $1,500, or $45.⁶

2. GST/HST filing frequency. How often the CRA wants a return comes from qualifying annual taxable sales, added up across any corporations associated with yours. That’s sales rather than profit, and it includes zero-rated domestic sales (e.g. basic groceries) but excludes zero-rated exports. At $1,500,000 or less you’re normally assigned annual filing, above that quarterly, and past $6,000,000 monthly.⁷ An annual filer can fall a quarter behind and still recover, whereas twelve filing deadlines a year is a different job altogether.

3. Keeping your money and the corporation’s money apart. Record whether a transfer is salary, a dividend, an expense reimbursement or money borrowed or repaid between you and the company. A dividend is a payment to you as shareholder out of the corporation’s after-tax profits, with no tax withheld for a Canadian-resident owner. A loan to you normally needs repaying within a year after the end of the corporation’s financial year in which you took it. Miss that window and the amount is included in your income for the borrowing year, although a later qualifying repayment gives a deduction in the repayment year. Repay in time and the loan itself can escape income tax, though an interest-free balance adds a smaller benefit instead. The repayment relief doesn’t apply to a series of loans and repayments.⁸ The shareholder loan account explains those conditions in full.

4. Whether you’ll actually reconcile. An owner who reconciles religiously in a spreadsheet has better records than one who pays for good software and opens it in March, so your own track record is the honest test here.

The arrangements, and what each one asks of you

Under the arrangement we’d recommend, meaning software you reconcile monthly plus a paid professional check and year-end close, bank feeds remove most of the typing and the reconciliation proves the records are complete. It catches the month where the automatic bank connection quietly stopped pulling transactions in, e.g. after you changed the password. What you pay is a software subscription plus a fee that’s hard to predict, since it depends on how clean your records are. Responsibility gets blurry too, because a wrong number could come from how you categorised a transaction or from the professional check of it.

Doing nothing during the year and handing over a folder at year-end costs you no time while the year is running, which for a seasonal business is worth something real. However, you pay more for the same quantity of bookkeeping than under any other arrangement, because twelve months get reconstructed inside a compressed window at an accountant’s hourly rate. You also have no usable profit figure all year, so what you pay yourself is a guess. Your corporation’s tax falls due before its return does, which our guide to CRA deadlines for incorporated owners sets out in full.

Handing the monthly bookkeeping to the same firm that prepares your corporate and GST/HST returns gets the tax-category decisions made once, by the people who have to live with them, and deadlines managed rather than remembered. On the flip side it carries the highest recurring fee of the realistic options, you pay it in the quiet months too, and you lose familiarity with the detail unless you read what you’re sent.

How often this changes

Revisit the arrangement once a year, and straight away if any of the four conditions above stops being true. Taking on inventory, or work started for a customer but not yet billed, is the trigger owners tend to miss, because your profit means nothing until someone counts and values it. One more trigger comes from outside the business, when a lender or a buyer asks for financial statements carrying a formal opinion from a licensed CPA firm, meaning an audit or a review engagement, and only a firm holding that licence can issue one. We aren’t one, so that particular piece of work has to go elsewhere, and we’d help you find someone who can do it.

Closing thoughts

A lot of what gets sold as a choice between doing your own books and paying someone else is really a question about habits. Shutting the books at the end of every month and keeping neat expense categories are professional conventions rather than legal requirements. Whichever arrangement you land on, write down who is responsible for reconciling and by when, because the ones that fail are usually where each side assumed the other had it covered.

How we handle it

We take the records in whatever state they’re in and reconcile them to the bank. Then we fix the categories that matter for tax, e.g. money you took out, what you owe the corporation or it owes you, and which of the GST/HST you paid on purchases you can actually claim back, and we file the corporate return from the corrected figures. Owners who want to keep doing the day-to-day work get that check and a year-end close instead of monthly bookkeeping. Where the records are behind, we file first and tidy second, because the deadlines carry interest and the tidying doesn’t.