Owing Taxes Is A Good Thing

April 30 is fast approaching and you might be scrambling to get your last few tax slips and expenses over to your accountant to file.

As busy business owners, it is hard to keep track of your everyday expenses and it can quickly add up to more income taxes than we had hoped for.

However, have you ever considered the impact it has when you have to income taxes owing in April?

In the Canadian tax system, we are required to file our personal income taxes at the end of April and if we don't, we pay interest and penalties for the taxes we owe. So if you are expecting a refund, to be honest, it's not a big deal if you don't get it in before April 30.

Now, let's say you did all your paperwork and you and your accountant came to the conclusion that you did owe some taxes this year. WHAT A DRAG! I hate paying my income taxes, it's a very common and natural feeling. You might even be asking yourself, did you do something wrong? Are you paying too much income taxes?

It is instinctive that we don't like to pay more income taxes than we need to, but I often remind my clients, owing taxes is actually a good thing. Owing taxes in April means that you didn't pay enough taxes throughout the calendar (either through your payroll or installments) and that you have to pay off the balance. Whereas, the alternative is that you OVERPAID your taxes throughout the year and you got back the money that was simply yours in the first place.

In other words, you lent the CRA interest-free money for 12 months and you simply get back your principal. Imagine I asked that of you today? Can you lend me $20,000 this year and I'll invest it, spend it or grow it for 12 months and simply return to you the principal amount at the end of the year? Is that a good arrangement for you? Could you keep your own money and grow it first before paying the government? This is the fundamental principle of a tax refund. You've paid too much, so here you go, here's your money, interest-free.

By NO means should you go ahead and just go pay more taxes. What I am saying is that you should be doing your tax planning PROACTIVELY instead of REACTIVELY. Don't just spend your money throughout the year without a cash flow plan and hope that you don't need to pay more taxes.

An effective cash flow plan is one of the best tools our successful business owners use to build a winning financial future. It is not a traditional budget plan where you feel restricted to spend your money. Rather an effective cash flow plan takes into consideration your behaviors and your lifestyle. Imagine a world where a financial planner encourages you to spend your money and you have guilt-free money to enjoy your lifestyle while reaching your financial goals.

The cash flow plan is the first step in our unique financial planning process and is different from a traditional budget plan. There's no need to count your pennies and have a set amount of money for each category of spending. Let's be honest, that is not how we spend our money. A clear cash flow plan gives you the freedom to spend your money guilt-free and proactively estimates how much income you actually need. No longer will you question whether or not you are paying too much tax. Since you know how much you need to live then you'll take out exactly what you need from your corporation and pay the right amount of income tax.

Ideally, the best situation is that you owe exactly $0 each year because this means you were 100% effective with your cash flow plan and you paid exactly what you needed to pay for your income taxes throughout the year (with your payroll or installments). There is another radical thought that you should go ahead and NOT pay your installments altogether and invest and grow your money first and just pay off your taxes with penalties and interests AFTER you grow your money first.

Either way, the most important thing to take away from this is that owing taxes isn't the problem. Not understanding your cash flow and in turn, being reactive in your tax planning is the real problem. So next time you file your income taxes and you have an owing just ask yourself:

• Do I know how much money I spent this year?
• Is my income aligned with my spending needs?

If you answered "yes" to these questions then you have managed your income and your taxes effectively. Owing taxes wasn't a problem for you and in fact, if you did owe, congratulations, you probably made more money than giving your money to the government first.