Tax Tips & FAQs for Accounting & Bookkeeping
There are many advantages and disadvantages to incorporating your business. The first advantage is that corporations have limited liability, thus limiting shareholder’s liability to the amount that they have invested in their shares. The second advantage of incorporating is that Canadian Controlled Private Corporations pay a much lower tax rate on the first $500,000 of active business income compared to unincorporated companies. The third major tax advantage is the $866,000 capital gains deduction for the sale of shares of qualifying small business corporations. Lastly, Incorporated companies can provide tax-free private health care benefits for employees. Disadvantages include higher setup, administrative and accounting costs, as well as not being able to deduct business losses against other income of shareholders.
Along with the legal and licensing requirements, businesses in Canada are required to register with the Canada Revenue Agency (CRA) before starting operations. Once you setup your new corporation, the CRA will assign your company a 9 digit Business Number. Among the required or optional accounts is the GST/HST, payroll, corporate income tax account, and the import/export account. While the corporate income tax account is mandatory for corporations, a payroll account is only required for companies with employees or for shareholders that are on the company payroll. The import/export account is only required for companies that buy or sell products outside Canada. The GST/HST account will be discussed below.
If you have payroll or if you operate a construction business or wish personal coverage, then you must register with the Workplace Safety and Insurance Board (WSIB).
HST registration can be either mandatory or voluntary. You must register your business once your total worldwide taxable supplies of goods and services exceed the small supplier limit of $30,000 in a single calendar quarter or in four consecutive calendar quarters or if you are a limousine or taxi operator.
If you own a corporation that operates a small business, you can pay yourself either salary or dividends or a mix of both. There are several advantages and disadvantages for each way of payment and I will outline some of them. Receiving the only salary from your corporation has the advantage of being able as an individual to purchase RRSP to offset some of the tax consequences, as well as paying into the Canada Pension Plan (CPP), having the salary paid out is deducted from corporate income and income splitting among family members. The biggest disadvantage of salary payment is that you will have a higher personal income, which can result in higher personal tax. Other disadvantages of salary compared to dividends payments, is that salaries are 100% taxable. Also, your corporation will have to pay both the employer and employee portion of the CPP. Receiving only dividends from your corporation has the advantages of being taxed at a lower tax rate than salary, resulting in lower personal tax. Also, you need not pay into the CPP. The major disadvantage of receiving only dividends is that it doesn’t allow you to purchase RRSP and can possibly affect your ability to take advantage of some personal tax deductions, such as child care expenses. A third option will be paid a combination of salary and dividends. Combinations of salary and dividends will depend on the corporation’s owner’s personal financial circumstances.
If you receive a letter or a phone call from the CRA don’t panic. In many cases, when clients receive a phone call or a letter, the CRA may have administrative or general inquiries and may not necessarily be looking to auditing you. In some cases, they might be asking for unfiled returns. There are many levels of audits and reviews. This can range from basic questions and information to a full-blown audit. If you have a business, its important to realize which account is being audited or reviewed. This can include an audit or review for the payroll, corporate tax, HST, personal tax, WSIB, among others. It’s very important to consult an accountant or in some extreme cases a lawyer prior to talking to the CRA auditor or reviewer. It’s equally important to cooperate with the auditor or reviewer by providing, through your accountant or lawyer, the CRA with the information they are requesting. Ignoring CRA requests will only make things worst. In some cases, the Voluntary Disclosure Program can be very helpful to those who which to come forward, make things right, and have a piece of mind before the CRA contacts them. This program may allow you to avoid penalties and potential prosecution.
GST/HST For corporations, the CRA will often assign you a monthly, quarterly, or annual GST/HST filing frequency, depending on you your company sales levels. If your reporting period is monthly or quarterly, you have to file your GST/HST return and remit any amount owing no later than one month after the end of your reporting period. However, for annual filers, you have to file and pay no later than 3 months after the end of the fiscal year. For individuals with business income, annual filers, or if you have a December 31 fiscal year-end, your payment is due April 30 but, you have till June 15 to file your GST?HST return.
Payroll If you have employees, then you must file a T4 or T4A return by the last day of February following the calendar year to which the information returns apply. However, if your business stops operating, the return will be due within 30 days of the day your business ends.
Remittance due dates are based on when the employee is paid, rather than the pay period for which the services are rendered. Your type of remitter will be determined by your average monthly withholding amount (AMWA) of 2 prior calendar years. If you are a regular remitter with an AMWA 2 years ago of less than $15,000, then you have to remit your payroll deductions on or before the 15th day of the month following the month you made the deductions.
Corporate income tax You must file your corporate income tax return no later than 6 months after your company fiscal year-end. However, for corporations that owe income tax at fiscal year-end, payment is due within 3 months of the fiscal year-end. You must file a return within 3 years after the fiscal year-end to receive a tax refund. Generally, corporations have to pay their taxes in installments, so that corporations are treated the same as individuals who have tax deducted from their income at source.
Individual income tax (self-employed) In most cases, individuals must file their personal tax returns by April 30. However, that’s not always the case.
If you or your spouse or common-law partner have self-employed income, then you must file your tax return by June 15, however, your payment due date is April 30.