Starting and running a business in Canada is an exciting venture, but understanding the tax landscape is essential to keeping it sustainable. For businesses large and small, knowing your tax obligations can make the difference between growth and costly missteps.
This article breaks down the essentials so you can make informed decisions and maximize your financial outcomes.
Taxes - Two Different Things
Income tax: The portion of annual income that individual residents of Canada pay to the government. This includes revenue from owning a business and other commercial activities.
Goods and Services Tax (CST)/ Harmonized Sales Tax [HST): Businesses are responsible for collecting and remitting the GST/HST they charge to clients and can generally claim input tax credits on GST/HST paid on purchases used in commercial activities.
Record Keeping
Importance: Health of Business, Improvement, Ease of Business
Record-Keeping Process: Accuracy, Daily Activity, Accounting software
Which Records?: Income, Expenses, Assets
Tip: Keep business and personal bank accounts separate.
Tax Payment
Why Pay Taxes?:
Canadian Economy; Essential Services; Avoid Tax Evasion
Late Filing:
Penalty Charged on Balance and Interest. Tip: File on time even if cannot pay.
Business Loss: Still File Taxes! Loss can be carried forward to future years. For Sole Proprietors and Partnerships – loss offsets personal income.
Receipts: No need to send receipts, but need to have them available for an audit: 6-7 years.
GST - Goods and Services Tax
5% on most Canadian goods and services. Businesses are required to collect this tax and remit to the government when filing their taxes.
Zero-rated: Products for which GST is charged at 0%, i.e., essential items, groceries, prescriptions.
Exempt supplies: Applies to basic services for which public access should not be prohibited by cost, i.e., medical, dental, legal aid.
PST - Provincial Sales Tax
- Determined by the province, i.e., PST in British Columbia is 7%
- Some provinces combine the GST and PST to form HST (Harmonized Sales Tax), i.e., HST in Ontario is 73%
- Taxes are charged based on the jurisdiction of the transaction
- There are nuances regarding the “pass through” of goods and opportunities for companies to offset the taxes if they are reselling the items in some form
- Other countries are not charged Canadian taxes, but might be charged duties or other taxes
GST/HST Registration
Over 30K/Year:
Must register for a GST/HST account and start charging taxes immediately.
If total amount of tax from customers is higher than amount of tax paid for supplies, then business owner owes the difference.
If the total amount of tax from customers is lower than amount owner pays for supplies, then can ask for refund.
Under 30K/Year:
Business is considered a small supplier and you do not need to charge or remit sales tax.
Important Distinctions
Sole Proprietor/Partnership
- There is no legal separation between the individual(s) and the business
- Business income and personal income are declared on a Tl form personal income tax form
- Details of business income and expenses are declared on a T2725 form – statement of business or professional activities
- Taxes owed should be filed by April 30th. If no taxes are due, you have until July 15th to file them.
- This is the fiscal year by default, but you can set another deadline to accommodate peak sales-you would need a CRA form to make the accommodation
Corporations
- There is a clear legal separation between you and your business – the law treats the corporation like a person who can enter contracts, own property in its name, and file its own taxes
- When filing taxes- submit one for yourself as an individual and one for your corporation
- Taxes on the corporation’s profits are at a corporate rate, which will be lower than a personal tax rate
- As owner of a corporation -you can claim your share of dividends or capital gains on your tax return
- Remember, if you pay yourself a salary, you must also pay: payroll taxes, El, CPP, personal tax on income
- Two ways to pay yourself: salary or dividends
- Salary: regular payments; set up payroll, statutory deductions
- Dividends: lump sum paid to shareholders at regular intervals and taxed at a lower rate than salaries-there are no CPP or El deductions
- Corporations have 6 months of their year-end to file taxes, i.e., if fiscal ends on December 31st, then have until June 30th
- Calendar year is the default, but can be moved with the proper CRA forms
Other Considerations
Import/Export Taxes:
Import and Export taxes, duties, and tariffs. Canada has various trade pacts and deals with the other nations globally and there is an impact to potential transfer of goods across borders.
Excise Taxes:
Canada taxes specific items such as gasoline/ petrol products, alcohol, cigarettes, and cannabis and are also unique by province.
There are other things you could add, it really depends on you, your business, your industry, and so on, but be aware of not adding too much. The 6 parts were just discussed are the focus and you don’t want key information getting lost.
