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 provide them with a spreadsheet data organized in 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 http://cra.gc.ca 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 someone 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, to be designated as 'holding corporation', that will participate
in less business, and therefore not be 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) these funds are considered
to be held in trust for the government.
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 or 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 you 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.
Some data you may find useful:
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 about: 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:
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.
Above article is for reference only. Every taxpayer's situation is unique and
offers various opportunities for tax savings and right tax strategy. Feel free to Contact us
for no-obligation evaluation and no-charge initial consultation.
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 (c)
legislation and may not be reproduced, whole or in part without
author(s) written permission.
