Our Small Business 101 series is for anyone who owns a small business and for anyone who's thinking about starting a small business. It draws from lessons we've learned while working with thousands of Canadian small business entrepreneurs over the years. It's the class we wish we'd taken before starting Origami. And the night class you should be taking right now.
Thanks to Ashley Brulotte, CPA, co-founder of Origami, and Partner at Origami Professional Corporation for his input into this post.
If you're a small business owner, keeping track of the various types of taxes that apply to your business can be overwhelming. It's not what you want to be doing. But, at the same time, it's definitely not what you want to be avoiding either. It's all too easy to fall behind. Then you have to climb the mountain (lost paperwork, having to remember why you transferred $240 two years ago, finding the money for back taxes owing, penalties, interest) just to get caught up.
You don't want that. Neither do we. This post helps to demystify the small business tax landscape. It gives you the information you need to stay compliant in terms of your business tax filings and payments. At Origami, we take care of all business-related tax planning, calculations, and filings for our clients. So if this is one thing you want off your plate, don't hesitate to get in touch.
Federal corporate taxes
The corporate tax is an income taxJust like individual taxpayers have to pay taxes on their personal income, an incorporated business needs to pay taxes on its corporate income. Individual taxpayers file T1's, corporations file (the more complicated) T2's.
A corporation's income is the difference between its revenue (sales) and its expenses. Say your business had $80K in sales and $60K in eligible expenses in the past year. Is your business going to owe taxes on $80K? No. Your business will owe taxes on $20K, the difference between its sales and its expenses. The accounting for what exactly goes into sales and what exactly goes into expenses can get tricky sometimes, but the basic formula (income = sales - expenses) is what you want to keep in mind.
Remember that the corporate tax is an income tax. The business has to have a positive income. If your business shows a loss for the year, then there will be no corporate taxes owing. Losses can be carried forward and applied against income in subsequent years.
Corporate tax rate for small businesses
The corporate tax rate is approximately 9% for the first $500K of income, what's called the small business deduction. This reduced rate is a part of Canadian tax policy designed to encourage small business activity. Income over the $500K threshold is taxed at a rate of 27%.
What month should I choose for my fiscal year end?
Individual taxpayers file tax returns for calendar years. Corporations file tax returns for fiscal years. A corporation's fiscal year is the 12-month period in which it reports its financial performance to the Canada Revenue Agency (CRA).
As a rule of thumb, you'll want to choose the fiscal year end month to be roughly 11-12 months out from your date of incorporation, to defer the filing of the tax return as long as possible. (You have a maximum of 371 days from your date of incorporation for your fiscal year end.) We usually recommend choosing the last day of the month that's before the month of incorporation. For example, if the business incorporated in April, choose Mar. 31 as the year end. Or choose a year-end month that's during a slower time for your business so you can focus on getting the books in order for your CPA.
It's the first corporate tax return filed with CRA that actually "sets" the year-end with the government, however, so you don't need to decide on your year end when you incorporate. You may have chosen a Dec 31st year end for your GST when you opened the RT account with CRA, but that doesn't mean you're forced to choose that for your corporate tax year end as well.
While it may make sense for business to have a calendar year end month of December 31st, there are some drawbacks. If you just incorporated in the fall, then having to file a tax return just 2-3 months after incorporating can be annoying. Further, accounting firms don't exactly love December 31st year ends as the work has to get done during their busiest time of year, which is February and March. To receive better overall service and keep your accountant at least partially sane, we recommend a summer or fall month for your year end (June 30th or Sept 30th).
For a corporation, the due dates are different from your standard personal tax return, which is due for most people at the end of April each year. With corporate tax returns, it all depends on the month that you choose as your corporate year end. The filing deadline is 6 months from the date of your year end.
Here's an example. If you choose June 30th for your corporate year end (also known as the fiscal year end), then you'll need to file your corporate taxes by December 31st, 6 months later. If you don't file by that deadline, then the corporation (you) will be hit with a late filing penalty. The late filing penalty works out to 5% of your taxes owing; plus 1% for each full month that you are late, to a maximum of 12 months. Ouch!
Interest on taxes owing
It's important to keep in mind that interest on any corporate taxes owing will start to accrue 3 months after the year end. So if you want to avoid paying interest on any corporate taxes owing, the unofficial filing deadline for corporate taxes is 3 months, not 6 months, after your year end.
Once you file your first corporate tax return, and if you owe more than $3,000 of federal corporate taxes, you should get into the good habit of paying quarterly installments into your RC (corporate) tax account. If you don't make these quarterly payments, the CRA will charge interest on taxes owing for the year ahead. After each year's tax filing, your CPA can help you calculate a reasonable installment amount to pay based on your tax situation.
Provincial corporate tax
The provinces get a share of corporate income as well. Depending on the province, the small business tax rate can range from 2% to 5% of your taxable income. Most provinces collect these taxes via the CRA so you only need to pay one combined amount to the federal government.
For provinces such as Alberta, the provincial taxes are administered separately and therefore you would need to make a separate payment for Alberta corporate taxes.
For your small business, the federal and provincial tax rates total approximately 11% to 14% of your corporate income, depending on the province of incorporation. It's important that you budget for these taxes when operating your business. Often we recommend clients create a separate tax savings account to put away money for taxes and GST/HST each month.
The GST/HST is a consumption tax
The Goods and Services Tax (GST) is a tax levied on the consumption of goods and services. Corporations need to charge and collect GST on behalf of the federal government. But corporations also pay GST on the goods and services they use as inputs. Each quarter or each year, your corporation must report on the net GST collected, and you must remit that amount to the CRA. Corporations are required to register for an RT GST number before they start collecting GST or once their annual sales exceed $30,000 CAD.
Some provinces like Ontario use the Harmonized Sales Tax (HST) which combines the GST with a provincial sales tax. In an HST jurisdiction, corporations file a single sales tax return with the CRA to account for both the GST and provincial tax owing (or refundable). BC and Saskatchewan have a separate provincial sales tax. Corporations in those provinces have to file provincial sales tax separately from GST.
The rates to charge
The rate you charge on your sales depends on your province that your customer resides in. For example, if your customer is in Alberta you would charge 5% GST. Whereas for a customer in Ontario, you would need to charge 13% HST. Again, what matters is the residence of the customer, not the location of your corporation.
It's worth noting that if you earn foreign sales, for example, from customers located in the USA, these are considered 'exempt' sales and you don't need to charge these customers GST / HST. There's a section on the GST return when we file with CRA that asks companies to state their amount of exempt sales.
Input Tax Credits (ITCs)
To help lower the GST/HST bill, GST registrants can claim Input Tax Credits (ITCs). ITCs are essentially all the GST that you pay on your expenses. ITCs lower the net GST that you need to pay to the government. Using proper bookkeeping software such as QuickBooks Online helps you track and calculate the amount of ITCs you've paid, and this helps make the GST calculation more accurate — potentially saving you hundreds of dollars.
Sales tax can definitely be a complex area - if you have any questions we recommend asking your Origami CPA, doing research on the web, or contacting the CRA directly.
GST due dates
GST due dates are fairly straightforward. If you're a yearly filer, the filing due date is 3 months after your GST year end. If you're a quarterly filer, then the filing due date is 1 month after your year end. The CRA charges the same interest rate for overdue GST as for overdue personal or corporate taxes.
In a nutshell
If you decide to pay yourself a T4 wage from your corporation, or if you have employees, you'll need to understand how payroll taxes work. Payroll taxes are calculated and deducted off employee cheques. As an employer, you need to collect and remit these taxes back to the CRA.
Payroll taxes are made up of three components: income taxes, CPP (Canada Pension Plan), and EI (Employment Insurance). Because of the arcane and ever-changing rules on how these amounts are calculated, the calculations are almost always done using payroll software such as QuickBooks payroll, Payworks, ADP, Ceridian etc. We do not recommend calculating payroll taxes yourself. While the CRA offers a free online payroll calculator, unless you have significant experience with payroll, there's too high of a probability of making a calculation error, in our opinion. The payroll software would also calculate and prepare the T4 wage slips that your employees need at the end of the year to prepare their personal taxes.
Payroll taxes need to be paid to the CRA by the 15th of the month following the payroll date. As an example, taxes on payrolls run in September need to be paid by October 15th into your RP payroll account. It's very important you pay these taxes on time. The CRA charges a 5% penalty on the amount of the taxes — if you are even one day late! It's very hard to convince the CRA to waive these fees once they're incurred. So it's best to set up a recurring calendar reminder on the 11th or 12th of the month to go into your web banking to pay these remittances before the deadline.
Most payroll companies offer to automatically make the remittances to the CRA. If you have the stable cash flow to allow for this, we recommend this more automated approach.
As you can see, there are no shortages of taxes to navigate as a small business owner Having up-to-date monthly bookkeeping and financials prepared by Origami will help you to budget for these taxes so you know exactly how much you owe and when. While we can't remove all the stress of being a small business owner, we're happy to do our part to lessen your anxiety and confusion on the tax side of things.
Thanks for reading! If you're ready to start building a better business, give us a call at 1-888-745-1315 or get in touch with us by filling out our Get Started form. We're always happy to hear from you and learn about your business. We'd love to see your small business succeed, and we'd be proud to be a part of your success.