For small business owners across Canada, tax season can be a challenging time. Between managing operations, satisfying clients, and keeping up with payments, handling taxes and GST/HST obligations often falls to the bottom of the priority list. But mistakes in this area can result in unnecessary penalties, missed deductions, and even CRA audits.
Here are the 10 most common tax and GST/HST mistakes that entrepreneurs, freelancers, and small business owners make in 2025 and why avoiding them is critical for the financial health of any Canadian business.
1. Mixing Business and Personal Expenses
A common issue among new entrepreneurs is failing to separate business and personal finances. When business purchases are made using personal accounts—or vice versa—it becomes difficult to track legitimate business expenses. This not only complicates year-end tax reporting but may also cause the CRA to disallow deductions due to insufficient clarity.
Proper separation of finances is also essential for audit defense. Without a dedicated business account, it’s nearly impossible to present a clear picture of income and deductible expenses. Over time, this lack of separation creates confusion that can disrupt cash flow, budgeting, and long-term financial planning.
One Reddit user admitted: “Mixing personal and business expenses was one of the worst mistakes I made early on. CRA doesn’t care if you forgot—it just costs you more.” . This real-world insight reflects just how common this oversight is, especially for freelancers and new entrepreneurs.
2. Missing the GST/HST Registration Threshold
Many small business owners are unaware of the GST/HST registration requirement. Once a business earns $30,000 in total taxable revenues over four consecutive calendar quarters—or in a single quarter—it must register with the Canada Revenue Agency. Delays in registration can lead to missed collections, retroactive tax liabilities, and late filing penalties.
A common oversight occurs when entrepreneurs earn a mix of income from exempt and taxable sources or deal with international clients. Even when a portion of the business comes from U.S. customers or non-taxable services, once the threshold is crossed, GST/HST must be charged on all eligible Canadian transactions moving forward.
3. Failing to Charge GST/HST on Taxable Supplies
Once registered, a business must charge GST/HST on all taxable goods and services it offers. However, some owners forget or choose not to apply the tax, especially when dealing with new clients, casual projects, or digital products. This can result in future liabilities when the CRA discovers the under-collected tax.
A frequent misunderstanding happens among independent contractors and online sellers, especially those providing services across provinces. Not all provinces charge the same rate, and confusion about place of supply rules can lead to incorrect invoicing and reporting.
4. Spending Collected GST/HST
GST/HST collected from clients is not business income—it is held in trust for the government. Yet, many businesses mistakenly treat this as revenue, using it for day-to-day expenses. When it’s time to file their returns, they realize they’ve spent what should have been remitted to the CRA.
This oversight often leads to cash flow problems and late remittance penalties. The longer the delay, the greater the interest and penalty charges, which can cripple a small business financially.
5. Claiming Input Tax Credits Without Proper Documentation
Claiming Input Tax Credits (ITCs) allows a business to recover the GST/HST paid on eligible expenses. But these credits can only be claimed if proper documentation is maintained. Missing receipts, incomplete invoices, or documents issued in the wrong name can all lead to disallowed claims during an audit.
Even experienced business owners often forget that ITCs must reflect the business use portion of mixed-use expenses. For example, only 50% of the GST/HST paid on meals, entertainment, and certain vehicle costs is recoverable. Overclaiming ITCs puts the business at risk of reassessments and fines.
6. Missing Tax Deadlines and Filing Late
Late tax filings are more than just a minor administrative error. CRA imposes interest and penalties for late returns or payments, especially when taxes are owed. Many self-employed individuals mistakenly believe their filing deadline is April 30, like salaried employees, but most have until June 15, though any balance owed is still due by April 30.
According to Liberty Tax Canada, CRA imposes a 5% penalty on the balance owing for late-filed returns, plus 1% for each full month your return is overdue, up to a maximum of 12 months. That adds up fast, especially for sole proprietors and small businesses behind on recordkeeping.
Procrastinating until the last minute often results in rushed filings, mistakes, and missed deductions. Even if an accountant is handling the return, failing to provide information on time can lead to incomplete filings and CRA scrutiny.
7. Not Reporting All Income
Every source of income must be declared, even if it comes from casual freelance work, side gigs, or cash transactions. Failing to report small payments might seem harmless, but the CRA has tools to match reported payments from clients with unreported income on your return.
As digital platforms and payment processors share more information with tax authorities, the risk of underreporting is growing. Businesses operating on platforms like Shopify, Etsy, or Upwork may be unaware that their income is being tracked by third parties and automatically reported.
8. Misclassifying Employees and Contractors
Misunderstanding the difference between an employee and an independent contractor can have serious tax consequences. If someone works exclusively for your business, under your direction, and with set hours, they are likely an employee, not a contractor.
Improper classification can lead to unpaid payroll taxes, CPP contributions, and EI premiums. If the CRA audits your business and reclassifies a worker as an employee, you may be liable for retroactive deductions, employer contributions, and penalties.
9. Overlooking GST/HST on Asset Sales
It’s easy to forget that when a business disposes of assets—like used computers, equipment, or vehicles—it must charge GST/HST if the assets were used in the course of business. These are often one-time transactions, but they still fall under CRA’s purview.
Failing to account for tax on these disposals can lead to errors in your GST/HST return. Many small business owners treat such sales informally, not realizing the implications until the CRA conducts a review.
10. Not Reconciling Bank and Credit Card Transactions
At the end of the day, accurate recordkeeping is the foundation of proper tax filing. If your accounting records don’t match your bank statements, you may be missing income or expenses. Inconsistent records can result in underreported revenue or lost deductions.
Bank reconciliation helps ensure that every transaction—whether a payment received, a refund issued, or a vendor paid—is properly recorded. Many tax errors stem from incomplete records or assumptions based on unverified financial data.
How to Fix a Tax Filing Error in Canada
If you’ve already filed and spotted a mistake, don’t panic.
Here’s how to fix it:
- Wait for your Notice of Assessment
- Log in to CRA My Account and use “Change My Return.”
- Or, submit a T1 Adjustment Request (Form T1-ADJ) by mail
- Include all supporting documents
- Expect 2–8 weeks for updates
Final Thoughts
Running a small business in Canada comes with many responsibilities, and managing taxes is one of the most important. Mistakes in GST/HST registration, reporting, or income declaration can cause stress, cost money, and damage your credibility with the CRA.
By understanding these 10 common tax errors—and staying organized year-round—you can protect your business, improve your cash flow, and avoid costly surprises. For accurate HST calculations and province-specific tax breakdowns, use tools like HSTCalculator.Onl to stay compliant and confident during tax season.
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