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Most business owners consider tax issues to be a financial hassle. A penalty. An unexpected bill. An occurrence that the accounting staff manages and forgets.
It is the wrong framing, and it is expensive.
Issues with tax compliance are removed from the tax file. They move. Cash flow estimates, lender conversations, hiring choices, and boardroom discussions all mention them. For Canadian businesses, the consequences of unresolved tax difficulties are significantly more strategic, operational, and occasionally irrevocable. The first step in taking care of the relationship is understanding it.
Why Most Businesses Underestimate Tax Problems
Tax risk builds up slowly: failure to file during an accelerated growth period; an SR&ED claim that was not well-documented; or failure to properly structure a corporate reorganization, every event is individually controllable.
However, it is a problem that the Canada Revenue Agency does not assess these events individually. CRA audits follow a systematic approach. They look at patterns, they compare several years, and they ask for documentation that many growing businesses do not have at their fingertips. When a tax issue is “noticed,” it is typically larger than it appears at first glance.
How Tax Issues Disrupt Cash Flow
Cash flow is the bloodstream of a business and it gets attacked head-on by tax issues.
An unanticipated CRA inspection requesting interest and penalties could force the business to transfer funds in a short timeframe, diverting money from hiring, paying suppliers, or investing in new equipment.
This has a ripple effect for family businesses and mid-sized firms with not as much liquidity. Lines of credit are drawn down. There are tensions between the vendors and the client. Relations with vendors are strained. Choices about investing are delayed. A tax dilemma that starts as a compliance problem escalates into a cash management crisis.
Operational Consequences of Tax Non-Compliance
Along with the cash flow issues, tax noncompliance creates tangible tension within the organization.
The finance team should be engaged in reporting, forecasting, and assisting with growth discussions. However, instead, they spend weeks or months answering CRA letters, collecting old information and communicating with outside experts. The bandwidth of leadership changes from running a business to managing a tax dispute.
For businesses in regulated industries or those that handle government contracts, unresolved tax issues can affect licensing, eligibility to bid on government contracts, and customer relations with public-sector customers.
The Hidden Cost of CRA Audits and Investigations
A CRA audit is not just an administrative audit. It affects the service’s operation.
Direct costs consist of tax advisor professional fees, the time internal finance personnel invest in the issue, and any re-assessment with penalties and interest. The indirect costs are sometimes higher as audits cast doubt and affect investor confidence, lender relationships, and senior management engagement.
Open CRA files can be a major stumbling block for any company that is looking to sell, merge, or raise new capital. The buyers and investors perform tax due diligence. Inability to resolve tax risks results in the death of the transaction or a decline in the enterprise’s value. However, the costs of an audit are not restricted to those that CRA estimates. It contains the things which the business is not allowed to do throughout the audit period.
How Tax Problems Affect Decision-Making
To make sound business decisions, there must be clarity on financial information. That clarity is marred by tax uncertainty.
A company may be subject to a tax controversy where the financial statements it files may not show the actual liability exposure. Management teams are forced to do budget allocations, staffing plans and growth plans with financial information that has a material asterisk.
In such cases, controllers and CFOs frequently take a conservative stance throughout the organization, which can affect any number of decisions unrelated to tax. The chilling effect on business momentum is real, and it’s hard for it to be measured until it has come at a cost to the business.
Impact on Growth, Hiring, and Investment
Growth requires capital. Tax issues consume it.
Lenders are more curious about loans for businesses carrying over tax liabilities in Canada, which have not been resolved. Calculations of covenants may be impacted. If the tax exposure is high, then the credit facilities may be reduced or withdrawn.
Executive and senior finance professionals ask pointed questions during due diligence in the hiring process. When it comes to assessing the health of an organization, experienced CFOs and Controllers assess tax posture. If a business has ongoing tax problems in Canada, it can become more difficult to find the type of financial leadership that it needs to help move the business forward.
Why Tax Planning Is an Operational Strategy
Tax planning is not an end-of-the-year activity. It is a continuous discipline that is used in operations.
Tax strategy can be a component of every business’s financial planning, which will help them better manage cash flow, structure transactions efficiently, and avoid the type of decisions made on the spur of the moment that lead to compliance issues later. These include compensation planning, decisions with the corporate structure, cross-border activity, and investment timing.
Preserving optionality is another aspect of business tax planning. Firms with good tax compliance history enjoy the benefit of being able to respond quickly to acquisition opportunities, when capital markets reopen and when transitioning out of ownership becomes an issue.
How Proactive Tax Management Reduces Business Risk
The most effective tax risk management companies are not reactive but rather proactive.
This also involves keeping documentation that is consistent and consistent enough for CRA to look at any time. It involves periodically checking corporate structures to make sure they align with the company’s current situation. It involves being aware of the impact of last year’s legislative developments on current jobs, especially since the pace of change in the federal tax policies of the last few years in Canada.
Qualified tax advisors are involved in a tax transaction before it closes, not after, which is another part of proactive tax management. A poorly thought-out restructuring of a deal or a non-compliant one is almost always more expensive than getting the advice ahead of time.
When Businesses Should Seek Professional Tax Advice
Timing is critical in business in terms of tax strategy at certain times.
This includes any time the CRA audit or CRA inquiry is undertaken, shareholder changes, succession planning, preparation for a sale or capital raise, corporate reorganizations, and rapid revenue growth, among other instances. Each of these decisions has long-term tax implications, which are inconvenient and expensive to change.
Business owners and finance leaders should also call on external tax counsel when they need expertise in a certain tax field like SR&ED claims, estate and trust tax, or cross border transactions that may be unavailable from their current advisors, or when the company is becoming more complex than their current tax planning capabilities.
How Faber LLP Can Help
Faber LLP assists executives, business owners, and finance professionals in identifying tax concerns before they become operational obstacles. Our team assists companies in strengthening their tax compliance procedures, enhancing the integrity of financial reporting, evaluating their exposure to CRA inspection, and creating workable tax strategies that support long-term business goals.
We assist businesses with going beyond reactive problem-solving through our fractional CFO, accounting, and tax advising services. Businesses can increase cash flow visibility, lower risk, and build a better platform for expansion by incorporating tax planning into more general company decision-making.
The issue for business leaders is not if taxes will be a problem. They will. The issue is if the organization is ready to handle them or if they will grow to be more than a tax issue.