10 Tax Tips For New Corporation Owners In Canada

Congratulations! You have just added another brick to the foundation of your own Business, taking it to a new level, deciding to give it a corporate structure. Although your daily business operations have not changed much because of that, you have to realize how many things have changed for you from the tax perspective!

Here is what you need to remember to get the full benefit from corporate structure:

1. Keep track of all your transactions and be sure to have the supporting documents. The good accounting shall maintain an up to date file of all transactions, so that at any point in time you are aware of your Revenues, Expenses and Net Income. In case you are too busy with other tasks and wish to leave calculations for later, at least be sure to store all:

– invoices

– receipts

– bank statements

– deposit slips

– agreements

– letters from CRA, WSIB, and others

Keep a separate file with articles of incorporation, minutes book and other documents related to the foundation of the company.

The good idea would be to store any and all the documents related to your business activities, so when you will need evidence to support your position before CRA, you will have some material at your disposal. You might not always know, what will be useful, so keeping everything could be a good idea for the start. You can keep simple bookkeeping file in Excel, without being at any disadvantage to those who use accounting software like Quick Books or Simply Accounting. In fact, Chartered Accountants do use Excel along with their tax preparation software. So, they would be glad if at the year end, if you decide to ask them to prepare the T2 Corporation’s Tax Return, you will bring them spreadsheet data organized in the format like this:

Date | Name on Invoice | Invoice No | Paid by Ck No | Net Amount | Tax | Total | Paid for

2. Do get an HST No. registered. If what you sell or provide is HST taxable, or zero-rated, register for HST promptly! If you hear a reply from your accountant, that before your sales have not just yet reached 30,000, by CRA rules you are not obliged to register, ask them how you will then return all HST that you paid at the business start-up? Keep in mind that you usually have more expenses than revenues in these first months of operation.

For example:

Month 1.

– The corporation buys:

Equipment 100,000 plus HST of 13,000

Rent and other expenses 50,000 plus HST of 6,500

Car financing total purchase price 25,000 plus of HST 3,250

– And in month one, there are:

Sales of 25,000 plus HST 3,250

Subtraction of HST paid from HST collected will generate a net refund of 19,500 in Month 1.

Month 2.

– The corporation buys:

Rent and other expenses 25,000 plus HST 3,250

– And in month two, there are:

Sales of 35,000 plus HST 4,550

Subtraction of HST paid from HST collected will generate the tax due of 1,300 in Month 2.

In the example above, that is usual case for a newly formed corporation, by registering early, the business will recover 19,500 of HST paid in the first month. One can guess, that this is probably the reason why CRA does not require the businesses to apply for HST registration before sales reach a 30,000 limit. Even if you collect more HST on your sales than pay on your expenses, you are still better off exactly by the total amount of HST Paid, since your client pays you extra 13%. They in turn claim it back in the same way, so the actual tax is being paid by the end user of goods or services. Refer to HST Tax Guide available from CRA official website for more information.

3. Think twice before leasing/buying/spending in order to reduce tax, there are other ways where you can save on taxes and keep your money! If you decide to go ahead with vehicle financing, remember that maximum cost to be considered by the CRA for write-off is 30,000. Hence if the car is worth more, it will still be considered a 30,000 dollar car for tax purposes. You do not need to be reminded that extra funds are critical for keeping your business afloat, and if spending is meant to reduce taxes along the way, you may first want to make sure that you are looking at substantial net income and tax is due.

4. Choose your Fiscal Year End wisely. According to CRA, the first tax year can be of any length, not exceeding 53 weeks. Therefore, if for example, your date of incorporation is May 16, and you want the tax year to be from November 1 to October 31, you can file your first corporate tax return for the period May 16 – October 31. And then all the following tax years will end on October 31. What year-end should you choose? Here you will have to realize that you will have two Income Tax Returns: the Personal – T1, and the Corporate -T2. The Personal Tax is filed for the calendar year, that is January 1 to December 31, and is due April 30. The Corporate Tax Return is filed for the set tax year as we described, and is due six months after the year end. Tax due is to be paid three months after the year-end for Small Private Canadian Corporation. Same tax year for you and your corporation makes it easy and transparent when determining your real income from corporation.

5. Use your business account carefully. From the CRA’s point of view, any deposit to the bank account shall be treated as income, unless it can be proven otherwise (i. e. loan, investment, refund or transaction reversal). If you got a deposit that is not income, be sure to retain enough documentation to prove it. Otherwise you may be liable for Income Tax and/or HST on that deposit.

6. Keep shareholder account accurate. This is one of the areas that draws special attention of tax collectors as most tax avoidance cases involve withdrawing funds without withholding tax, as it is in case of regular payroll. From CRA’s point of view, your net withdrawals from your corporation, is your income subject to to tax. This income needs go be declared in T1 Personal Tax Return. An accurate calculation of what you withdrew less what you invested is key here. If you have paid some of the corporate expenses, you have invested funds into your company. If the company paid expenses for it’s owner, this is a withdrawal.

As an example:

During the calendar year, for which you have to file your personal taxes you have:

1. Invested 20,000 into the corporation by transferring the amount to corporation’s account.

2. Invested 15,000 worth of assets, such as computer, furniture, tools.

3. Paid 5,000 out of your pocket for company’s gas, telephone and insurance expenses.

4. Withdrew 30,000 from corporation’s account for living expenses.

5. Paid from corporation’s bank account for your home renovation 15,000.

Your shareholder account balance will then be calculated as follows:

20,000 + 15,000 + 5,000 – 30,000 – 15,000 = – 5,000

This means that you took 5,000 more than you invested, and at the end of the year, if not paid back, the amount must be included in your personal income subject to income tax. This is why it is important to keep track and retain any proof of these transactions. If you will not be able to provide any documents to support the fact that you initially invested 20,000 into the company, your income can be re-assessed, so it will now be 25,000 instead of just 5,000.

7. Separate your wealth from your tax and legal liabilities. A corporation may be a bounty for some who has an intention to sue and get some of it’s assets. If you do a lot of business and accumulate funds and other assets over time, you might consider registering one more company, that will be a holding corporation, that will be less exposed to various claims. Limited liability offered by corporate structure has also it’s own limitations from tax perspective. Paying HST and Payroll source deductions is direct liability of director, since these funds were already received and are being held by the corporation before they are remitted to the CRA by the appropriate due date (One month for monthly and quarterly HST, 15 days for payroll source deductions, refer to due dates schedule at the end for more information).

8. Meet CRA criteria for self-employed in case you are the one and only director and shareholder in your corporation. To be considered a business from the Income Tax Act perspective, you must meet certain conditions. CRA has developed a range of criteria that distinguish the business income from employment income. These criteria help the CRA to apply tax according to economic reality instead of legal structure. To be considered a business, you typically must have more than one client, bear responsibility for completion of the whole work project, use your own tools, hire workers in process of performing the contract. These criteria do not need to be necessarily met all together, but you have to be ready to defend your position from that angle. See the “Employed vs Self-Employed” guide, available from CRA website for more information.

9. Plan for Salary/dividends in advance. If your business generates net income, you as an owner would probably withdraw all or part of it. You may decide to do that in form of salary or dividends. Salary is a tax deductible expense for the corporation, whereas dividends are not. However, the recipient will pay less tax on dividends. This is especially true for the 50-60k annual income.

10. File on time, stay on good record. Fulfilling hour obligations before the Tax Revenue agency is obviously a good business practice, keeping you more organized and ready for possible audits or inquiries. Knowing that your books are in order and having no reason to be worried about tax issues will lift a great weight from your shoulders, so you can do your business and let your. Indian concentrate and enjoy creative work. As accountants, we can only add, that whatever news hours receive from the authorities, this is remotely a drama, as almost any audit will come and go, and if something was not explained or your explanations were not accepted, you always have 90 days to file an appeal, which is most often a fair process, often entirely overturning the audits decisions.

Attachments:

1. Corporation’s Tax rate. The Small Canadian Corporation will pay tax as follows:

Basic Federal Tax: 38%

Less:

Small Business Deduction: 17%

Federal Tax Abatement:. 10%

Ontario Provincial Tax:. 14%

Less:

Ontario Small Business Deduction: 8.5%

Net effective tax: 16.5%

2. CRA filing and payment due dates

Filing on time might save you money and help keep the good standing with the Agency:

Corporation Tax:

Tax is payable two months after fiscal year end.

One month extension is available for Canadian controlled private corporations.

T2 Tax return is due six months after the corporation’s year-end.

5% + 1% late filing penalty on tax due.

10% + 2% for repeated failure to file.

Arrears interest on outstanding balances computed at the prescribed interest rate.

Payroll:

Source deductions shall be remitted no later than the 15th of the following month.

T4 slips together with T4 Summary must be submitted by February 28 of the following year for the calendar year ending Dec 31.

Dividends:

T5 dividend slips and summary must be submitted by February 28 of the following year for the calendar year ending Dec 31. Up to $1,000 late filing/failure to file penalty.

Small Business:

Tax for sole proprietorship, partnership or limited partnership is payable April 30, that is four months after fiscal year end.

T1 Tax return for sole proprietorship, partnership or limited partnership is due on June 15th of of the following year, for the calendar year ending Dec 31.

5% + 1% late filing penalty on tax due.

10% + 2% for repeated failure to file.

Arrears interest on outstanding balances computed at the prescribed interest rate.

Personal Tax Returns:

Tax for individual taxpayer is payable April 30, that is four months after calendar year end.

T1 Tax return for individual taxpayer is due on April 30 of of the following year, for the calendar year ending Dec 31.

5% + 1% late filing penalty on tax due.

10% + 2% for repeated failure to file.

Arrears interest on outstanding balances computed at the prescribed interest rate.

Important notice(1): The information above may reflect a subjective interpretation by the author(s), who, by no means may accept any responsibility or liability whatsoever for the results of proper or improper use of the above information, whole or in part, it as well is explicitly stated that whatever information provided by authors, may not suit specific purpose of specific reader, and it alone may not be relied upon to produce decision. In each individual case professional advice must be obtained.

Important notice(2): This text is subject to copyright © legislation and may not be reproduced, whole or in part without author(s) written permission.

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